Main Changes

Reforma fiscal en Brasil
Mar, 2014
Circular 230 disclaimer
►
Any US tax advice contained herein was not intended or
written to be used, and cannot be used, for the purpose of
avoiding penalties that may be imposed under the Internal
Revenue Code or applicable state or local tax law
provisions.
►
These slides are for educational purposes only and are
not intended, and should not be relied upon, as
accounting advice.
Page 2
Today’s Agenda
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Timeline for application of Provisional Measure (PM) 627
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Main changes description
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Transitory tax regime
Goodwill
Controlled Foreign Companies (“CFC”)
Other changes
Page 3
PM 627 Timeline Snapshot
12 Nov 2013
Jan 2014
Regulations to PM 627
60 (up to 120) days for conversion into law by the Congress
Page 4
Jan 2015
Main Changes
Transitory Tax Regime Termination (TTR)
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PM 627 revokes the TTR as of January 2015, but provides for an early adoption
election as of January 2014
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Still no guidance was issued on how taxpayers should do the election.
Option may be demanded at any time according to informal position of tax
authorities
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Taxpayers will calculate taxable income based on Brazilian current GAAP (the New
GAAP) with tax adjustments via eLalur
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Although TTR preserved tax neutrality despite the adoption of New GAAP, it created
important book to tax differences such as:
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Goodwill tax amortization;
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Equity method to recognize income; and
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Use of financial statements based on New GAAP as reference for calculating
dividends, Interest on Net Equity (INE)
In 2013, the Brazilian tax authorities released regulations (NI 1,397)
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Page 5
Controversial position that dividends, INE and equity pickup should reference the
2007 GAAP
Main Changes
Transitory Tax Regime Termination (TTR)
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If PM 627 is early adopted, dividends paid until the publication date of PM 627
and related to the period from 1 January 2008 up to 31 December 2013 may
be referenced to financial statements based on the New GAAP
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INE and equity-pick calculations for the same period would also be grandfathered
In case no election is made, tax authorities will be able to tax the excess of
dividend/INE distributions and gains on disposition of investments from 2008
to 2013 by reference to the 2007 GAAP
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Important exposure may exist in certain cases
Taxpayers should analyze carefully as soon as possible whether or not to make the
election, considering other eventual TTR termination tax impacts vis-à-vis the tax
exposure from excess of dividends, INE and gains on investments based on 2007 GAAP
Page 6
Main Changes
Dividends and INE Potential Exposure Example
Illustrative dividend distribution
New GAAP
500,000
2007 GAAP
300,000
Effective distribution
500,000
Non resident exposure basis
200,000
(i) Withholding tax (15%)*
30,000
(ii) Withholding grossed-up*
35,294
* Penalty and interest also apply on top of
above values.
Page 7
Illustrative INE distribution
2007 GAAP New GAAP
Capital
1,000
1,000
Accumulated P&L
80
100
Current year profits
120
150
Net Equity
1,200
1,250
Long term interest rate
6%
6%
INE basis
65
66
50% Current Profits
60
75
50% Accumulated Profits
40
50
INE payment limit
60
66
2.04
Resident CIT exposure (34%)
* Penalty and interest also apply on top of CIT exposure
Main Changes
PM 627 Conversion Rule
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Initial adoption: PM 627 created a conversion rule for the difference
between 2007 GAAP and New GAAP opening balance sheet values
in 1 January 2014 (for taxpayers under the earlier adoption) or
1 January 2015
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Positive differences in assets as of 1 January 2015 will be subject to
income tax
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Deferral possible as long as the entity is able to highlight this difference in
subaccounts related to the assets to allow the difference addition when
the asset is realized, including by depreciation or amortization
In case of negative differences, exclusion from taxable basis is only
possible when the asset is realized, including by depreciation or
amortization, and if the company maintains the same control criteria
Page 8
Main Changes
PM 627 Early Adoption Comparison
MP 627 Effects
Election for early
application in 2014
Equity pick-up
INE/Dividends
Discussion
From 2008 to 2013 - based
on equity calculated in
accordance with the criteria
established by Law No.
6.404/76;
INE calculated and
profits/dividends paid until
November 12th 2013 based on
the corporate balance sheet
between 2008 and 2013
Elimination of these
discussions from 2014
onwards, as a result of the
New Tax Model.
Important: in the case of profits
and dividends calculated based
on the corporate balance sheet
between 2008 and 2013 not yet
paid, there will be taxation on
the distribution even if the
company has exercised the
option for the New Model Tax in
2014.
