The Brazilian Tax SystemThe Brazilian Tax System

Presentation to Students of the School Presentation to Students of the School of Business, University of Victoria, of Business, University of Victoria, Canada in São Paulo 11 April 2013Canada in São Paulo 11 April 2013

Tax on Corporate Profits (Income Tax )Tax on Corporate Profits (Income Tax )

WORLD WIDE INCOME BASISWORLD WIDE INCOME BASIS

Companies domiciled in Brazil are Companies domiciled in Brazil are liable to Corporate Income Tax on liable to Corporate Income Tax on income arising both in Brazil and income arising both in Brazil and overseas. Brazilian branch offices, overseas. Brazilian branch offices, agencies or representative offices of agencies or representative offices of companies domiciled abroad are companies domiciled abroad are subject to income tax on income subject to income tax on income arising in Brazil. arising in Brazil.

Tax RateTax Rate

The basic rate of Income Tax on The basic rate of Income Tax on corporate profits (including capital corporate profits (including capital gains), as adjusted for tax purposes, gains), as adjusted for tax purposes, for the year 2013 is 15% with an for the year 2013 is 15% with an additional surtax of 10% on taxable additional surtax of 10% on taxable profits exceeding R$240,000 profits exceeding R$240,000 (approximately US$ 120,000 per (approximately US$ 120,000 per annum.annum.

Tax BasisTax Basis

Income Tax is payable based on either real, Income Tax is payable based on either real, presumed or imputed profits (“presumed or imputed profits (“lucro real, lucro real, presumido oupresumido ou arbitradoarbitrado”). ”). Law nº 9.249/95 et Law nº 9.249/95 et alal

The so-called “real” profit is represented by The so-called “real” profit is represented by accounting profit as adjusted for tax purposes, accounting profit as adjusted for tax purposes, whilst the estimated or imputed profits are whilst the estimated or imputed profits are calculated by applying a percentage over the calculated by applying a percentage over the company’s turnover to determine the “profit” company’s turnover to determine the “profit” figure, upon which Income Tax is calculated at figure, upon which Income Tax is calculated at the rates indicated above. The imputed profit the rates indicated above. The imputed profit basis is used when a company fails to produce basis is used when a company fails to produce proper accounting or make annual tax returns proper accounting or make annual tax returns and is calculated based upon the application of and is calculated based upon the application of certain percentages fixed in law to the certain percentages fixed in law to the company’s turnover.company’s turnover.

Treatment of Expenses Treatment of Expenses Income andIncome and expenses are to be recognized on expenses are to be recognized on

an accrual basis and the general rule for the an accrual basis and the general rule for the deduction of expenses is that they should be deduction of expenses is that they should be “necessary to the activity of the company and “necessary to the activity of the company and the maintenance of the respective income the maintenance of the respective income producing source.” Necessary expenses are producing source.” Necessary expenses are considered to be those “paid or incurred and considered to be those “paid or incurred and which may be considered normal or usual in which may be considered normal or usual in the company’s transactions, operations or the company’s transactions, operations or activities.” Certain expenses, such as medical activities.” Certain expenses, such as medical assistance, are only considered deductible assistance, are only considered deductible when the benefit is extended to all the when the benefit is extended to all the company’s employees and are not permitted if company’s employees and are not permitted if only extended to, say, the company’s directors. only extended to, say, the company’s directors.

LossesLosses

The losses originated in an accounting The losses originated in an accounting period may be carried forward for relief period may be carried forward for relief against future profits, without time limit, against future profits, without time limit, but the offset is limited to 30% of current but the offset is limited to 30% of current year taxable income. No carry-back of losses year taxable income. No carry-back of losses is allowed under Brazilian legislation.is allowed under Brazilian legislation.

Pre-operational (start up expenses) should Pre-operational (start up expenses) should

be treated as deferred assets and amortized be treated as deferred assets and amortized over a period of not less than five years from over a period of not less than five years from the date of commencement of operations.the date of commencement of operations.

Social Contribution on Net ProfitsSocial Contribution on Net Profits

In addition to the liability for income tax In addition to the liability for income tax on profits, as referred above, a company on profits, as referred above, a company is liable to social contribution tax is liable to social contribution tax (“(“Contribuição social sobre o lucroContribuição social sobre o lucro” – ” – “CSLL”) upon its income and capital “CSLL”) upon its income and capital gains. gains.

