Brazil Tax

Significant changes in the Brazilian Transfer Pricing System – Convergence to the OECD Standard

On June 15, 2023, act No. 14,596/2023 was published, which establishes the new Transfer Pricing rules in Brazil. This law is the result of the conversion of Provisional Measure No. 1,152/2022, issued on 12/31/2022. From now on, the Brazilian Transfer Pricing rules will adopt the OECD guidelines. Regarding cross-border transactions, it is worth noting that Brazil had previously adopted Transfer Pricing rules that were not aligned with the traditional arm’s length principle. According to this principle, the terms and conditions of a controlled transaction should be established, for tax purposes, as they would have been established between unrelated parties. Act No. 14,596/2023, in addition to introducing the arm’s length principle into the Brazilian Transfer Pricing system, established, among other important points: i) the concept of comparability analysis; ii) incorporated new transactional methods, such as the Transactional Net Margin Method (TNMM) and the Profit Split Method (PSM); iii) introduced the rule of selecting the most appropriate method (instead of the most advantageous method previously used); iv) eliminated limitations on royalty deductibility; and v) established a modern international tax approach to cross-border transactions involving commodities, intangibles, financial transactions, and intercompany business restructuring. Regarding the deadline for applying the new rules, taxpayers are allowed to opt for compliance for the year 2023, provided that the option is formalized in September 2023 (Normative Instruction No. 2,132/2023). Starting from the year 2024, the new system will be mandatory. In light of this new scenario, it is advisable for Brazilian companies engaging in transactions with related parties located in different jurisdictions to reassess their business models in order to identify potential risks and opportunities. It should be noted that the new rules may impact profit allocation among companies, as well as other taxes levied on transactions (given the specificities of the Brazilian tax system). The Tax Planning team at Drummond Advisors has knowledge and experience in the OECD Transfer Pricing standard and is available to assist you in the process of implementing the new rules. Written by Adriana Lemos, Tax Planning Team Leader

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What is the purpose of the regulation and taxation of sports betting websites in Brazil?

In recent years, the sports betting industry has gained prominence in Brazil. This popularity has led to discussions about the need for regulation and taxation of sports betting websites, which may be necessary to ensure the safety of users and harness the economic potential of this activity. Recently, the subject gained strength with Operation Maximum Penality, which investigates cases of betting schemes in Brazilian soccer, causing debates and discussion of proposals both in the media and in the legislative arena. Legislative discussion A committee at the House of Representatives held a hearing to debate the issue of regulation and taxation of sports betting websites. According to the Chamber’s website, the commission aimed to debate and analyze proposals related to the subject, seeking to find solutions that benefit both the bettors and the State. Importance of the regulation The regulation of sports betting websites is essential to provide a safe environment for users, with guarantees of protection against fraud and illegal practices. In addition, legalization may allow the Brazilian government to collect taxes on betting activities, increasing tax revenues and enabling investments in priority areas. Conclusion The advances in the regulation and taxation of sports betting websites are a fundamental step towards the creation of a safe environment for sportsbooks and bettors, as it favors enforcement, which consequently can decrease or put an end to the number of result manipulations. Another point is the revenue for the country with the taxation of betting websites, which, according to Fernando Haddad, Minister of Finance, may generate up to R$ 15 billion in contributions. Are you in doubt on the matter? Do not hesitate to call us through the chat available or email info@drummondadvisors.com. Written by Marcos Ferreira, Content Assistant at Drummond Advisors

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Main practical aspects of Provisional Measure No. 1,171/2023

