The Supreme Court docket has lastly determined the so-called “case of the century” – Tax

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The Supreme Court finally decided the case, which concerns the exclusion of the ICMS tax from the tax calculation bases PIS and COFINS. Although a decision was made in March 2017, a request for clarification was pending.

The Supreme Court ruled by a majority that the ICMS tax, which is to be excluded from the PIS and COFINS tax calculation bases, is the amount shown on the tax invoice and not the ICMS tax amount actually paid by the taxpayer, i.e. after credits and debits credit.

In addition, the court has limited the effects of the decision so that it will not apply until March 15, 2017, with the exception of lawsuits filed before that date.

The decision was a great victory for taxpayers.

New Perspectives on Brazilian Tax Reform

In Brazil, the need for tax reform has long been debated, the main aim of which is to simplify tax law and achieve greater economic rationality.

The discussion on this topic has intensified in recent months, and especially after the decision of the Supreme Court to exclude the ICMS tax from the PIS and Cofins tax calculation bases, the National Congress pushed ahead with the preparation of reform laws.

As this is an issue where executive-legislative alignment is required, it has been reported that reform is likely to be piecemeal.

The reform may address: (i) the introduction of a new contribution tax on goods and services that would replace PIS and Cofins taxes and possibly ICMS and ISS taxes over time, (ii) Changes in income tax legislation, (iii) taxation of dividends and the end of interest on equity (Juros sobre o Capital Próprio) and (iv), among other things, the introduction of a digital tax.

There are several options that are being assessed, but there is no consensus on which reforms should be prioritized and, with many amendments in Congress, it is impossible to know which path to take.

In this context, it is important that taxpayers are aware of the changes so that they can assess the impact of the reforms on their business operations as early as possible.

The Brazilian government has announced the double taxation agreement between Brazil and the United Arab Emirates

The Brazilian government announced the double taxation treaty between Brazil and the United Arab Emirates, which was signed on November 12, 2018.

This convention aims to eliminate or minimize double taxation of income from residents in both countries by establishing tax sovereignty over various types of income such as profits, dividends, interest, royalties and services. In addition, the convention regulates the exchange of information between the tax authorities of the two countries according to internationally recognized standards.

From now on, the Convention is in force, which reflects a balance between the interests of the signatory states and promotes increasing legal certainty and improving the business environment.

Federal government publishes interpretation on the taxation of exchange rate fluctuations for investments abroad

Recently, in response to a request from a taxpayer, the Federal Revenue Service gave its opinion on the taxation of exchange rate fluctuations due to foreign investments (controlled company) by a Brazilian legal entity.

The case investigated by the tax authorities involved a Brazilian oil and gas company that was considering reducing the capital of its subsidiaries abroad.

The analysis questioned two points: (i) whether the positive exchange rate fluctuations calculated between the date of investment and its settlement are considered as a cost of calculating the profit or loss at the time of the capital decrease and (ii) the understanding of the effects of fluctuations for the purpose of Calculation of income tax (IRPJ and CSLL) and social contribution taxes (PIS and Cofins).

In response to the taxpayer, the tax authorities stated that the change in the exchange rate of investments abroad for income tax purposes is part of the cost of these investments, while retaining its character as a counterpart to the adjustment of the investment value.

With regard to social contribution taxes, the position was taken that the positive change in the exchange rate should be regarded as taxable financial income.

The position of the tax authorities is important to avoid challenges in the taxation of exchange rate fluctuations by the IRPJ and CSLL taxes and to eliminate the risk of assessments, but given the position of taxpayers, that this should not be considered as taxable income for social contribution tax purposes be considered.

Federal government starts installment payment program for debts from the profit-sharing program

The National Treasury (Revenue Service and the Attorney General of the National Treasury) has introduced an installment payment program that allows taxpayers to resolve administrative and judicial disputes relating to the taxation of profit-sharing programs (PLR) at a discount of up to 50 % and payment in installments.

This is a novelty known as a “litigation control transaction” that, according to the Treasury Department, aims to resolve conflicts with greater predictability and security.

