BRAZIL: An Introduction to Tax: Non-contentious

Brazil is a federal state with three constitutional levels of public administration, namely: (i) municipalities; (ii) member states; and (iii) federal government. Brazil’s Federal Constitution is very detailed and, in many aspects, quite specific. Attribution to impose taxes on Brazilian taxpayers follows the same division mentioned above, which results in each of the three administrative levels being able to issue tax laws and collect taxes, which are sometimes conflicting.

This is one of the reasons why the Brazilian tax system is often perceived as complex. There are three other factors that contribute to this chaotic scenario:

• the intensive legislative activity of the government bodies;
• the significant time it usually takes for a view on the interpretation of tax legislation to be officially expressed by the tax authorities; and
• the often aggressive positions of the tax administration, which does not have well-established “dialogue channels” with the business community.

A substantial reform in the tax system is long awaited by companies and investors in general. In 2023, the first step of this tax reform was taken when Constitutional Amendment No 132 (“EC 132”) was approved, amending the constitutional framework in relation to indirect taxation.

Now in 2024 it is expected that a complementary law is going to be approved by congress to detail the rules of the new indirect taxation constitutional framework.

Although the reform of the Brazilian Corporate Income Tax (CIT) law did not make much progress in 2024, the federal government put forward some relevant pieces of legislation restricting the deduction of so-called interest on net equity (“JCP”) and establishing the taxation of investment subsidies granted by the federal, state and municipal governments, and the possibility of granting a tax credit (which will be reimbursed or offset against other federal tax debts).

Another remarkable change was the introduction of new Brazilian Transfer Pricing (TP) Rules to align Brazilian legislation with OECD standards.

Constitutional Reform of Taxes on Consumption of Goods and Services

Unlike European countries, Brazil currently imposes several taxes on transactions involving the sale of goods and/or the rendering of services, namely the state tax on the sale of goods and certain services (“ICMS”), the municipal services tax (“ISS”), as well as the social contributions on gross revenues (“PIS” and “COFINS”) and the tax on industrialised products (“IPI”), levied by the federal union.

Several reforms have been proposed to simplify the consumption tax regime over the last few decades, but all of them have failed to be approved in view of the lack of political support.

By the end of 2023, however, the Brazilian parliament finally approved EC 132.

EC 132 substantially changed the current framework for the taxation of goods and services in Brazil by eliminating several of the currently existing indirect taxes (ICMS, IPI, ISS and PIS/COFINS) and replacing them with three new taxes: the Tax on Goods and Services (“IBS”), the Contribution on Goods and Services (“CBS”), and the Excise Tax (“IS”).

The IBS and CBS are value-added taxes similar to those existing in Europe that have single rates applicable to all types of goods and services, subject to certain exceptions expressly provided for in EC 132. The CBS rate will be established by federal law and the IBS rate will be the sum of the rates established by the state and municipality where an operation is based.

Although some aspects of the indirect taxes reform have yet to be thrashed out, such as how certain regimes that are specific to some economic sectors will work, EC 132 undoubtedly represents a very important step forward in the enhancement of the Brazilian investment environment.

Since the beginning of the year, congress and civil society have been discussing the Bill of Complementary Law No 68 (“PLP 68”) presented by the federal government. PLP 68 deals with the main aspects of IBS and CBS, but important discussions in the market have been about the so-called “specific regimes”. EC 132 established that some sectors will be subject to specific regimes of IBS and CBS (as is the case with the financial sector and the real estate sector, for example), but it will be up to the complementary law to define what the exact terms of these regimes will be – and for this reason, market players have focused their attention on the proposals addressing these regimes. PLP 68 has already been approved by the house of representatives and is currently awaiting approval by the senate, to be sanctioned by the president of Brazil.

More recently, the Bill of Complementary Law No 108 (“PLP 108”) was presented by the federal government. It proposes specific rules regarding the creation of a management committee responsible for administering the IBS and other procedural issues.

CIT Relevant Changes

Important changes to the CIT legislation came into effect in 2024.

On the one hand, Law No 14,789 imposed significant restrictions on the calculation basis of JCP. JCP is an equity remuneration instrument that is generally calculated by applying a legally defined long-term interest rate (“TJLP”) proportionally per day on equity account balances. With the restrictions imposed by Law No 14,789, some relevant equity accounts (such as the reserve for tax incentives) were excluded from the basis for calculating JCP, which has negatively affected the deductible amounts of JCP calculated by companies.

On the other hand, Law No 14,789 also brought up new rules about the impact of municipal and state tax incentives on the CIT basis. Until then, it had in many cases been possible to exclude the amounts of these incentives from the CIT basis, but this possibility was revoked under Law No 14,789. From 2024 onwards, a regime came into force in which the amounts of state and municipal incentives must be included in the CIT basis, and only in very specific cases can they generate a 25% tax credit that can be reimbursed by the federal government in 24 months, or used to offset other federal taxes.

New Brazilian TP Rules

Another remarkable change in 2024 was the entry into force of new Brazilian TP Rules as part of Brazil’s accession process towards an OECD membership. The new Brazilian TP Rules, which came into effect on 1 January 2024 (with an option for early adoption with effect from 1 January 2023), aim to align with the standards of the OECD Transfer Pricing Guidelines and completely depart from the old Brazilian approach (which made Brazil an outlier from a global tax perspective). Given the significance of the changes, existing structures have been impacted and Brazilian companies have been facing adaptations on their cross-border intercompany transactions – especially regarding financial and intragroup service transactions.

Conclusion

In view of all of the above, consistent tax advice and planning continue to be crucial for companies and investors in general in order to navigate the Brazilian system and understand the practical implications of the decisions they take. This is true for a broad range of aspects of businesses in Brazil, which involve, among other things, deciding on the most tax-efficient way to structure and finance a new business or the acquisition of an existing one, accessing and exiting the local capital markets, putting in place a company’s logistics structure and location, creating remuneration plans for directors and employees, developing infrastructure or real estate projects, and implementing local and international corporate restructurings.