As 2012 comes to a close, Brazilian President Dilma Rousseff faces a challenge: For the first time in years, federal tax revenues are decreasing.
The decrease is a result of the tax breaks granted in mid-2011, including the replacement of the 20 percent payroll tax with a tax on monthly gross income and, more importantly, the decrease of the country's economic activity resulting from the international crisis. Brazil is still a major exporter of commodities, and a decrease in the world's consumption of commodities, particularly in China, directly affects the country's economy and growth.
Brazil ended 2010 with 7.5 percent growth in GDP; in 2011 the growth was a mere 2.7 percent. As for 2012, the most optimistic predictions suggest growth of 1.52 percent at most.
Less tax revenue means less money for investments in major infrastructure projects and the social programs initiated by former President Luis Inácio Lula da Silva. There is also less revenue for states and municipalities as some federal taxes like income tax and the excise tax (IPI) are constitutionally shared with state and local governments. Many Brazilian states and many more municipalities cannot pay for their own obligations without their share in federal tax revenues, which means more pressure on Rousseff from local governments.
Encouraging domestic consumption and demand for credit -- as was done in 2008 and 2011 -- seems not to be an efficient measure anymore. Despite a reduction of interest rates, default rates have grown and affected the financial statements of the major Brazilian banks, which became more selective in lending money.
With few exceptions, most of the tax changes during 2012 focused on tax breaks to stimulate the local economy, beginning in late 2011 with the increase by 50 percent of the limits of the simplified tax regime (SIMPLES NACIONAL) for small businesses, which allowed more companies to enter the regime.
The government reduced to zero the 20 percent payroll social security tax for selected labor-intensive businesses in exchange for a new tax on gross income. There are now 40 business sectors included in the payroll tax switch compared with five in 2011, even though most of them will pay the new tax as of January 1, 2013. The major issue with the new tax is that it is mandatory rather than optional. Some sectors will face a tax increase rather than a decrease as originally announced by the government.
Other tax breaks include the creation or the expansion of tax incentives and a special tax regime for certain sectors and activities such as telecom services and equipment; construction and remodeling of day-care centers and preschools; manufacture and sale of personal computers for educational use; and implementation, expansion, and modernization of Brazil's national broadband program.
In the second half of the year, Brazil finally enacted the tax regime for the Rio de Janeiro 2016 Summer Olympic and Paralympic Games. The tax incentives are similar to those granted to FIFA's 2014 Soccer World Cup to be hosted in Brazil and include tax breaks for imports of goods and services associated with the games and also cross-border and local activities carried out by the International Olympic Committee.
Along with tax breaks to the local industry, Brazil adopted a more protective approach when it comes to imported goods. In addition to increasing taxes on many imported items such as motorcycles and home appliances, Brazil created a special program for car manufacturers (INOVAR-AUTO), which in theory promotes local research and development activities, but in practice increases taxation of vehicles with no local manufacture. INOVAR-AUTO raised issues by foreign car manufacturers, which have threatened to challenge the regime with the WTO.
New transfer pricing rules are mandatory as of January 1, 2013. The two variations of the resale price less profits (resale and production) method for imports were replaced with a single resale price less profits method, which includes different profit margins for certain business sectors. Also, two new mandatory methods were created for import and exports of commodities (the listed price on imports method and the listed price on exports method), which can no longer use other methods to determine the transfer price.
As for tax evasion, an important change to the Anti-Money Laundering Act by Law 12,683/2012 removed the list of mandatory preexisting crimes as a requirement for money laundering prosecution. With this and other changes, prosecution for money laundering is now possible if the financial resources originate from any illegal activity, including tax evasion.
No major tax treaty was signed by Brazil during the year. However, Brazil has been active in initiating and executing tax information exchange agreements, such as those with the United Kingdom (September 28), Uruguay (October 24), and Bermuda (October 29). A TIEA with Jersey and a tax treaty with Malta are under negotiation.
Also, social security agreements were signed with Luxembourg (June 22) and Spain (July 24 -- amending the 1991 agreement).
Brazil's Supreme Court on December 15, 2011, ruled that a company's shareholders and managers can be held liable for taxes owed by the company only if they are a party during the administrative tax case resulting from a tax assessment. The decision set an important precedent because it departed from the approach that has been taken by the Revenue Attorney General's Office and the Superior Court of Justice (STJ).
In May the STJ delivered one of the most important tax decisions of the year. The STJ Second Chamber confirmed that service payments remitted to Canada, and before 2006 to Germany, are not subject to Brazilian withholding tax because the payments qualify as business profits under Brazil's income tax treaties with those countries. The ruling was the first decision delivered by a higher court on the issue, setting another important precedent for the acceptance and application of treaty provisions over more burdensome domestic tax legislation.
There may be significant tax changes in 2013 if Rousseff succeeds in gathering congressional support. Among her tax-related plans are:
- Simplification of the tax regimes for P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security), the two welfare taxes levied on monthly gross revenues. The government plans to combine the existing cumulative and noncumulative regimes applicable to the taxes into a single noncumulative regime.
- Reduction of taxes and charges levied on electricity to allow price reductions to consumers.
Those plans could be postponed, or dropped altogether, if federal tax revenues decline to a level that compromises Brazil's fiscal stability. For that reason, one cannot discard possible tax increases on imports of goods from abroad, which could be seen as protectionism by foreign countries and lead to disputes at the WTO.
(Article originally published in the December 26, 2012 edition of World Tax Daily - Copyrights Tax Analysts).