Originally published in the January 22 edition of World Tax Daily
Brazilian corporate taxpayers have until either January 31 or February 27 to elect their income tax calculation method for fiscal 2009. There are three options available (subject to specific limitations):
- the actual income tax regime (lucro real);
- the presumed income tax regime (lucro presumido); and
- the simplified tax regime (Super Simples).
The election must be made at the time of the first income tax payment for 2009, which is February 27 for those electing lucro real or lucro presumido. For smaller companies eligible for Super Simples, the deadline is January 30.
The election is important not only because of its actual tax impact on corporate taxpayers, but also because taxpayers cannot change the tax regime during the course of the year. Once an election has been made for 2009, another election will not be available until 2010. A bad decision in electing the calculation method will likely result in increased tax payments during the entire year, with adverse consequences to equity holders (that is, fewer profits available for dividend payments).
Further, the election also affects other tax payments, such as the 9 percent Social Contribution on Net Income (CSL) and the applicable rate and credit system under the Program for Social Integration (P.I.S.) and Contribution for the Financing of Social Security (COFINS) regimes.
Taxpayers under lucro real are subject to P.I.S. and COFINS at higher rates (1.65 percent and 7.6 percent, respectively), because this regime automatically includes the taxpayer under the noncumulative P.I.S./COFINS regime. 1 While it is far from perfect, the noncumulative P.I.S./COFINS regime allows taxpayers to take some P.I.S./COFINS credits.
Taxpayers under lucro presumido are subject to P.I.S. and COFINS at lower rates (0.65 percent and 3 percent, respectively), but no tax credits are allowed.
The Super Simples Method
For those electing the Super Simples regime, which entered into force in mid-2007, the election also affects payment of the federal excise tax (IPI); the social security payroll tax, including social contributions to private social assistance agencies; the state VAT (ICMS); and the municipal service tax (ISS). All those taxes, together with the corporate income tax, CSL, P.I.S., and COFINS, may be rolled into a single tax for Super Simples taxpayers. The regime is aimed at small and very small companies with maximum annual gross income of BRL 2.4 million (approximately $1.02 million).
It is important to note that taxpayers that elect Super Simples cannot have any pending tax issues before federal, state, or municipal tax authorities as of January 30, 2009; otherwise, the taxpayer will be limited to either the lucro real or lucro presumido method.
The Lucro Real Method
Under the lucro real method, taxpayers pay income tax in advance as a percentage of their monthly gross receipts during the calendar year. At the end of the year, they are required to prepare a balance sheet in which all expenses and income, including the net operating losses of previous years, are computed, and the actual taxable income is determined and taxed.
The estimated monthly tax payments also are computed to offset the actual income tax due. Any overpayment is refundable, and taxpayers can suspend or reduce their estimated monthly payments by showing, through the balance sheet, that the payments they have made exceed the tax due.
Alternatively, taxpayers under lucro real may elect a quarterly (instead of annual) regime. Under the quarterly regime, all expenses, income, and losses are computed on a quarterly basis, and each quarter is treated as a separate, independent fiscal period. However, this regime is used by very few taxpayers with specific business cycles, as one of its disadvantages is that the operating losses of one quarter can be used to offset only up to 30 percent of the taxable income of the following quarter. Under the annual lucro real method, all losses incurred during the year are computed without limitation.
Some taxpayers are required by law to calculate income tax according to lucro real rules. These include financial institutions in general, insurance companies, and those enjoying special income tax exemptions or reductions.
For calendar year 2009, some taxpayers may be subject to an increase in monthly tax payments under lucro real. Until 2008, taxpayers with accumulated federal tax credits could use those credits to pay their estimated monthly tax payments during the year. Therefore, no cash disbursement was required as long as the taxpayer had sufficient tax credits to offset the monthly tax payment. That was particularly the case for exporters because tax-exempt exports generated continuing tax credits of P.I.S., COFINS, and IPI^2^ that could be used to pay corporate income tax and estimated monthly CSL payments.
However, Provisional Measure 449/2008 prohibited taxpayers from using federal tax credits to set off corporate income tax and estimated monthly CSL payments as of January 1. Therefore, taxpayers will be required to make cash payments during the year instead of using their tax credits. Regarding those tax credits, depending on specific circumstances, the taxpayer may be entitled to file an administrative tax refund claim, but payment could take months.
Although the restriction created by Provisional Measure 449/2008 cannot be characterized as a true tax increase, it clearly results in a significant impact on the cash flow of certain taxpayers, including exporters. In extreme situations where margins are small, the restriction could put a taxpayer out of business. Taxpayers in those situations could challenge the restriction in court based on the argument that it violates the tax capacity principle established in Brazil’s Constitution.
The Lucro Presumido Method
Under the lucro presumido regime, taxpayers calculate income tax on a percentage of gross revenues for the entire 12 months of the year (although payments are made quarterly). At the end of the year, no adjustment is made even if actual profits exceed the presumed profit used to calculate the income tax. To be eligible for this method, taxpayers’ annual gross revenues in the preceding year cannot exceed BRL 48 million (approximately $20.4 million).
Final Remarks
There is no standard answer for determining which method is best. Taxpayers are advised to consult with their accountants and tax advisers and to hypothetically structure their payments under each regime to evaluate their opportunities for tax minimization in 2009.
The new restriction on the use of tax credits to pay corporate income tax and monthly CSL obligations under lucro real should also be considered. Significant adverse financial impact to the company might present an opportunity to challenge the restriction in court.
David Roberto R. Soares da Silva
FOOTNOTES
1 Exceptions apply to some sectors where the taxpayer’s business may be subject to a special P.I.S./COFINS regime such as tax substitution, a different rate system, etc. In some special circumstances, a company electing (or required by law to use) lucro real may benefit from the calculation of P.I.S./COFINS under the cumulative regime. Sectors and businesses with different P.I.S./COFINS regimes include financial institutions and equivalent companies, ethanol, telecommunications, news media, passenger transportation, telemarketing, civil construction, software, real estate, and others.
2 This was because of the credit of P.I.S., COFINS, and IPI on inputs, and the lack of such taxes on outputs (exports).
END OF FOOTNOTES
David Roberto R. Soares da Silva