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6.2. Main Differences between Commercial and Tax Accounting

The Accounting Practices adopted in Brazil(BR GAAP) are founded upon Brazilian corporate law. At the end of 2007, a new law(Law 11,638) modified Brazilian corporate law,effective from 2008.

This law was an important step towards aligning BR GAAP with IFRS. The local standard setter, the Accounting Pronouncements Committee (CPC), was established in 2007 and is responsible for issuing new Brazilian accounting standards, which must then be endorsed by the applicable regulators, such as the CVM, the Central Bank or the Private Insurance Regulator(SUSEP). Representatives of the regulators usually attend CPC meetings as observers, so they become familiar with the new standards and can approve them soon after they have been finalized by the CPC.

The CVM, the Central Bank and SUSEP have each issued regulations requiring that the entities regulated by them prepare consolidated financial statements in accordance with IFRS for the 2010 or 2011 calendar years, depending on the case.These regulated entities will still prepare their standalone financial statements in accordance with BR GAAP.

All companies are required to determine net income in accordance with the accounting principles established in Law 6,404/76 (seeSec. 12). In general, the accrual method is required for both accounting and taxation purposes. Special tax-accounting methods also apply in other areas.

The tax return is based on the annual audited financial statements prepared under BR GAAP. Non-deductible non-taxable income should be adjusted to the accounting profit to calculate the taxable income.

In general,operating expenses are deductible if the following conditions are satisfied: they are necessary, usual and common to the company’s activity; they are actually incurred; and they are supported by proper documentation. However, the following expenses,among others, are not deductible:

  • Expenses related to fixed assets, including financial and operating lease payments, depreciation and amortization, if the assets are not directly used in the production or commercialization of products and services.
  • Fringe benefits furnished to shareholders and officers if the beneficiaries are not identified and individualized (a 35% ffective rate of 53.84%] withholding tax is imposed on such payments).Neither the fringe benefits nor the withholding tax is deductible.
  • Donations in general, gifts and other non compulsory payments.

Inventory

Companies that have an integrated cost system must value inventory for tax purposes at the lower of cost or market value, using either the average cost or the first-in, first-out (FIFO)method. Direct cost and last-in, first-out (LIFO) methods can not be used. In general, companies that do not have an integrated cost system must value finished products at 70% of the highest sales price of the product sold in the tax period. Work-in-process must be valued at either 80% of the finished product cost or 1.5 times the highest cost of the material content. Supermarkets and similar enterprises that sell a large array of goods may use a specific system for inventory valuation based on periodic and simplified counting.