On March 15th, 2017, the Federal Supreme Court (STF) judged Extraordinary Appeal No. 574.706/PR (with recognized general repercussion), in which it was established that the ICMS is not included in the tax base for contributions to PIS and Cofins.
After the decision was handed down, on March 15th, 2017, the Attorney General of the National Treasury filed a motion for clarification (which is still awaiting a decision) in order to request (a) temporal softening of its effects and (b) clarification regarding the amount of ICMS subject to exclusion from the tax base for contributions to PIS and Cofins.
Nevertheless, on October 18th, 2018, the RFB, by its General Coordination of Taxation and its General Coordination of Administrative and Judicial Litigation, issued Cosit SCI No. 13, which provides several considerations about item 'b' above.
In order to comply with final and unappealable court decisions that deal with the exclusion of the ICMS from the tax base of Contributions to PIS/Pasep, in the cumulative or non-cumulative determination regime, the following procedures must be observed:
- a)the amount to be excluded from the monthly tax base of the contribution is the monthly value of ICMS to be collected, according to the understanding reached in the judgment of Extraordinary Appeal No. 574.706/PR, by the Federal Supreme Court;
- considering that to determine the Contribution to PIS/Pasep for the period the legal entities segregate the calculation and record of each monthly tax base, according to the Tax Situation Code (CST) established in the legislation regarding the contribution, it is necessary to segregate the monthly amount of ICMS to be collected in order to identify the ICMS installment to be excluded in each of the monthly tax bases for the contribution;
- said segregation of the monthly ICMS to be collected, for the purpose of excluding the proportional value of the ICMS in each of the tax bases of the contribution, shall be determined based on the percentage ratio between the gross revenue related to each tax treatment (CST) of the contribution and the total gross revenue received each month;
- to determine the ICMS amounts to be collected, calculated, and recorded by the legal entity, it is preferable to consider the amounts recorded in its ICMS and IPI digital tax books (EFD-ICMS/IPI), which are transmitted monthly by each of its establishments that are subject to said tax; and
- in the event that the legal entity is exempted from recording an ICMS entry in the EFD-ICMS/IPI in some of the periods covered by the final judicial decision, it may alternatively prove the values of the ICMS to collect, month by month, based on the tax collection forms, attesting to their payment, or via some other means that are able to demonstrate the ICMS amounts to be collected, defined by the States with jurisdiction over each of its establishments.
Legal Provisions: Law No. 9,715, of 1998, article 2; Law No. 9,718, of 1998, articles 2 and 3; Law No. 10,637, of 2002, articles 1, 2, and 8; Decree No. 6,022, of 2007; Federal Revenue Service of Brazil Normative Instruction No. 1,009, of 2009; Federal Revenue Service of Brazil Normative Instruction No. 1,252, of 2012; ICMS Agreement No. 143, of 2006; COTEPE/ICMS Act No. 9, of 2008; ICMS Protocol No. 77, of 2008.
From an analysis of the excerpt transcribed above, two conclusions are necessary: (i) in the RFB's view, only the ICMS actually collected by the establishment (after the deduction of the non-cumulative credits and any tax benefits granted by states to taxpayers) may be subject to the exclusion from the tax base of the contributions to PIS and Cofins and; (ii) the monthly segregation of the ICMS to be collected, for the purpose of excluding the proportional value of the ICMS from the tax bases of each of the contributions, shall be determined by the percentage ratio that exists between the gross revenue related to each of the tax treatments of the contribution and the total gross revenue received each month.
Cosit SCI No. 13 makes clear the RFB's understanding on the matter. Therefore, taxpayers who adopt a different position about the exclusion of ICMS from the tax base of the contributions to PIS and Cofins, as well as those that record amounts collected in excess as credits (for eventual offset after final judicial decision), shall be contested.
Considering that Cosit SCI No. 13 lends itself to fulfilling final court decisions about the exclusion of ICMS from the tax base of the contributions to PIS and Cofins, taxpayers who have individual decisions that differ from the understanding settled in Cosit SCI No. 13 are authorized, in our opinion, to use their individual and concrete decisions instead of the one mentioned in the RFB act.
In light of the above, and especially the fact that the subject matter of Cosit SCI No. 13 is still awaiting a decision by the STF on the motion for clarification presented by the Attorney General's Office (which would prevent the RFB from promulgating rules on the subject), we understand that the interpretation adopted by the RFB is subject to questioning by taxpayers.
Aiming at counteracting tax planning used by multinationals that take advantage of the heterogeneity of the international system to reduce their overall global tax burden, the Organization for Economic Co-operation and Development (OECD) and the Group of 20 (the so-called G-20, which includes the 19 largest economies in the world and the European Union) started in 2013 the Base Erosion and Profit Shifting (BEPS) Project. As a member of the G-20, Brazil participated in the discussions and implemented some of the measures envisaged, but it still needs to move ahead in specific areas that are crucial to ensure legal certainty for taxpayers operating in Brazil and alignment with international practices.
The current stage of implementation of the measures proposed by the BEPS Project was the topic of the 71st Congress of the International Fiscal Association (IFA), held in Rio de Janeiro at the end of August.
The actions to be developed as part of the BEPS Project are organized into three pillars: (i) introducing coherence into domestic rules dealing with cross-border activities that affect the definition of taxable basis; (ii) reinforcing substantive requirements for structures implemented to follow existing international standards; and (iii) improving transparency, certainty, and predictability of the international system, with due collaboration between tax authorities.