Automatic application
for 2015 onwards
Page 9
From 2008 to 2014 - based
on equity calculated in
accordance with the criteria
established by Law No.
6.404/76;
INE and profits/dividends
calculated based on the
corporate balance sheet
between 2008 and 2014
Elimination of these
discussions only from 2015
onwards, as a result of the
New Tax Model.
Main Changes
Goodwill
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Tax calculation follows accounting rules: allocation of the excess price paid in
an shares acquisition has to be allocated into two categories, in the following
order:
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First: Identifiable assets (i.e. tangibles and intangibles) and liabilities
assumed at fair value. Consistent with the Accounting Purchase Price
Allocation (PPA)
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Remaining portion: Future profitability (goodwill) or bargain gain
Treatment of the fair value and goodwill upon post-acquisition merger or spinoff transactions:
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Identifiable assets: the book fair value balance is treated as part of the
asset cost value for depreciation, amortization and capital gains purposes
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Goodwill: may be amortized over 60 months
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Bargain gain: taxed at a minimum of 1/60 per month
Page 10
Main Changes
Goodwill
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The amounts should be (i) registered in distinct accounts and (ii) the fair value
supported by an appraisal report (i.e., same appraisal used for accounting purposes).
The appraisal report should be registered with the federal revenue or the registry of
deeds and documents until the last working date of the 13° month after the acquisition
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Acquisitions occurring in 2014, which merger or spin-off takes place until 2015, are
still subject to the old tax rules for mergers with goodwill
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Debatable: the grandfathering applies regardless of the election for 2014
Termination of internal goodwill: deductibility of fair value/goodwill will be permitted
only in cases when occurred between independent entities
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PM 627 defines what is considered “dependence.” It provides the tax authorities
with the ability to interpret broadly the term
Additional restrictions on future transactions: fair value/goodwill deductibility is not
allowed when created:
1.
As a result of a share-for-share transaction;
2.
Stepped transaction to acquire control – in this case only the last acquisition
where control is obtained will create goodwill that may be amortized
Page 11
Main Changes
Goodwill
BEFORE
NOW
NET EQUITY
NET EQUITY
Asset Market
Value
GOODWILL
Future
Profitability
Intangibles,
going concern,
other economic
reasons
ACQUISITION PRICE
Page 12
APPRAISAL
REPORT
NET ASSET FAIR VALUE
GOODWILL
(FUTURE PROFITABILITY)
ACQUISITION PRICE
Main Changes
Goodwill
NOW
ACQUISITION PRICE
ACQUISITION PRICE
Asset Market
Value
NEGATIVE
GOODWILL
Future Losses
APPRAISAL
REPORT
BARGAIN GAIN
Intangibles,
going concern
other economic
reasons
NET EQUITY
Page 13
NET EQUITY
NET ASSET FAIR VALUE
BEFORE
Main Changes
Goodwill transition rules example
Acquisition date
Merger
Tax treatment
Valuation report
registered up to
13th month
Up to 2013
Up to 2015
Most favorable
allocation
No
2014 (without early
adoption effects)
Up to 2015
Most favorable
allocation
No
2014 (without early
adoption effects)
After 2015
New rules
No
2014 (with early
adoption effects)
Up to 2015
Most favorable
allocation *
Yes
2014 (with early
adoption effects)
After 2015
New rules
Yes
2015
At any time
New rules
Yes
* Debatable if MP 627 early adoption changes tax treatment or not in this case
Page 14
Main Changes
CFC Rules
►
Brazilian CFC rules continue to follow worldwide taxation system
►
Taxation is on an accrual basis (at year-end regardless of distributions) and the foreign
CIT paid may be credited, limited to the tax paid in Brazil
►
The PM 627 provides for an early adoption election as of January 2014 for new CFC
regime. Distinct for the TTR early adoption
►
Consolidation of the results derived from active income of CFCs allowed up to 2017 on
an experimental basis. Excluded from consolidation of CFCs:
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Located in countries without information exchange treaty with Brazil
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Located in tax havens and Privileged Tax Regimes
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Subject to regimes with nominal Corporate Income Tax rate inferior to 20%.
