Briganti Advogados, as a renowned Tax Law office and international operations, supports the search for the best tax efficiency for Brazilian and foreign companies that run trades across various jurisdictions. This action seeks to plan the beginning of the business, whether it is the purchase and sale, distribution, eventual permanent investment, or the organization of an existing business structure that, due to some characteristics of the countries’ legislation involved, does not reach the best tax efficiency.
In our daily tax consulting practice, it is common for taxpayers who reside in a jurisdiction different than the Brazilian one and are interested in doing business in the country to come to our office with a series of questions about the subject. After all, Brazilian tax is considered to be one of the most complex in the world, and it can be fundamental to reasonably understand that in order to better position products or services that want to be sold here. A good tax efficiency can be a determining factor for the competitiveness of the economic player.
On the other hand, what most of those who have some contact with the Brazilian tax system are unaware of is that the aliquots of our main taxes are not high if compared to those practiced in other jurisdictions. In fact, they are close to those of European countries, such as Spain and France, members of the largest economical-financial hub and consumer market in Latin America, the Organization for Economic Cooperation and Development, (OECD). The point that still stands us out negatively is, without a doubt, the tangle of rules and ancillary practices that demand attention from any taxpayer.
As a positive point, the tax legislation in Brazil is considered to be friendly to foreign investors. Regardless of the government’s adopted line to conduct the Republic, it is incontrovertible that Brazil demands investments, technology, and, for this reason, provides for the formation of new businesses established here, whether through benefits or other incentives. Our tax team, led by our founding partner Leonardo Briganti, has prepared special content to clarify 11 frequently asked questions in this regard. Check it out!
1. How does tax happen for Brazilian companies that operate abroad?
The investment of Brazilian companies abroad is a delicate point in our legislation. Brazil is, in our opinion, a country that is receptive to foreign investment, but gives low support to the Brazilian entity that wants to internationalize, through controlled or affiliated companies abroad; there is, in these cases, an effective tax penalty. The local legislation, depending on the position of the investment and the social control’s exercise, requires the Brazilian entity to recognize the results produced abroad for tax purposes in Brazil, even if these results have not been effectively made available. That is, the proceeds from the activity abroad’s exploitation, even if reinvested in that company, kept in a reserve account to support, for example, a potential contingency, must be considered as made available to Brazilian partners or shareholders and, therefore, taxed in Brazil. In this regard, whenever there is a need for internationalization of Brazilian companies, it is essential to understand the tax of the destination place, the existence of international treaties signed to avoid double tax of income, among other ways to better plan the beginning of this activity.
This rule is not common in more mature jurisdictions that tax the income produced in foreign entities when this income is effectively perceived by the partner or shareholder, or for countries that seek to strengthen the national companies’ presence in an increasingly globalized market.
2. How is tax for multinationals that want to operate in Brazil?
For multinationals that want to do business in the country, the environment is different and, depending on the business, it could be favorable. It is important to reiterate that the Brazilian jurisdiction and the federal political power seek to attract direct foreign investment and, therefore, that which intends to be implanted here, practically gains national status for the purposes of tax on the production of goods or services’ provision. Even though the bureaucracy can be considered intense, as a rule, the foreign investor has no restrictions or encumbrance to do business in Brazil as a result of his foreign status.
On the other hand, in some situations, the foreigner and his investments may enjoy benefits for carrying out the endeavor. In any case, he has, for tax purposes, the same condition as a Brazilian, with a few peculiarities that must be observed on a case-by-case basis.
As for the trades involving products or services, Brazil also has a culture of always encouraging exports linked to the payment of free convertibility currencies, unencumbering in these transactions the taxa of the revenue earned by the respective exporter. Currently, there is an exemption from exportation tax, contributions to PIS, COFINS, ICMS, IPI, and ISS, always respecting the specific rules for the case. Regarding importation by Brazilian entities located here, Brazil presents as a legislative tax policy position to encumbrance the introduction of products and services from abroad, subjecting them to an unfavorable position from the point of view of competitiveness with locally produced products and services. Basically, goods/services of foreign origin are encumbered by the importation tax – II and contribution for intervention in the economic domain – CIDE, respectively, taxes that do not fall upon the acquisition of goods and services produced locally.
Brazil has signed some economic cooperation agreements, the Mercosur being the most prominent one, currently. This agreement encumber products produced by countries in the bloc from importation taxes. The absence of other agreements of greater relevance prevents products from other locations from being introduced in Brazil in an equivalent environment to national goods. In this area, the possibility of formalizing the agreement with the European Community may cause the mentioned importation tax to cease to be fall upon certain products, increasing market competitiveness, whether for foreign producers who want to introduce their products into Brazil, or for Brazilians who want to compete with their products in the common European market.
In any case, it is important to understand the tax environment and the taxes’ types that will be fell on the foreign products’ importation and services by Brazilian taxpayers and, with this, to evaluate, in planning, ways to reduce this tax charge. This study has gained even more importance due to recent changes in the United States America’s law, a country that, despite not having a treaty, locally allowed taxes paid by American taxpayers in foreign jurisdictions to be offset against taxes owed to the American jurisdiction itself. This internal rule allowing the use of the tax paid abroad as a tax credit may have its days numbered. That is because nowadays the law restricts credits only if they were generated in countries that have similar tax systems to those in the United States. And this is not currently the case in Brazil.
