As the Constitutional Amendment Bill providing for the extension of the provisional tax on financial transactions (CPMF) was not approved by Congress, the government had to find other means to recover the loss of tax revenue. As part of the measures taken by the government, Decree No. 6,339 and Provisional Measure 413 were issued by the Brazilian government to increase the rates of the tax on financial operations (IOF) and the social contribution on net profits (CSLL). Both instruments were published in the Official Gazette of 3 January 2008.
IOF and CSLL rates
IOF is a tax that is levied on credit, foreign exchange, insurance and securities transactions at different rates. As a general rule, the rates were increased by 0.38%, which is exactly the tax rate applicable for extinct CPMF tax. The increment on the tax rates is effective as of 1 January 2008.
CSLL is a contribution levied on net profits of legal entities, in general, at a rate of 9%. The rate was increased from 9% to 15%, but only to financial, insurance and capitalization companies. The new rate will be effective as of 1 May 2008.
PIS and COFINS modified
The Contribuição para o Programa de Integração Social (PIS) and the Contribuição para o Financiamento da Seguridade Social (COFINS) are two federal taxes that generally apply on gross revenues and on imports. Provisional Measure 413 established that payments made by a Brazilian to a foreign entity as a consideration for the rent or lease of sea or fluvial vessels for purposes of transporting persons in tourism, even if in combination with cargo, are now also subject to PIS and COFINS at a combined rate of 9.25%.
The new Provisional Measure also imposed, among other rules, a tax substitution system for the PIS and COFINS due by manufacturers, importers and distributors of alcohol. As of 1 May 2008, the PIS and COFINS due will be paid exclusively by the manufacturers and importers of alcohol, being the rest of the commercial chain subject to a 0% rate of PIS and COFINS.
Tax benefits
Despite the increase in the tax rates mentioned above, Provisional Measure 413 brought some specific tax benefits, which are effective as of 1 January 2008. It provided for (i) an accelerated depreciation of movable assets acquired by legal entities engaged in the hotel business (for purposes of calculating their corporate income tax); and (ii) the possibility by all legal entities to offset, in certain circumstances, the PIS and COFINS withheld at source that cannot be offset with the PIS and COFINS due on future transactions, with other federal taxes.
New adjustment mechanism for transfer pricing on exports
In an effort to reduce the impact caused by the appreciation of the Brazilian Real (BRL), the Ministry of Finance and the Chief of the Federal Revenue Service respectively issued Directive 329 and Normative Instruction 801, both published in the Official Gazette of 28 December 2007, providing for a mechanism to adjust the prices of export transactions for purposes of complying with transfer pricing regulations. This type of adjustment has already been provided for the years of 2005 and 2006.
Transfer pricing rules on exports include a general safe harbour for export purposes. Exports are subject to transfer pricing rules only when the average price of the exported goods, services or rights during the current tax period is less than 90% of the normal domestic sales price for the same types of goods, services or rights in that period and under similar payment conditions. In addition, for exports that do not meet the general safe-harbour rule, export prices shown on the relevant supporting documents are, in principle, deemed to be at arm's length if:
| - | the net income before income taxes of the relevant company derived from export transactions is equal to at least 5% of its overall export revenue, taking into account the average of the same period and the 2 previous years; or | |
| - | the enterprise's export-related net turnover in a tax period is 5% or less of its total net turnover in the same period. |
In order to mitigate the impact of the appreciation of the BRL on the calculation of (i) the 90% general safe harbour and on (ii) the first 5% threshold (i.e. the net income threshold), Directive 329 and Normative Instruction 801 determine that the revenue from exports may be multiplied by a factor of 1.28.
Normative Instruction 801 further clarifies that for purposes of calculating the average of the 3-year period under the first 5% threshold, the export revenue earned in 2005 and 2006 can be adjusted by a factor of 1.35 and 1.29 respectively. Alternatively, the taxpayer is also allowed to calculate the minimum net income of 5% only for the 2007 calendar year by using the 1.28 factor.
Finally, the 1.28 factor can also be used when the taxpayer applies the cost-plus method to verify the adequacy of the prices practiced on its export transactions (this will be the case when the taxpayer does not meet any of the available safe harbours mentioned before).