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Same to CFCs directly or indirectly controlled by the aforementioned regimes
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Vertical and horizontal consolidation possible
Different treatment for affiliated entities. Taxation upon distribution of the profits
Page 15
Main Changes
CFC Rules
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Deferral rule available for CFC that fulfill the active income test (80%) and high taxation
thresholds. CIT deferred up to five years, in which case it is converted to a USDdenominated interest-bearing liability (LIBOR)
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25% of profits should be considered distributed in first year
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Results must be individually accrued in the Brazilian HoldCo
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Payment subject to USD foreign exchange fluctuation, annually accumulated
Active income versus company with 80% of active income
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Difference for consolidation vs. deferral
Under certain conditions, withholding tax paid in connection to distributed profits is
creditable for Foreign Tax Credit purposes
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Page 16
Unclear treatment of withholding tax paid by a direct subsidiary of the Brazilian
entity
Auditoría | Asesoría de Negocios | Fiscal-Legal | Fusiones y Adquisiciones
Acerca de EY
EY es líder global en servicios de aseguramiento, asesoría, impuestos y transacciones. Las
perspectivas y servicios de calidad que entregamos ayudan a generar confianza y seguridad en
los mercados de capital y en las economías de todo el mundo. Desarrollamos líderes
extraordinarios que se unen para cumplir nuestras promesas a todas las partes interesadas. Al
hacerlo, jugamos un papel fundamental en construir un mejor entorno de negocios para nuestra
gente, clientes y comunidades.
Para obtener más información acerca de nuestra organización, visite el sitio www.ey.com/mx
© 2014 Mancera, S.C.
Integrante Ernst & Young Global
Derechos reservados
Ernst & Young se refiere a la organización global de firmas miembro conocida como Ernst & Young Global Limited, en la que cada
una de ellas actúa como una entidad legal separada. Ernst & Young Global Limited no provee servicios a clientes.
NUESTRAS OFICINAS
CLAVE
TELÉFONO
NUESTRAS OFICINAS
CLAVE
TELÉFONO
AGUASCALIENTES
449
912-82-01
MEXICALI
686
568-45-53
5283-13-00
CANCÚN
998
884-98-75
MÉXICO, D.F.
55
CHIHUAHUA
614
425-35-70
MONTERREY
81
8152-18-00
CIUDAD JUÁREZ
656
648-16-10
NAVOJOA
642
422-70-77
CIUDAD OBREGÓN
644
413-32-30
PUEBLA
222
237-99-22
216-64-29
CULIACÁN
667
714-90-88
QUERÉTARO
442
GUADALAJARA
33
3884-61-00
REYNOSA
899
929-57-07
HERMOSILLO
662
260-83-60
SAN LUIS POTOSÍ
444
825-72-75
LEÓN
477
717-70-62
TIJUANA
664
681-78-44
LOS MOCHIS
668
818-40-33
TORREÓN
871
713-89-01
MÉRIDA
999
926-14-50
VERACRUZ
229
922-57-55
Auditoría | Asesoría de Negocios | Fiscal-Legal | Fusiones y Adquisiciones
Acerca de EY
EY es líder global en servicios de aseguramiento, asesoría, impuestos y transacciones. Las
perspectivas y servicios de calidad que entregamos ayudan a generar confianza y seguridad en
los mercados de capital y en las economías de todo el mundo. Desarrollamos líderes
extraordinarios que se unen para cumplir nuestras promesas a todas las partes interesadas. Al
hacerlo, jugamos un papel fundamental en construir un mejor entorno de negocios para nuestra
gente, clientes y comunidades.
Para obtener más información acerca de nuestra organización, visite el sitio www.ey.com/mx
© 2014 Mancera, S.C.
Integrante Ernst & Young Global
Derechos reservados
Ernst & Young se refiere a la organización global de firmas miembro conocida como Ernst & Young Global Limited, en la que cada
una de ellas actúa como una entidad legal separada. Ernst & Young Global Limited no provee servicios a clientes.
NUESTRAS OFICINAS
CLAVE
TELÉFONO
NUESTRAS OFICINAS
CLAVE
TELÉFONO
AGUASCALIENTES
449
912-82-01
MEXICALI
686
568-45-53
5283-13-00
CANCÚN
998
884-98-75
MÉXICO, D.F.
55
CHIHUAHUA
614
425-35-70
MONTERREY
81
8152-18-00
CIUDAD JUÁREZ
656
648-16-10
NAVOJOA
642
422-70-77
CIUDAD OBREGÓN
644
413-32-30
PUEBLA
222
237-99-22
216-64-29
CULIACÁN
667
714-90-88
QUERÉTARO
442
GUADALAJARA
33
3884-61-00
REYNOSA
899
929-57-07
HERMOSILLO
662
260-83-60
SAN LUIS POTOSÍ
444
825-72-75
LEÓN
477
717-70-62
TIJUANA
664
681-78-44
LOS MOCHIS
668
818-40-33
TORREÓN
871
713-89-01
MÉRIDA
999
926-14-50
VERACRUZ
229
922-57-55