OECD member countries supported the project because they are the most affected by tax base erosion practices. In the case of Brazil, however, the main motivation to cooperate with the BEPS Project is transparency and international exchange of information, given its different investment profile, more focused on attracting foreign capital, not exportation.
In addition, since the mid-1990s, the federal government has implemented Specific Anti-Avoidance Rules (SAARs), which are considered by the Brazilian Federal Revenue Service (RFB) as enough to mitigate the effects of the international tax planning that motivated the BEPS Project. These rules have been implemented in Brazil through legislative changes since 1998, based on the OECD’s recommendations in the Harmful Tax Competition Report.
Examples of SAARs adopted by Brazil are: taxation on worldwide income, transfer pricing rules, a list of low-tax jurisdictions (black list) and privileged tax regimes (grey list), increased rate of income tax on payments to low-tax jurisdictions, limitation on the deductibility of such payments, and thin capitalization rules, among others.
In the context of actions aimed at promoting transparency and the international exchange of information, the RFB issued rules to implement the following measures: (i) Country-by-Country Declaration (RFB Normative Ruling No. 1681/16); (ii) exchange of information regarding rulings (RFB Normative Ruling No. 1,689/17); and (iii) mandatory declaration of the beneficial owner of Brazilian legal entities (RFB Normative Ruling No. 1.634/16). Also focusing on international transparency, two agreements regarding the automatic exchange of financial information were signed by Brazil: the Foreign Account Tax Compliance Act (FATCA) with the United States and the Common Reporting Standard (CRS), within the framework of the Global Forum on Transparency and Exchange of Information for Tax Purposes.
With the above measures, the RFB will receive a substantial amount of information on the international structure of Brazilian taxpayers, which will change tax inspection proceedings. From this, the need to introduce measures that seek to align Brazilian rules with international standards will become even more evident, in order to avoid having international information and concepts used in inspections merely for tax collection purposes.
With regard to the pillars of substance and coherence, Brazil has hardly evolved, which may make it difficult for it to join the OECD in order to attract foreign investment. Unlike the RFB, the National Congress did not follow the developments of the BEPS Project and the need to undertake legislative changes in tax matters aiming at coherence and legal certainty.
Refinement of the rules on taxation of worldwide income, on the legal definition of substantive criteria, and on the possible introduction of a general anti-avoidance rule (internationally known as GAAR) are examples of legislative changes necessary for legal certainty in international tax matters.
The success of the BEPS Project in Brazil and the acceptance of Brazil by the select group of OECD members do not depend only on the RFB's efforts with respect to transparency and effective cooperation between tax authorities. For investors and Brazilian taxpayers, the OECD petition highlights Brazil’s need for aligning with international taxation standards, which should occur through legislative changes preceded by a broad debate with the private sector, aiming at legal certainty and greater competitiveness of Brazilian companies in the global context.
Law 13,169/2015: increasing of CSLL rate
It was published in the Oficial Gazette, on Thursday, October 7, 2015, Law 13,169/2015, which is the provisional measure 675/2015 conversion into law.
According to the modifications introduced in section 3, subparagraphs I e II of Law 7,689/1988, the Brazilian Social Contribution on Net Income (“CSLL”) rate for financial institutions was increased from 15% (fifteen percent) to 17% (seventeen percent) or 20% (twenty percent), depending on the nature of the activities developed by the Company.
Supreme Court modifies its understanding regarding the tax substitution regime
The Full Court of the Supreme Court ("STF") analyzed the Extraordinary Appeal No. 593,849, under the general repercussion regime (with binding effects), which discussed the reimbursement of overpaid amounts by taxpayers of the Tax on Goods and Services ("ICMS"), subject to the tax substitution regime.
Provisory Law raises
Income Tax rate for capital gains earned by individuals and changes.
Provisory Law No. 692, of September, 2015, amended Law No. 8,981/95 changing the current 15% Income Tax rate for individuals on capital gain to the following rates: 15% for gains until R$1 million, 20% for gains from R$1 million to R$5 million, 25% for gains from R$ 5 million to R$20 million and 30% for gains over R$20 million. This modification also applies to companies under Simples.
State of Rio de Janeiro approves friendly notification of charge before beginning a tax procedure
Law No. 6,884, of September 5th, 2014, amended Law No. 2,657/1996, which sets forth ICMS rules, in order to create a specific Section (Section VII-A Procedures without Loss of Spontaneity), related to the possibility that the State Revenue Service issue a friendly notification before beginning any tax procedure to impose penalties, for the taxpayer to regularize the obligation it had failed to comply with.
Optional regime concerning tax reduction on payroll and increase of rates of Social Security Contribution on Gross Revenue
On August 31st, 2015, Law No. 13,161 was enacted. Among other provisions, this law brings relevant amendments to the tax reduction on the payroll set forth in Law No. 12,546/2011. This new law makes optional the collection of social security contribution on gross revenue (Contribuição Previdenciária sobre a Receita Bruta - CPRB) for companies already subject to that regime.
PAY ATTENTION TO FATCA
On September 30th, 2015, the Brazilian Internal Revenue Service and the United States Internal Revenue Service will begin to exchange information on accounts held by Brazilian individuals and entities in the United States and information on accounts held by American individuals and entities in Brazil.
IN n. 1,658/2016: recent changes on Brazilian tax havens’ list
Normative Ruling n. 1,658, dated September 13th, 2016, published yesterday, amended Normative Ruling n. 1,037, dated June 4, 2010, which establishes the lists of low tax jurisdictions and privileged tax regimes.