The applicable tax rate is 9%. The applicable tax rate is 9%.

Effective Tax Rate on profits – 34%Effective Tax Rate on profits – 34%

Capital Gains on Foreign Direct Capital Gains on Foreign Direct InvestmentInvestment

Capital Gains arising on the disposal by non-Capital Gains arising on the disposal by non-residents of investments registered with the residents of investments registered with the Central Bank (BACEN) are liable to tax at Central Bank (BACEN) are liable to tax at source at 15%. Where the investor is resident source at 15%. Where the investor is resident in a tax haven jurisdiction the rate is 25%.in a tax haven jurisdiction the rate is 25%.

Base value for the calculation is the foreign Base value for the calculation is the foreign currency investment registered with BACEN.currency investment registered with BACEN.

Tax still applies even if sale takes abroadTax still applies even if sale takes abroad

WITHHOLDING TAXESWITHHOLDING TAXES

Dividends – zeroDividends – zero

Interest – 15% or 25% if tax havenInterest – 15% or 25% if tax haven

Royalties – 15% (plus CIDE 10%) or Royalties – 15% (plus CIDE 10%) or 25% (plus CIDE) if tax haven25% (plus CIDE) if tax haven

Service payments – 15% plus CIDEService payments – 15% plus CIDE

CIDECIDE Since 1 January 2002, the contribution for Intervention in Since 1 January 2002, the contribution for Intervention in

the Economic Domain (“the Economic Domain (“CIDECIDE”) is also due over the amounts ”) is also due over the amounts paid, credited, delivered, used or remitted, on a monthly paid, credited, delivered, used or remitted, on a monthly basis, to non-resident beneficiaries, for royalties and basis, to non-resident beneficiaries, for royalties and remuneration in the following types of contracts:remuneration in the following types of contracts:

a)a) Licensing and assignment of patents;Licensing and assignment of patents; b)b) Technical support (in relation to technical assistance Technical support (in relation to technical assistance

and specialized technical services)and specialized technical services) c)c) Assignment and licensing of trademarks;Assignment and licensing of trademarks; d)d) Software supply (only when occurs the transfer of its Software supply (only when occurs the transfer of its

technology);technology); e)e) Technology supply; andTechnology supply; and f)f) Contracts for the supply of technical services, Contracts for the supply of technical services,

administrative assistance and other similar services.administrative assistance and other similar services. This contribution is levied at rate of 10 per cent over the This contribution is levied at rate of 10 per cent over the

amounts paid, delivered, credited, used or remitted per amounts paid, delivered, credited, used or remitted per month as payments under the types of agreements month as payments under the types of agreements mentioned above to beneficiaries who are resident abroad.mentioned above to beneficiaries who are resident abroad.

Due to its specific tax incidence, the provisions of treaties to Due to its specific tax incidence, the provisions of treaties to avoid double taxation to which Brazil is a signatory are not avoid double taxation to which Brazil is a signatory are not available to permit any reduction or exemption in relation to available to permit any reduction or exemption in relation to this base.this base.

TAX TREATIESTAX TREATIES

Brazil has signed double taxation treaties Brazil has signed double taxation treaties with Argentina, Austria, Belgium, with Argentina, Austria, Belgium, Canada, Canada, Chile, China, the Czech and Slovak Chile, China, the Czech and Slovak Republics, Denmark, Ecuador, Finland, Republics, Denmark, Ecuador, Finland, France, Hungary, India, Israel, Italy, Japan, France, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, Netherlands, Norway, Luxembourg, Mexico, Netherlands, Norway, Philippines, Portugal, South Africa, South Philippines, Portugal, South Africa, South Korea, Spain, Sweden and Ukraine. Korea, Spain, Sweden and Ukraine.

No Tax Treaty with the UK or USA.No Tax Treaty with the UK or USA. Brazil not a member of OECD.Brazil not a member of OECD.