3. But, after all, what is international tax?
International tax is the set of standards and administrative regulations promoted by all countries (jointly – as members of the OECD – or separately) to organize the collection of taxes, formalization of treaties, and economic management around the world and in multilateral transactions.
Understanding these impacts on transactions between countries is important to guide corporate decisions, especially in light of the new actions developed by the OECD to reduce tax evasion related to Base Erosion and Profit Shifting (BEPS).
4. What are the main taxes and tax regimes inherent in exportation and importation relations in Brazil?
The main taxes due on importation are:
a) II (Importation Tax)
b) IPI (Tax on Industrialized Products)
c) PIS (Social Integration Program)
d) COFINS (Contribution for Social Security Financing)
e) ICMS (Tax on the Circulation of Goods and on Services)
f) ISS (Service Tax)
h) CIDE (Contribution for Intervention in the Economic Domain)
Besides these, depending on the factual situation, there is also the IOF Exchange (Tax on Credit, Exchange, and Insurance Transactions, or those related to Securities), due at the moment of the exchange of reais to the foreign currency of payment.
Also in relation to IOF exchange, the Brazilian government recently issued Decree 10,997/2022, in order to align the country with the provisions of the Capital Liberalization Code of the Organization for Economic Cooperation and Development (OECD). The oder foresees a schedule to zero the tax levied on the contracting of foreign currency by the year 2028.
In exportation, on the other hand, the existing and foreseen tax charge nowadays is under exemption rules and, therefore, is reduced, as said above, it is a mechanism adopted by the Brazilian government as a way of providing local products and services to reach the international market in conditions to compete on price. Given this scenario, taxes such as IPI, PIS, COFINS, ICMS, IOF Exchange and ISS are exempt, immune, or not levied in exportation.
There is also a forecast of the Exportation Tax’s (IE) incidence. This tax has an extrafiscal purpose, that means, it is an instrument for the application of exportation flow’s fiscal and regulatory controls. Currently, there is only exportation tax levied on transactions with cigarettes containing tobacco, weapons and ammunition. For other products the IE tax aliquot is zero.
In importation and exportation there is a provision for granting special customs regimes that have the purpose of reducing the tax charge or granting differentiated treatment in customs controls as measures for reducing bureaucracy or cash flow efficiency. The main customs regimes are:
- Drawback: special customs regime that allows the suspension or elimination of taxes levied on the acquisition of inputs used in the exported products’ industrialization.
- Temporary admission: special customs regime of temporary admission with total suspension of the taxes’ payment, is what allows the importation of goods that must remain in the country for a fixed period of time, with total suspension of the taxes’ payment on importation.
- Temporary exportation: allows the exit from the country, with suspension of exportation tax’s payment, of national or nationalized goods, conditioned to the re-importation within a determined period, in the same state in which it was exported.
- Recof-Sped: allows the beneficiary company to import or acquire, in the domestic market, inputs for its production process, industrialize its final products, and export them, without paying taxes at any of these stages.
- Repetro: is the special customs regime for the exportation and importation of goods destined for the activities of research and extraction of oil and natural gas.
- Customs transit: special regime that allows the transportation of goods, under customs control, from one point to another of the customs territory, with suspension of taxes payment.
5. What are the main taxes that deserve attention in an M&A transaction involving different jurisdictions? And in a joint venture?
In a Mergers and Acquisitions (M&A) transaction, one of the involved parties sells its business stake to the other and, by doing so, can earn a capital gain. On this gain, in operations carried out in Brazil or with assets located in this territory, there will be tax by Corporate Income Tax. On the other hand, the acquiring company may realize a goodwill/discount on the acquisition and, depending on its location (direct acquisition by the entity located abroad or through a subsidiary created in Brazil), some tax effects may be relevant.
It is also important to emphasize that for the purposes of acquisition, even if not related to this legal event, the acquirer may be liable for any tax liabilities linked to the acquired entity, which makes it essential to have a good work of.Due Diligence.The Brazilian law is strict in this aspect and sometimes differs from other systems in force in different countries, a fact that ends up creating difficulties for investors.
In addition to these effects directly related to the M&A transaction, other tax effects related to the subsequent moment must be known and anticipated. Here we refer to, for example, mandatory tax in the jurisdiction of the produced profits’ origin in the invested entity, even if these profits have not been made available, or possible tax of this asset depending on the classification attributed to it in a future disposal.
The payment of dividends is also an important point, since the legal rules of foreign jurisdictions can encumber this form of retribution to the shareholders. This can even be more impacted if there is no international agreement to avoid double tax that foresees a Tax Sparing mechanism.
6. What is the role of international treaties, agreements and conventions in the tax sphere?
In a globalized economy, in which entities do business in different jurisdictions, treaties, agreements and conventions have an important mission to avoid that the same income produced is double taxed, or even, if double tax is allowed, to establish the maximum encumber that can be demanded from taxpayers.
