Originally published in the June 17 edition of World Tax Daily (Copyrights Tax Analysts)
Brazilian corporate taxpayers’ nonoperational income (income that is not derived from the sale of goods or services) is now exempt from the P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security).
The exemption, which took effect May 28, is the result of a last-minute change made by Congress while converting Provisional Measure 449/08 into Law No. 11,941/09 (which was published in the official gazette May 28).
Before Law No. 11,941/09, corporate taxpayers — whether subject to the cumulative or noncumulative regime for the calculation of P.I.S. and COFINS — were required to pay those contributions on any income earned, regardless of the company’s business activity or the accounting classification of the relevant income item. In practical terms, that meant that unless a tax exemption or express exclusion applied,1 any income earned by corporate taxpayers was subject to P.I.S. and COFINS.
That tax liability was created in 1998 by paragraph 1, article 3 of Law No. 9,718/98. Before Law No. 9,718/98, only income arising from sales of goods and services was subject to P.I.S. and COFINS.
During the legislative process of converting Provisional Measure 449/08 into law, Congress added a provision (article 79, item XII) that expressly revoked paragraph 1, article 3 of Law No. 9,718/98. That change returned P.I.S. and COFINS taxation to the tax basis effective before 1998, which in practical terms means that only operating income from sales of goods and services is subject to those taxes.
The revocation may be advantageous, for example, if a company that is not in the leasing business receives rent payments for assets it has leased.
The Federal Revenue Attorney General’s Office has confirmed that the revocation of paragraph 1, article 3 of Law No. 9,718/98 excludes any nonoperating income (income that is not related to the company’s business purpose) from the P.I.S. and COFINS tax base.
Companies with financial income that are under the noncumulative regime for calculating P.I.S. and COFINS previously were subject to a zero rate; that zero rate is now an exemption. This is most relevant for interest on equity earned by those taxpayers. The zero rate P.I.S. and COFINS applicable to financial income were created by Decree 5,164/04 and Decree 5,442/05, which expressly excluded interest on equity. That meant that interest on equity earned by taxpayers under the noncumulative regime was subject to a 7.6 percent COFINS and a 1.65 percent P.I.S. With the revocation of paragraph 1, article 3 of Law No. 9,718/98, interest on equity is no longer subject to P.I.S. and COFINS.
For companies under the cumulative regime (including those under the presumed income tax calculation method), the Supreme Court ruled in 2005 that P.I.S. and COFINS should not apply on financial income. However, before Law no. 11,941/09, there was no legislation that expressly excluded financial income from P.I.S. and COFINS.
Perhaps the most controversial issue arising from the revocation of paragraph 1, article 3 of Law No. 9,718/98 concerns P.I.S. and COFINS payable by financial institutions. For years, banks and other financial institutions have claimed that they should pay P.I.S. and COFINS only on service income earned from fees charged to clients, which would exclude interest earned from borrowing and lending activities, transactions with government bonds, and so on. A case is now under review by the Supreme Court, but no decision has been delivered thus far.
The financial institutions claim that the revocation of paragraph 1, article 3 of Law No. 9,718/98 supports their argument that P.I.S. and COFINS should not apply to their financial income, but the Federal Revenue Attorney General’s Office disagrees with that argument, saying that the revocation backs up the government position that interest earned by financial institutions is subject to P.I.S. and COFINS because it is business income by nature for those companies, compared with nonfinancial institutions.
FOOTNOTE
1 Income that was not subject to P.I.S. and COFINS before Law No. 11,941/09 included export income and the proceeds from sales of fixed assets.
David Roberto R. Soares da Silva