The issue of taxing PLR programs has been the subject of much discussion in recent years. On the one hand, the taxpayers take the position that their programs are lawful and non-salary, and on the other hand, the Brazilian federal finances levy levies because they assume that the payments are salaries per se.

As part of the transaction, there is an option to pay the disputed amounts in three ways. All three require a down payment of 5% of the total amount with no reduction in five installments, with the remainder payable: (i) in seven months with a 50% reduction in fines, interest and other fees, (ii) in 31 months with a 40% discount on fines, interest and other fees or (iii) in 55 months with a 30% discount.

It is important to emphasize that the taxation of profit-sharing programs is a matter that is directly related to the practical situation of the individual case, with each parameter and criteria directly influencing the prospect of a successful litigation and should be carefully considered before a decision is made whether to pursue this settlement option.

Attorney General requests state laws on the taxation of gifts and inheritances abroad

In February 2021, the Brazilian Supreme Court ruled as binding precedent not to apply Gift and Inheritance Tax (ITCMD) to gifts and inheritances abroad, as the Brazilian Constitution stipulates a complementary law to collect ITCMD tax when the donor is domiciled or is domiciled abroad, as well as if the deceased owned assets abroad.

After this decision, the states and the federal district have no legal capacity to collect the tax pending regulation.

As a result, in May 2021, the Attorney General of the Brazilian Ministry of Finance (PGR) filed 24 lawsuits against the constitutionality of state and federal district laws that regulate the taxation of donations or inheritances abroad. These lawsuits are significant as these rulings provide taxpayers with reassurance that there is no need to file a lawsuit in order to secure the right not to pay the unconstitutional tax.

The PGR also filed a lawsuit against the Brazilian Congress for the promulgation of a supplementary law regulating the ITCMD on inheritance and gifts abroad.

Exemption from real estate transfer tax when capitalizing assets in the capital of the real estate company

The Supreme Court ruled that when real estate is used to make capital contributions to a corporation, the transaction is exempt from land transfer tax (ITBI) if the real estate value does not exceed the deposited capital value.

The case did not focus on real estate companies, but a majority of the judges voted in favor of real estate transfer tax exemption for real estate companies with real estate transfer tax, changing previous court rulings on the matter.

Despite this recent Supreme Court ruling, some state courts still hold that the capital paid into real estate companies
Not exempt from ITBI. Because of this, the Supreme Court may be required to reanalyze and re-evaluate the case, focusing on real estate companies.

Property tax proposed in many bills in Congress

A wealth tax has been provided for in the Brazilian constitution since 1998. However, it requires the creation of a supplementary law, which has not been enacted.

Due to the political and economic crisis, particularly exacerbated by the coronavirus pandemic, several bills that want to introduce a wealth tax in Brazil are currently being discussed in Congress.

The latest draft law (Supplementary Law Bill No. 215/20) provides for the assessment of wealth tax for every natural person with assets in excess of BRL 50 million (approx. USD 9.9 million).

Several countries in Europe have introduced wealth tax, including Austria, Denmark, Finland, France, Germany, Iceland, Luxembourg, the Netherlands, Norway, Spain, Sweden and Switzerland. In 2017, however, only four of these countries had a wealth tax (France, Norway, Spain and Switzerland) and France had significantly reduced the scope of its wealth tax in 2019.

The lack of success of the wealth tax in these countries raises serious concerns about its introduction in Brazil.

Brazilian tax authorities are making progress in offering digital services to taxpayers

The Brazilian Tax Management Support Program (“PROFISCO”), which is financed and technically supported by the Inter-American Development Bank (IDB), has implemented the automation of administrative tax disputes so that both tax authorities and taxpayers can submit all case documents exclusively digitally.

A software program called Fiscal Administrative Procedure (PAT-e) enables the complete administration of documents, defines and automates the control rules for the creation, maintenance, handling and archiving of documents in all phases.

The results so far with the implementation of PAT-e show that digitization is an essential tool for the state to increase tax collection and improve the provision of services to Brazilian taxpayers. It is also living proof of the transformative power of the PROFISCO program, a partnership between the IDB and the Brazilian government that promises to continue to drive innovation in Brazilian tax management.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.