- Slides: 28
Doing Business in Brazil Miller James, Rasi Beatriz, Staaf Per, Tang Xinran
I. Political Situation
What kind of political system does the country have? Elections and political parties. Brazil is a federal republic, with 26 States, and 5, 570 Municipalities. The current president is Dilma Roussef, the country’s first female president. The President is the head of state and head of government and serves a four-year term with the possibility of a re-election for a second successive term. The federation is set on five fundamental principles: sovereignty, citizenship, dignity of human beings, the social values of labor and freedom of enterprise, and political pluralism. Thirty-Four registered political parties. Four predominant political parties : Worker’s Party, Brazilian Social Democracy Party, Brazilian Democratic Movement Party, and Democrats. There is no election threshold.
Competence and decision making at presidential and governmental level? President appoints the Ministers of State, or the members of the federal Cabinet, which exercise the executive power in Brazil. Ministers prepare standards, monitor and evaluate federal programs, formulate and implement policies for the sectors they represent. They are also responsible for establishing strategies, policies and priorities in the application of public resources. Legislative power is exerted by a National Congress consisting of a Senate and a House of Representatives. The number of representatives per state is determined by its population. Voting is compulsory at the age of 18, but 16 and 17 -year-olds, the over-70 s and the illiterate are free to choose whether to vote or not. The judicial branch consists of a system of federal, state and local courts throughout the country, headed by the Federal Supreme Court. The Supreme Court’s decisions are final and cannot be appealed. The state and municipal courts act independently of the federal courts, within the bounds of the Constitution.
Competence and decision making at regional or municipal level? States have autonomous administrations, collect their own taxes and receive a share of taxes collected by the federal government. They have a governor and a unicameral legislative body elected directly by their voters. They also have independent Courts of Law for common justice. Criminal and civil laws can be voted by only the federal bicameral Congress and are uniform throughout the country Each state has a governor who is its chief executive, and power is divided among the state’s executive, legislative and judicial branches.
II. Economic Situation
GDP and main fields of business Gross domestic product per capita? $11, 384. 6 in 2014. Brazil has undergone several programs of privatization of state-owned companies, with the biggest taking place in 1998 when the state-owned telecommunication companies were sold. There continues to be considerable state and semi-state participation in various strategic sectors, transport and utilities. Brazil is a top exporter of every commodity that has seen price surges, such as iron ore, soybeans, sugar. Largest producer of coffee for the last 150 years. In total, Brazil ranks 23 rd worldwide in value of exports. Major manufacturing industries include petrochemicals, automobiles, mining, cement, paper and related products, agribusiness and wood processing. Brazil’s steel industry ranks amongst the nine largest in the world. Fourth largest car market in the world. Oil has become very important in Brazil. At one time it was the sixth-largest company in the world by market capitalization and accounted for roughly 10 percent of Brazil’s gross domestic product. In the past few years Brazil has witnessed the creation of new start-up businesses in the internet sector and an increase in venture capital being invested in these types of businesses. Brazil has a of over a 107 million (ranking 6 th worldwide) and unemployment of 6. 2% (ranking 64 tlabor force h worldwide). Fearful of foreign shocks, Brazil is still one of the most closed economies in the emerging world—total imports and exports account for only 15 percent of GDP.
But. . . Corruption costs Brazil almost $41 billion a year alone, with 69. 9% of the country's firms identifying the issue as a major constraint in successfully penetrating the global market. To date, 117 indictments have been issued, five politicians have been arrested, and criminal cases have been brought against 13 companies. Current recession The State-run Oil giant, Petrobras has lost more than half its value in the last year, about $70 billion in market cap due to a major scandal. Impeachment proceedings against President Rousseff began on December 2 nd, 2015, due to allegations of mismanagement and corruption, which was suspended by the Supreme Court on Dec. 9 th.