Therefore, treaties are mechanisms that seek to make business possible, or, as a minimum, they can allow the product and/or service to be introduced in the destination jurisdiction more competitively.
7. Are there any signed agreements to avoid double tax between Brazil-Spain and Brazil-France? If not, how can the entrepreneur avoid double tax?
Brazil has international agreements, conventions and treaties to avoid double tax and prevent tax evasion with several countries, such as
Africa: South Africa;
Asia: China, South Korea, Arab Emirates, Philippines, India, Israel, and Japan;
Americas: Argentina, Canada, Chile, Denmark, Ecuador, Mexico, Peru, Trinidad and Tobago, and Venezuela; and
Europe: Austria, Belgium, Czech Republic, Finland, France, Germany, Hungary, Italy, Luxembourg, Netherlands, Norway, Portugal, Russia, Slovakia, Spain, Sweden, Switzerland, Turkey, Ukraine, and Slovakia.
It is worth pointing out that the Brazilian government provides access to the full text of the international agreements and treaties in force in Brazil.Click here to check them out.
The convention to avoid double tax between Brazil and Spain was promulgated in Brazil by Decree No. 76,975, January 1975, and between Brazil and France by Decree No. 87, November 1971.
In recent years, Brazil has signed a document of intent to establish international rules in trade with countries in the euro zone. This agreement, still to be formalized, foresees the gradual reduction of tax on foreign products and services and will be an important step in the increase of commercialtrade between the involved jurisdictions .
8. What are the transfer prices? How does their legislation work in Brazil, Spain and France?
Transfer pricing is a method of controlling prices and agreed-upon values in transactions between linked or related parties that are located in different jurisdictions or tax havens in order to avoid tax avoidance in the jurisdictions involved. In this way, we can say that these are rules for defining the minimum “market value” to be practiced in the importation and exportation of products and services between parties belonging to the same group.
With the aim of seeking a parameterization of rules, the OECD guides that transfer prices should be guided by the “arm’s length” principle, by which transactions between related parties belonging to the same multinational group should, for tax purposes, be valued as if they were transactions carried out between independent companies. It should be noted that Spain and France are OECD Member States and adopt transfer pricing rules according to the “arm’s length” principle.
Brazil, in turn, throughLaw 9,430/96 established the transfer pricing rules applied to define a minimum price for exportation and importation. In summary, the country has adopted a model on certainty and practicality based on fixed margins. It is noteworthy that the Federal Government has sought to have Brazil join the OECD. With this established, the transition from the fixed-margin parameter price calculation method to the one based on the “arm’s length” principle should take place.
9. What are the challenges of tax in an increasingly globalized world?
In view of the economy’s globalization, one of the main challenges in international tax is to establish clear, uniform, and generally applicable rules for the tax of profits. In addition, it is also a challenge, results in international operations in order to avoid double tax and unfair competition practices between countries.
The most recent initiative in the search for parameterization of tax norms is the setting of a minimum tax aliquot of 15% for multinational companies. This decision aims to minimize/terminate the practice of granting economic advantages, exemptions, and differentiated tax benefits that, in some way, border on the practice of unfair competition and tax avoidance between the countries involved.
10. What is the difference between international tax and customs relations?
International tax is a set of standards and administrative regulations promoted to organize the collection of taxes, especially those related to income and wealth generated in different jurisdictions. Its purpose is the treatment of income, based on the principle of the tax’s universality.
Customs relations, on the other hand, are the organization of the movement of goods and services around the world, focusing on rules of performance that facilitate or hinder the entry and exit of these goods from the most diverse territorial jurisdictions. Obviously, customs relations can impact international trades, especially when rules of an ancillary or material nature create difficulties or burdens in these relations.
11. In 2021, the OECD reached an agreement with 136 countries to set a minimum global tax of 15% for multinationals. What is the impact of this decision for Brazilian companies and multinationals operating in the country?
The agreement reached by OECD member countries to set a global minimum tax rate of 15% is intended to make multinationals pay more tax, while maintaining a fair standard aliquot, regardless of where they run their activities and generate their profits.
This agreement intends to prevent these large corporations from promoting, as a form of tax planning, their establishment in jurisdictions such as Hungary, Ireland and Estonia, which, until now, despite being members of the organization and participating in its guidelines, applied lower tax aliquots than the other countries, playing the role of true tax havens used to reduce tax.
Although signed, with reluctance from the countries benefiting from the reduced aliquots, the agreement will be valid as of 2023. In principle it will have the following impact on Brazilian companies: an increase in the income tax charge. Taking into consideration that the Brazilian legislation (art. 24-A of Law 11.727/08) determines that countries with no tax, or with general tax lower than 20%, are considered as privileged tax regimes and, consequently, they run tax and file tax differently than other countries.
This impact on income tax’s increase will also be the effect experienced by multinationals operating in Brazil and in all 136 OECD member jurisdictions. Thus, resulting in an increase in the final cost of the products that will certainly be passed on to the final consumer.