OTHER CONSIDERATIONSOTHER CONSIDERATIONS

Thin Capitalisation Rules (2:1)Thin Capitalisation Rules (2:1)

Transfer Pricing legislation effective since Transfer Pricing legislation effective since 1997 (connected companies and tax havens)1997 (connected companies and tax havens)

CFC LegislationCFC Legislation

Amortisation of goodwill on acquisition Amortisation of goodwill on acquisition through Brazilian corporate vehiclethrough Brazilian corporate vehicle

Other TaxesOther Taxes Social Contribution on Invoicing - COFINSSocial Contribution on Invoicing - COFINS This tax is levied on a non-cumulative basis at a general This tax is levied on a non-cumulative basis at a general

rate of 7.6 per cent on the gross revenue from sales of rate of 7.6 per cent on the gross revenue from sales of merchandise and the rendering of services.merchandise and the rendering of services.

For those companies that ascertain their profits using For those companies that ascertain their profits using the “presumed profit basis”, and for some kinds of the “presumed profit basis”, and for some kinds of revenue arising from some specific business activities, revenue arising from some specific business activities, this tax is levied on a cumulative basis at a general rate this tax is levied on a cumulative basis at a general rate of 3 per cent on the gross revenue from sales of of 3 per cent on the gross revenue from sales of merchandise and the rendering of services.merchandise and the rendering of services.

As of 2004, COFINS is also levied on imports of As of 2004, COFINS is also levied on imports of products, equipment and services from abroad at products, equipment and services from abroad at general rate of 7.6%. In relation to services, COFINS is general rate of 7.6%. In relation to services, COFINS is levied on those rendered by a foreign-base legal entity levied on those rendered by a foreign-base legal entity or individual even if those services are rendered directly or individual even if those services are rendered directly in Brazil and for services whose results can be “verified” in Brazil and for services whose results can be “verified” in the country.in the country.

Other TaxesOther Taxes Contribution to the Social Integration Program - Contribution to the Social Integration Program -

PISPIS This contribution is generally charged on a non-This contribution is generally charged on a non-

cumulative at rate of 1.65 per cent on the gross cumulative at rate of 1.65 per cent on the gross revenue from sales of merchandise and the rendering revenue from sales of merchandise and the rendering of services.of services.

For those companies that ascertain their profits using For those companies that ascertain their profits using the “presumed profit basis”, and for some kinds of the “presumed profit basis”, and for some kinds of revenue arising from some specific business activities, revenue arising from some specific business activities, this tax is levied on a cumulative basis at a general this tax is levied on a cumulative basis at a general rate of 0.65 per cent on the gross revenue from sales rate of 0.65 per cent on the gross revenue from sales of merchandise and the rendering of services.of merchandise and the rendering of services.

As of 2004, PIS is also levied on imports of products, As of 2004, PIS is also levied on imports of products, equipment and services from abroad at general rate equipment and services from abroad at general rate of 1.65%. In relation to services, PIS is levied on those of 1.65%. In relation to services, PIS is levied on those rendered by a foreign-base legal entity or individual rendered by a foreign-base legal entity or individual even if those services are rendered directly in Brazil even if those services are rendered directly in Brazil and for services whose results can be “verified” in the and for services whose results can be “verified” in the country.country.

Other TaxesOther Taxes Tax on Industrial Products - IPI Tax on Industrial Products - IPI IPI is a federal tax charged on industrial products at selective IPI is a federal tax charged on industrial products at selective

rates varying according to the class of products per the rates varying according to the class of products per the classification in the table included in the IPI tax law (Law classification in the table included in the IPI tax law (Law 4.502/64 and Decree-Law 34/66). 4.502/64 and Decree-Law 34/66).

According to Law 9.532/97, products for export can leave the According to Law 9.532/97, products for export can leave the industrial establishment with suspension of the IPI when: industrial establishment with suspension of the IPI when:

a) Acquired by an export trading company, with specific a) Acquired by an export trading company, with specific purpose of export; and purpose of export; and

b) Remitted to customs deposit areas or other places where the b) Remitted to customs deposit areas or other places where the customs brokerage takes place. customs brokerage takes place.

An industrialised product is considered as being a product An industrialised product is considered as being a product resulting from an operation that modifies the nature, function, resulting from an operation that modifies the nature, function, finish or appearance of a product. The rate varies and depends finish or appearance of a product. The rate varies and depends on the classification of the goods as specified by the law. on the classification of the goods as specified by the law.

The IPI tax on the wholesale purchase price of goods is The IPI tax on the wholesale purchase price of goods is registered as a credit in the books of the purchaser and, on the registered as a credit in the books of the purchaser and, on the sale of the finished product, the amount of tax shown on the sale of the finished product, the amount of tax shown on the invoice is registered as a debit. The balance which results each invoice is registered as a debit. The balance which results each month is the tax to be paid to the federal authority.month is the tax to be paid to the federal authority.

