Originally published in the September 2 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s Senate on August 18 accepted for review a law project that would allow taxpayers to declare or repatriate, under reduced tax rates, undeclared assets held in Brazil or abroad.
Senate Law Project 354/2009, sponsored by Sen. Delcídio Amaral, replaces Law Project 443/2008, which was presented by Amaral on November 18, 2008. Political circumstances and the depreciation of the U.S. dollar made the Senate unreceptive to the original law project, and it was never reviewed or put to a vote.
The law project would not only provide lower tax rates for individuals and companies reporting undeclared assets held within and outside Brazil, it also would benefit individuals and companies that have always declared their assets correctly by allowing them to adjust the value of those assets according to market value, in anticipation of capital gains, at an advantageous tax rate.
The new project includes most of the provisions contained in Law Project 443/2008 but also includes some new provisions, including rate reductions, that are worth mentioning.
Undeclared Assets Held by Individuals
Law Project 354/2009 would allow individuals to amend their 2008 annual tax returns to include undeclared Brazilian assets held in previous years. In those cases, the inclusion of undeclared assets held in Brazil would be subject to a flat income tax rate of 5 percent. That’s the first distinction from Law Project 443/2008, which provided for a tax rate of 8 percent.
Law Project 354/2009 also would allow amendments to individuals 1 2008 annual tax returns to include undeclared assets held outside Brazil.
The repatriation of the undeclared foreign assets to Brazil would be optional. If assets are kept outside Brazil, the applicable income tax rate would be 10 percent (as opposed to 15 percent under Law Project 443/2008) of the value of the foreign assets declared; if a taxpayer decides to repatriate the assets, the applicable rate would be 5 percent (as opposed to 8 percent under Law Project 443/2008).
A taxpayer could pay the tax in 10 monthly installments or in one lump sum. In the latter case, the taxpayer would be entitled to a further 5 percent discount on the tax due.
A further reduction of 50 percent of the tax due (regardless of where the assets are located) would be granted if the individual invests the domestic or repatriated foreign assets in certain investment funds, to be specially created by Brazil’s Securities and Exchange Commission, in the areas of infrastructure, housing, agribusiness, innovation, scientific and technological research, and debt bonds and securities of Brazilian companies offered in foreign capital markets. Law Project 443/2008 mentioned only infrastructure investment funds.
As a condition for the additional 50 percent discount, an individual could not liquidate the investment for two years (as opposed to five years under Law Project 443/2008) from the original investment date. However, Law Project 354/2009 grants a quicker way out by allowing negotiation of the investments in capital markets.
Adjustment of Assets According to Market Value
Like Law Project 443/2008, Law Project 354/2009 would allow individual taxpayers who have declared their assets correctly to update the value of those assets according to market value, with the payment of an anticipated capital gains tax of only 4 percent (as opposed to the standard 15 percent). But the new law project also would allow taxpayers to pay the tax in 10 monthly installments, or in a lump sum with an additional 5 percent discount.
By electing to adjust their assets, individual taxpayers may significantly reduce future CGT, which may be a good opportunity for tax and estate planning.
Corporate Taxpayers
Like Law Project 443/2008, Law Project 354/2009 would allow Brazilian companies to include undeclared assets (held in previous years) in their 2009 annual tax returns, subject to a flat tax of 10 percent for corporate income tax and 8 percent for the social contribution on net income (CSL) (as opposed to the standard 15 percent or 25 percent corporate income tax and 9 percent CSL).
The law project also would allow Brazilian companies not applying for the aforementioned tax benefit to update the value of their declared assets according to market value at a low tax cost: a 5 percent corporate income tax rate and a 4 percent CSL rate. The law project would thus provide opportunities for major tax planning, particularly in mergers and acquisitions.
It diverges from Law Project 443/2008 by expressly stating that any future capital loss in the disposition of updated assets would be nondeductible. Such a restriction makes sense; otherwise, taxpayers could inflate the valuation of updated assets by paying a reduced tax, but get a full 34 percent1 deduction on realizing a loss when disposing of the relevant asset.