Infrastructure The World Economic Forum ranks Brazil 120 th out 144 countries for the quality of its infrastructure. Roads and airports are especially bad. Most of Brazil’s power (around 90%, in fact) is generated by hydroelectric plants
On São Paulo The capital of the State of Sao Paulo, Brazil’s most populous and wealthiest state. The city São Paulo is Brazil's highest GDP city and the 10 th largest in the world, using purchasing power parity. The most populous city in Brazil, South America, and the Southern Hemisphere. The world's twelfth largest city by population. The "financial capital of Brazil. ” It is the location for the headquarters of major corporations and of banks and financial institutions. Unique among Brazilian cities for its large number of foreign corporations. 63% of all the international companies with business in Brazil have their head offices in São Paulo has the largest concentration of German businesses worldwide and is the largest Swedish industrial hub alongside Gothenburg. As of 2014, São Paulo is the third largest exporting municipality in Brazil. In that year São Paulo's exported goods totaled $7. 32 B (USD) or 3. 02% of Brazil's total exports. The top five commodities exported by São Paulo are soybean (21%), raw sugar (19%), coffee (6. 5%), sulfate chemical wood pulp (5. 6%), and corn (4. 4%).
III. Tax Legislation
Residence for tax purposes: For individual to be a resident for tax purpose, who subjects to unlimited tax liability Permanent visa Or temporary type V visas, with or without an employment relationship with a Brazilian entity Or 183 days within 12 months For corporation to a resident for tax purpose, who subjects to unlimited tax liability A foreign company is a resident if it was incorporated in Brazil or has local activity Corporations, limitadas (private limited-liability companies), other partnerships, and branches organized in accordance with Brazilian law, are subject to CIT. Non-profit entities that comply with certain registration and filing requirements are generally exempt from CIT. For non-residence entities and individuals, income obtained from Brazil is subject to withholding tax of 15% or 25% depending on its nature.
Corporate tax base and tax rates Corporate income tax is computed on the basis of taxable income at a single tax rate, with a surcharge on income over a certain level. This rate is currently 15%, with a surcharge of 10% on taxable income over R$ 240, 000 and social contribution of 9%. Tax must be calculated and paid on a monthly or quarterly basis. (depend on the accrual method). Foreign profits/income/gains of any kind are subject to Brazilian income tax.
Withholding taxes on interest, dividends and royalties Resident Recipients Non-resident recipients Deduction Dividends No WHT for dividends generated as from Jan. Not deductible for the 1 st, 1996 payer Interest Progressive rate for individual WHT rate at 15 -22. 5% for companies WHT rate 15% for non-tax Deductible for the payer -treaty and non-taxfor income tax purpose heaven countries Royalties No WHT rate 15%, if the recipient is not resident/domiciled in a low-tax jurisdiction. * Deductible if requirements are met * Royalties and service fees are subject to the Contribution for Intervention in the Economic Domain (CIDE), at the rate of 10% on the amounts credited/paid.
More on royalties Depending on the nature of the remittance to the foreign beneficiary, the respective payment/credit may fall under one of the services subject to the Municipal Services Tax - ISS. Under the prevailing legislation, ISS is not levied on the licensing of patents and copyright. Nevertheless, licenses to use/exploit trademarks and software have been subject to ISS since August 2003. The Brazilian entity is responsible (on behalf of the non-resident) for withholding and paying the tax to the municipal authorities, at rates ranging from 2% to 5%. In general, remittances of royalties are not subject to the PIS and COFINS taxes, as these social contributions apply to the import of goods and services (since May 2004). Nevertheless, once characterized as a service for ISS purposes, the federal tax authorities may also demand payment of the PIS and COFINS taxes, at the rates of 1. 65% and 7. 6% respectively. Lastly, remittances of royalties/technical assistance service fees abroad (i. e. foreign exchange transactions) are currently subject to the Tax on Financial Transactions – IOF, at the rate of 0. 38%. Deduction: Royalties payable to a foreign company with a direct or indirect controlling interest in a Brazilian company are deductible for tax purposes, provided the contract has been duly registered with the INPI.
VAT and sales tax regarding to imported software Characterization issue: Supreme Federal Court (“Supremo Tribunal Federal” - STF) position: if you have a “software off the shelf” (software de prateleira) - ICMS if you have a personalised software developed for a specific client/purpose - ISS Tax base: Customs value (“Valor aduaneiro”): price of the disk + shipping + insurance Taxes: II - 17, 5% IPI (Tax on Industrialized Products - “Imposto sobre Produtos Industrializados”) - 15% PIS (Social Integration Program - “Programa de Integração Social”) - 2. 1% COFINS (Contribution to Social Security - “Contribuição para o Financiamento da Seguridade Social”) - 9. 65% ICMS - 18% Siscomex Fee (for the using of the customs system) - R$ 185. 00/declaration *PIS and COFINS due when importing goods are calculated “from the inside” **Tax Base for ICMS will be (Customs Value + II + IPI + PIS/COFINS + Siscomex Fee)
VAT and sales tax cont. Problem: the way the tax is calculated. The tax is calculated “from the inside” (“cálculo por dentro”). 1219, 52 x 18% = 219, 51 Example: Tax base: 1. 000 Tax rate: 18% 1. 000 ÷ ( 1 - 18%) = 1. 000 ÷ 0, 82 = 1219, 52 For more information please refer to the booklet.