IPI is also levied on the importation of goods and equipment.IPI is also levied on the importation of goods and equipment.

Other TaxesOther Taxes Tax on Operations on the Circulation of Tax on Operations on the Circulation of

Merchandise and Services – ICMSMerchandise and Services – ICMS The tax on operations on the circulation of The tax on operations on the circulation of

merchandise and services (merchandise and services (“ICMS”“ICMS”) is a state tax ) is a state tax charged on all products. In the case of São Paulo, the charged on all products. In the case of São Paulo, the rate is generally rate is generally 18 per cent of the value of the 18 per cent of the value of the merchandise or services. When materials are merchandise or services. When materials are purchased, the ICMS tax is already included in the purchased, the ICMS tax is already included in the price. In operations between South of Brazil and the price. In operations between South of Brazil and the Southeast, the rate is 12 per cent, and between the Southeast, the rate is 12 per cent, and between the North, Northeast, Middle-West regions and the state North, Northeast, Middle-West regions and the state of Espírito Santo the rate is 7 per cent (Article 52 of of Espírito Santo the rate is 7 per cent (Article 52 of State Decree 45.490/2000). ICMS and IPI State Decree 45.490/2000). ICMS and IPI calculations are identical.calculations are identical.

ICMS is also levied on the importation of goods and ICMS is also levied on the importation of goods and equipment.equipment.

Other TaxesOther Taxes Import tax - The Common External Import tax - The Common External

Tariff Tariff Mercosul introduced the Common External Mercosul introduced the Common External

Tariff – CET, created by the Protocol of Tariff – CET, created by the Protocol of Buenos Aires and in Brazil by Decree 1.343 Buenos Aires and in Brazil by Decree 1.343 of 23 December 1994 as amended. of 23 December 1994 as amended.

The CET tariff applicable to trade between The CET tariff applicable to trade between any signatory of Mercosul with third-party any signatory of Mercosul with third-party countries and varies between 0% and 35% countries and varies between 0% and 35% depending upon the product.depending upon the product.

For imports from other countries, the rates For imports from other countries, the rates vary based on the fiscal classification of the vary based on the fiscal classification of the product, pursuant to Decree-Law 37/66.product, pursuant to Decree-Law 37/66.

Other TaxesOther Taxes Service Tax - ISSService Tax - ISS

ISS is a tax charged by the municipal authorities ISS is a tax charged by the municipal authorities on the rendering of services. In the city of São on the rendering of services. In the city of São Paulo, according to Municipal Law 13.701/03 of 24 Paulo, according to Municipal Law 13.701/03 of 24 December 2003, the tax is generally charged at December 2003, the tax is generally charged at rate of 5% on the services value. For some rate of 5% on the services value. For some activities there are lower rates (2 and 2.5 per activities there are lower rates (2 and 2.5 per cent) and there are special tax regimes for specific cent) and there are special tax regimes for specific services such as legal, accounting, medical etc.services such as legal, accounting, medical etc.

As of January 2004, ISS is levied on the purchase As of January 2004, ISS is levied on the purchase of foreign services. Based on that, the Brazilian of foreign services. Based on that, the Brazilian beneficiary is liable for the payment of this tax. In beneficiary is liable for the payment of this tax. In addition, ISS is also levied on exportation of addition, ISS is also levied on exportation of services when the results occur in Brazil (despite services when the results occur in Brazil (despite the fact that payment is made by a foreign the fact that payment is made by a foreign resident).resident).

Other TaxesOther Taxes

Real Estate Transfer Tax and Tax on Real Estate Transfer Tax and Tax on Inheritances and DonationsInheritances and Donations

Tax Levied on Urban PropertyTax Levied on Urban Property

Tax On Financial Operations (IOF)Tax On Financial Operations (IOF)

Additional Contribution Over the Additional Contribution Over the Freight for Shipping Renewal Freight for Shipping Renewal (AFRMM)(AFRMM)

Thank You Thank You

Robert E. Williams Robert E. Williams

Partner – International Tax DepartmentPartner – International Tax Department

    rew@noronhaadvogados.com.br rew@noronhaadvogados.com.br

www.noronhaadvogados.com.brwww.noronhaadvogados.com.br

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