Originally published in the April 20 edition of World Tax Daily (Copyrights Tax Analysts)
Brazilian corporate taxpayers that compensate employees and managers with stock option plans are concerned about the potentially adverse social security tax impact resulting from the way the plans must be booked under new accounting standards established by Law 11,638/2007 (the amended Corporations Act).
Auditors, accountants, and tax practitioners have differing opinions about the potentially adverse impact of the new accounting rules. (
Provisional Measure 449/2008, published in the official gazette on December 4, 2008, introduced a transition tax regime (regime tributário de transição, or RTT) and ensured the tax neutrality of accounting rules introduced by Law 11,638/2007.
Auditors and accountants have advised clients that under the new accounting standards introduced by Law 11,638/2007, stock plan expenses should be computed and disclosed as employee and management compensation expenses in a company’s financial statements.
Tax advisers, on the other hand, have advised clients not to follow that procedure, arguing that by disclosing stock option plan information, employers would put themselves at risk that the Federal Revenue Department (now also in charge of social security taxes) could deem the corresponding expenses as compensation and assess social security taxes.
They argue that Provisional Measure 449/2008 ensures tax neutrality only regarding corporate income tax, the 9 percent social contribution on net income (CSL), the Program for Social Integration contribution (P.I.S.), and the Contribution for the Financing of Social Security (COFINS). Provisional Measure 449/2008 does not address social security (payroll) taxes, which could motivate the Federal Revenue Department to tax stock plan expense as soon as tax officials detect that item in the taxpayers’ financial statements (if they follow the new accounting standards under Law 11,638/2007), tax advisers say.
Although tax practitioners agree that the mere indication of an accounting entry should not change the nonemployment nature of a stock option plan, they also agree that the Federal Revenue Department may take a different, more aggressive position. Historically, corporate taxpayers have not treated stock option expenses as compensation (thereby triggering payroll tax).
Many precedents from Brazil’s labor courts back up the taxpayers’ position as to the nonemployment nature of stock option plans. But those courts review only the strict labor law aspects of the plans, with no direct binding effect on payroll taxes.
Because the Federal Revenue Department is not bound by labor court decisions, it could in theory maintain that because stock option expenses are booked as compensation items in financial statements, they should be subject to payroll taxes like any other compensation item (such as Christmas bonuses, overtime payments, performance bonuses, paid vacations, and so on).
As a consequence, many companies are in doubt about the accounting treatment they will choose for stock option expenses, particularly in light of any adverse qualifications by auditors to the companies’ financial statements.
David Roberto R. Soares da Silva