Special Tax Payment Schedule
Law Project 354/2009 would preserve the special tax payment schedule created by Law Project 443/2008 for unpaid federal tax debts.
The new proposed tax payment schedule would apply to unpaid tax debts that are due through December 31, 2008, and that can be paid within 180 months.
The law project would waive delay penalties (usually 20 percent) and interest calculated according to the SELIC interest rate, which is currently 8.75 percent per year. Instead, it would apply a 3 percent interest rate per year from the time the relevant tax or taxes were originally due. Thereafter, tax debts under the schedule would be consolidated and subject to interest equal to 50 percent of the so-called long-term interest rate (TJLP), currently 6 percent per year.
This tax payment schedule does not make sense at the moment because another special tax payment schedule — created by Law 11,941/2009 — is in place for tax debts due through November 30, 2008, that may be paid in 180 months, although the interest rate is higher.
Tax Challenges and Criminal Indictment and Prosecution
Law Project 354/2009 preserves all the provisions of Project 443/2008 regarding tax challenges and criminal indictments and prosecution. If taxpayers elect to benefit from the provisions of the law project (that is, the declaration and repatriation of undeclared assets), tax authorities could not:
- challenge the amended tax returns or initiate tax procedures, administrative or judicial, for inaccuracy or misinformation contained in previous tax returns;
- assess the taxpayer for lack of payment of income tax, corporate income tax, or CSL; or
- impose penalties of any nature, including interest.
The only change in this regard is a limitation on the use of information and statements made by a taxpayer as evidence. Article 8 states that, except for family or succession law matters, statements and declarations made under the law project have no evidentiary value in any case or proceeding, whether administrative or judicial.
The inclusion of previously undeclared assets by taxpayers, according to the terms and conditions set forth by the law project, would extinguish liability to prosecution for:
- crime against tax, economic, and financial orders provided in Law 8,137/1990;
- smuggling;
- falsification of private or public documents;
- misrepresentation;
- crime against social security; and
- crime against the national financial system as provided in Law 7,492/1996.
This criminal amnesty also would apply to money laundering crimes, as contained in Law 9,613/1998 (Brazil’s money laundering statute), except crimes against the national financial system. Law 9,613/1998 lists eight preexisting, underlying crimes (including drug trafficking, terrorism, extortion via kidnapping, crimes against the national financial system, and crimes committed by criminal organizations) that are necessary to establish an additional charge of money laundering. Tax evasion or the failure to pay tax is not listed, because money involved in tax evasion may not be of an illicit or illegal nature.
Taxation of Offshore Companies in Low-Tax Jurisdictions
Article 10 of Law Project 354/2009 repeats almost entirely the provisions of Project 443/2008. It would change how individuals are taxed on income earned from participations in nonresident companies.
It establishes a flat 15 percent income tax rate on profits realized by companies domiciled in low-tax jurisdictions, regardless of actual distribution to the Brazilian individual owner. For that purpose, a low-tax jurisdiction is defined as a country that does not tax income or taxes it at a maximum rate of 20 percent. The 15 percent income tax applies to profits realized by offshore companies as of January 1, 2008. Profits realized by offshore companies until December 31, 2008, will be subject to a flat 2 percent tax.
Project 354/2009 also would allow individual taxpayers in the aforementioned situation to elect to be taxed only when distributions are actually made by their foreign companies. In that case, they would be taxed according to current rules that establish progressive rates of up to 27.5 percent on foreign-source income earned by Brazilian individuals from their foreign companies.
Profits distributed to Brazilian individuals by nonresident companies located in countries or locations other than low-tax jurisdictions would no longer be subject to income tax in Brazil.
Final Remarks
Amaral said there now is consensus in both the Senate and the House of Representatives to approve Project 354/2009, but he did not say when it will be ready for a review and vote. The law project is under review by the Senate’s Commission for Economic Affairs, which has conclusive powers, meaning that if it approves the law project, the legislation will be forwarded directly to the House of Representatives with no need for a vote by the full Senate.
FOOTNOTE
1 25 percent for income tax and 9 percent for CSL.
END OF FOOTNOTE
David Roberto R. Soares da Silva