International Tax Newsletter - Outubro 2023

Brazilian Internal Revenue Service establishes new rules for transfer pricing in Brazil

An important regulatory measure was made official in Brazil, marking a significant milestone in the international finance scenario. Normative Instruction #2,161/23, published in the Official Gazette of the Union (DOU), thoroughly outlines the new guidelines in relation to transfer pricing. This rule, originating from Law #14,596/23, establishes the basis for calculating taxes that apply to international transactions between interconnected companies.

The changes introduced by this normative instruction (IN) are notable and cover several aspects. Firstly, it simplifies the ancillary obligations associated with transfer pricing, relieving companies of some of the bureaucracy involved. Furthermore, IN offers concrete examples that will serve as a reference for taxpayers, clarifying the new rules.

An important change is the extension of the deadline for companies to opt in advance for the new guidelines. Now, interested companies have until December 31st of this year to declare their intention to apply the new rules in 2023. For other companies, the new transfer pricing regime will become mandatory from 2024.

It is important to highlight that these new rules are in accordance with the guidelines of the Organization for Economic Co-operation and Development (OECD), in particular with the arm's length principle. This principle, widely adopted by OECD member countries, requires companies involved in related operations to observe the values that would be practiced in similar transactions between independent companies. This aims to ensure fair taxation and avoid evasive practices, such as diverting profits to jurisdictions with favorable taxation.

Normative Instruction #2,161/23 was prepared after a public consultation carried out by the Federal Revenue Service, in which contributions from various sectors affected by the changes were considered. This demonstrates the commitment to transparency and public participation in the formulation of the country's fiscal policies.

This new legislation on transfer pricing represents an important step towards improving supervision and ensuring fair taxation in international operations between companies, especially multinationals. It strengthens the role of the State in preventing manipulations in the calculation basis of taxes levied on these transactions, contributing to economic stability and fiscal equity in Brazil. It is an assertive response to concerns about the covert sending of profits to countries with favorable tax regimes and the erosion of tax bases.

Therefore, the promulgation of Normative Instruction #2,161/23 represents a significant advance in the Brazilian tax system, aligning it with international standards of transparency and tax justice.

Chamber of Deputies Approves Bill for Taxation of Financial Assets Abroad 

On October 25, 2023, the Brazilian Chamber of Deputies approved the bill on the taxation of exclusive and offshore funds, the financial assets abroad of individuals domiciled in Brazil.

According to the approved text, profits generated by offshore companies will be subject to the annual tax rate of 15%, while exclusive funds will occur twice a year, in the months of May and November. In addition, it should be noted that this taxation will be applied regardless of the entry into Brazil of these amounts earned abroad.
Para os contribuintes que desejem se antecipar ao recolhimento da tributação, poderão estes se valerem da alíquota reduzida em 8% sobre os rendimentos de até 2023 dos fundos fechados. Ainda, poderão atualizar os valores dos bens no exterior com base no valor de mercado em 31 de dezembro de 2023.

If sanctioned, starting from January 1st, 2024, the individual must declare the income obtained in investments outside the country in a separate section from other income and capital gains. In the event of a Brazilian resident who earns capital gain from the liquidation of assets or rights abroad, he or she must continue to comply with the provisions of Law No. 8,981/1995

Since this is an Income Tax matter, if the bill is approved by both Houses and is sanctioned by the federal government before the end of the current fiscal year (year 2023), taxpayers will be subject to the new changes as of 2024.

App drivers may be entitled to INSS and minimum payment per hour driven

The Ministry of Labor and Employment (MTE) and the federal government intend to send a proposal to the National Congress to regulate the labor rights of service providers on apps, such as drivers and delivery people.

Among the main changes is the definition of a minimum amount to be received by workers per hour worked and the social security contribution.

The project establishes a minimum value per hour of work for app workers, setting it at R$30 for drivers and R$17 for delivery people. This calculation was designed to equate to a minimum wage proportional to the hours actually worked.

Another change is in the social security contribution obligation for both the category and the platforms, which will be deducted at source and collected by the companies.

The plan foresees that workers will contribute 7.5% of their income to Social Security, while companies will contribute 20%.

The final decision on the project will be made by President Luiz Inácio Lula da Silva. Afterwards, the project will be sent to Congress. The Ministry of Labor and Employment has aligned the terms of the regulation, which should be presented to President Lula soon, according to sources.

Negotiations are still ongoing, as an agreement has not yet been reached with the couriers, only with the drivers. This involves the two main companies in the sector, with Uber agreeing to the proposal, while iFood did not agree, but expressed interest in reaching an agreement.

Bill allows income tax deductions in support of animal causes

In an important step to promote support for the animal cause in Brazil, the Environment and Sustainable Development Committee of the Chamber of Deputies approved a proposal that will allow individuals and companies to deduct from Income Tax (IR) amounts allocated to animal protection. This measure aims to encourage donations that contribute to the cause.

According to the approved text, individuals will be able to deduct up to 6% of the tax due, while companies will be able to deduct 4%. These deductions will occur in conjunction with others already provided for by law.