Tax incentives: federal level Brazil offers a series of tax incentives, but most of them are for undeveloped areas of the country (north/north east regions, mainly). [corporate income tax and other federal taxes] “Lei do Bem” and its Requirements: Accrue profits with “Actual Profits” method Invest in Research in Technology Benefits: deduction from 20% up to 34% of Corporate Income Tax and CSLL (concerning the amounts used in the program deduction up to 50% of IPI when buying machinery destined to the program accelerated depreciation and amortization of such goods
Tax incentives: state level State of São Paulo provides some incentives such as a reduced tax rate (4%) for imported goods if the destination is another State (ex: Arrives in São Paulo, but final destination is to be sold in Rio de Janeiro). It is important to notice that state incentives is a sensitive area and can lead to unexpected tax assessments and tax enforcement actions. The main reason for this concern is that it is only allowed for States to give benefits if all the states of the federation agree. The decisions are made at the National Council of Fiscal Policy (“Conselho Nacional de Política Fazendária” - CONFAZ). If a benefit is not approved by CONFAZ, it is not considered legal by the States, and it is very likely that all operations done under this benefit will be challenged. On the other hand, according to the Supreme Federal Court, it is necessary that a disagreeing State takes this issue to the Supreme Court and only after that the legislation is considered illegal. In practice, what happens is that by the time the Supreme Court rules is unconstitutional, the issuing State will already have revoked that legislation and published another one with the same meaning.
Tax incentive: municipal Level Law 15. 928/2015: if your company invests in sports or is a sponsor of sports in the city, you can get a tax benefit of 70% of the investment to pay up to 50% of the due tax (ISS).
Internal measures for avoiding double taxation Different treatment depending on the type of accrual of profits Actual Profits (“Lucro Real”) - can credit the foreign tax - up to the amount of tax due in Brazil (Federal Decree N. 3. 000/99, art. 395) Presumed Profits (“Lucro Presumido”) - cannot credit, unless there’s a treaty According to the Regulations on Corporate Income Tax (“Regulamento do Imposto sobre a Renda” - RIR), the Actual Profits method is mandatory for companies that have profits abroad. (can be every 3 months, year or monthly payments of estimatives)
Tax treaty network and with the U. S. Brazil has signed 30 double taxation treaties today. But no treaty with the U. S. They are: Argentina: Austria, Belgium, Canada, Chile, China, Czech Republic, Denmark, Ecuador, Finland, France, Hungary, India, Israel, Italy, Japan, South Korea, Luxemburg, Mexico, Netherlands, Norway, Peru, Portugal, Phillippines, Slovakia, South Africa, Spain, Sweden, Turkey, Ukraine but mutual agreement Brazil have rules that give a Brazilian company the right to offset tax paid abroad on profits up to the limit of the Brazilian income tax.
Anti-avoidance regulation Special tax treatment for outbound payments to residents in low-tax jurisdictions Transfer pricing regulations Thin capitalization rules CFC-regulation Privileged Tax Regimes
Special tax treatment for outbound payments to residents in low-tax jurisdictions Interest Royalty 25 % withholding tax (15 %) No benefits
Transfer Pricing regulations Low-tax jurisdictions, even if not related To related parties Official publications and reports Pre-set documents – must be adequate Predetermined methods – Taxpayer must show
Thin Capitalization rules The interest expense is necessary for the company, The debt is no more than two times the equity value of the owner, The debt is no more than two times the equity value held by all the related parties.
CFC-regulation Profits from such a jurisdiction is subject to taxation in Brazil
Privileged tax regimes Less than 20 % tax grants tax advantages to non-resident entities or individuals does not grant access to information related to the composition of shareholders of legal entities Payments to such regimes are not deductable, Transfer pricing rules apply, irrespective of relation, Thin capitalization rules apply – restrictive limitation of interest deduction, Higher withholding tax – 25 %.