The original proposal, presented in Bill 2481/21 by deputies Felipe Carreras (PSB-PE) and Dagoberto Nogueira (PSDB-MS), together with six other related proposals, were combined in a new text prepared by the rapporteur, deputy Marcelo Queiroz (PP-RJ).

To ensure that deductions are made correctly, the approved wording stipulates that donations must be directed to non-profit animal protection civil entities duly authorized by competent bodies.

The rapporteur highlighted that the proposed tax benefit will not increase revenue foregone or create additional expenses for public coffers, as it shares the same limits as deductions already existing in law.

Furthermore, to comply with the guidelines of the Fiscal Responsibility Law, the substitute determines that the federal Executive must estimate the amount of the tax waiver and include it in the Annual Budget Law project.

In 2014, the World Health Organization (WHO) estimated that there are around 30 million abandoned animals in Brazil, including 20 million dogs and 10 million cats.

The project will now be analyzed by the Finance and Taxation committees, as well as the Constitution and Justice and Citizenship committees, conclusively, before becoming law.

This initiative represents a significant advance in promoting animal welfare and encouraging solidarity through tax deductions, reinforcing the commitment to protecting animals in the country.

Brazilian Court Decides for the Non-Incidence of ICMS on goods 

According to the court’s ruling, the ICMS tax does not levy on the transport of goods destined abroad. If the transport paid by the exporter is part of the price of the exported good, taxing the transport is equivalent to creating a charge on the export operation itself, which is contrary to the legislation and the Brazilian Constitution.

The judge decided that the tax authorities cannot charge ICMS on interstate and intermunicipal transport services, under a tax substitution regime, of a company in the agribusiness sector that produces for export.
According to the decision, there is an exemption on products for export, to relieve companies and increase the competitiveness of the national product in the foreign market.

It is important to emphasize that even if the beginning and end of the transport of the goods occur in national territory, the tax exemption applies if the good is exported. 

Brazilian Federal Court of Justice (STF) validates IOF incidence over loan operations between non-financial entities 

The Federal Supreme Court (STF) unanimously decided to validate the collection of IOF on loan transactions between legal entities or between legal entities and individuals, even if none of them is a financial institution.

The incidence of IOF on transactions carried out by factoring companies was discussed and, unanimously, the justices concluded that there is nothing in the Federal Constitution or in the National Tax Code (CTN) that restricts the levy of IOF to credit operations carried out by financial institutions.
As the conclusion: "the incidence of IOF on loan transactions corresponding to the loan of financial resources between legal entities or between legal entities and individuals is constitutional, not being restricted to operations carried out by financial institutions".

As the appeal has recognized general repercussions, courts throughout Brazil should apply this understanding in identical cases. 

Brazilian Regional Courts rules for the incidence of Income Tax on merger of shares

The decision is the first in favor of the Union in a collegiate of second instance and involves an exchange of roles in the merger between the Hermes Pardini and Fleury groups.

The National Treasury obtained, in the Federal Regional Court of the 6th Region (TRF-6), a decision that authorizes the incidence of Income Tax (IRPF) on the incorporation of shares in merger or acquisition processes. It is the first precedent of an appellate court in favor of the Union in this dispute, which, for now, is won by taxpayers. As the appeal has recognized general repercussions, courts throughout Brazil should apply this understanding in identical cases.

Social Security Agreement Between Brazil and India Enters into Force

On 1 January 2024, the Brazil - India Social Security Agreement (2020) will enter into force. The agreement has been approved and will be applicable starting from 1 January 2024. 

Brazilian Chamber of Deputies Approves Social Security Agreement with Israel

On 18 October 2023, the Brazilian Chamber of Deputies approved the Brazil - Israel Social Security Agreement (2018), by way of Draft Legislative Decree No. 742/2021. The agreement has been sent to the Senate for further approval.

Brazil – Uruguay Double Tax Treaty Enters into Force

On 20 January 2023, the Brazil - Uruguay Double Tax Treaty entered into force. The treaty encompasses Income Tax, and it aims to Prevent Tax Evasion and Avoidance and its Protocol, signed in Brasilia, on June 7, 2019.

Minister defends debate on adoption of 4-day working week without salary deductions

The Minister of Labor and Employment, Luiz Marinho, stated this Monday (9) that Brazil should discuss the theme of the week with a working day of just 4 days - a modality already adopted by some companies and countries - without salary reductions and that it is “past time” for this discussion to take place.

He also believes that the methodology would not have a negative impact on the Brazilian economy but reinforced that this is just the minister's own opinion, without representing the government's position, as the issue has not yet been taken to President Lula.

“I am sure that President Lula would not block a debate, in which society demands that Congress analyze the possibility of reducing working hours. Without reducing salaries, of course. I think the Brazilian economy would support it,” he said at a session of the Human Rights Commission in the Federal Senate.

Marinho also stated that this is a topic that should be discussed by civil society and the National Congress, which is responsible for legislating on labor issues.

The proposal for a 4-day working day has already been tested and defended worldwide, stating that with more rest and leisure time for workers, they become more productive on working days and also helps to reduce various work-related illnesses.