On April 30, 2023, the Federal Government published Provisional Measure (“MP”) No. 1,173/2023 which, among other aspects, aims to institute the automatic taxation of income tax on income earned by individuals resident in Brazil from financial investments, controlled entities, and trusts abroad. According to article 2 of the MP, this income must be reported in the Annual Adjustment Declaration and separated from other income and capital gains, observing the following progressive table: Total Income Rate Up to R$ 6,000.00 0%   From R$ 6,000.001 to R$ 50,000.00 15% Above R$ 50,000.00 22,5%   FINANCIAL APPLICATIONS The income from financial investments was defined as the remunerations produced by the investments, including premiums, commissions, premiums, discounts, profit sharing, dividends, gains from secondary market negotiations (including gains from the sale of shares of non-controlled entities on foreign stock exchanges), and also gains from exchange variations. The MP presented a list of examples of what would be the financial investments subject to the taxation imposed by the MP, highlighting bank deposits, insurance policies, fixed income securities, credit card deposits, and retirement and pension funds. In relation to quotas of investment funds and corporate interests, these will be considered financial investments if they do not fit into the concept of foreign controlled entity, explained below. FOREIGN CONTROLLED ENTITIES For the purposes of the MP, foreign controlled entities are companies and other entities, personified or not, including investment funds and foundations, in which the individual holds a.         Rights that assure him/her preponderance in the corporate resolutions or power to elect or dismiss the majority of its managers; OR b.         More than 50% of participation in the corporate capital, or equivalent, or in the rights to receive its profits, or to receive its assets in the hypothesis of its liquidation. The provisions of item “a” apply to the individual who holds such rights directly, alone or together with other parties, including due to the existence of agreements and votes. In regards to item “b”, the MP states that in order to certify the participation exceeding 50%, the participation of the individual himself/herself, herein referred to as the “tested person”, must be considered, added to the participation of other individuals and legal entities considered to be linked, such as, for example, the spouse or relative by blood or affinity, up to the third degree. We emphasize that only foreign controlled entities that are located in a country or dependency with favored taxation or are beneficiaries of a privileged tax regime and/or that compute active income lower than 80% of the total income are subject to the taxation brought by the MP. In other words, controlled entities in all jurisdictions may be subject to the provisions of the MP, provided they are within these specific parameters. Own active income is defined as the income obtained by the legal entity by means of the exploitation of its own economic activity, excluding the revenues deriving, exclusively, from royalties, interest, dividends, equity interests, among others set forth in item I, paragraph 5, article 4 of the MP. The taxation will occur as follows: 1.         The profits of controlled entities abroad will be calculated individually in the annual balance sheet, which must be prepared in accordance with the accounting principles. 2.         On December 31 of each year, such profits will be taxed at up to 22.5% (see progressive table above) regardless of distribution and in proportion to the interest in the capital stock or equivalent. 3.         These profits will be stated as an additional acquisition cost in the Annual Adjustment Declaration, specifically in the assets and rights tab. 4.         As of the effective distribution, the profits will reduce such additional acquisition cost, without further taxation. With regard to the balance sheet mentioned in item 1, the MP has not clarified whether the accounting principles to be observed are those of the jurisdiction of the foreign controlled entity or the principles adopted in Brazil, the use of the latter being recommended, at least until further notice. It is worth mentioning that some deductions from such profits are allowed, such as, for example, losses ascertained by the foreign subsidiary. FOREIGN TRUSTS Under the terms of the MP, assets and rights subject matter of foreign trusts will be considered as remaining under the settlor’s ownership after the creation of the trust. Ownership will pass to the beneficiary when one of the following events occurs first: a.         The trust distributes to such beneficiary the assets and rights; or b.         Death of the settlor.  The income and capital gains related to the trust’s assets and rights will be taxed by the progressive table from 0% to 22.5% mentioned above, in the person of its holder. It is worth highlighting that the MP does not address nor recognizes the existence of irrevocable trusts as such. Specifically with respect to the trustee, the latter was considered a trustee of the trust (article 9, item III of the MP)III of the MP), even if he/she is the holder of the assets and rights transferred to the trust. The provision of transfer of ownership of trust property contemplating only the settlor and beneficiary figures. Considering that the trust is a contractually ruled instrument, it is necessary to emphasize that the MP did not make any reference to the possible instructions to be outlined by the settlor, such as, for example, the termination of the trust upon death without the transfer of ownership to the beneficiary. The trust holder must inform the assets and rights transferred to the trust in his/her Annual Adjustment Declaration at the acquisition cost, i.e., the trust itself should not be declared, according to article 8 of the MP. We highlight that if the trust has a foreign subsidiary, for practical purposes, the holder will be considered the owner of such company, and the respective rules for foreign subsidiaries described in the MP will apply. In the event of a distribution by the trust to the beneficiary during the settlor’s lifetime, the distribution will have the legal nature

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Income Tax Refund 2022 has already started to be paid, be aware of the dates

Federal Revenue Service opened consultations on the residual batch of Income Tax refunds, which has started to be paid on March 31.  In this batch, there were 94,864 taxpayers, among priority and non-priority ones, totaling a disbursement of BRL 300 million. Calendar of Income Tax Refund 2022 1st batch of refund – paid on May 31 2nd batch of refund – paid on June 30 3rd batch of refund – paid on July 29 4th batch of refund – paid on August 31 5th batch of refund – paid on September 30 1st residual batch of refund – paid on October 31 2nd residual batch of refund – paid on November 30 3rd residual batch of refund – paid on December 29 4th residual batch of refund – paid on January 31 5th residual batch of refund – paid on February 28 6th residual batch of refund – consultation released on March 24 and payment on March 31. How to consult refund In order to consult Income Tax Refund, only access the website Meu Imposto de Renda [My Income Tax] (https://www.gov.br/receitafederal/pt-br/assuntos/meu-imposto-de-renda) and click on “Consultar a Restituição” [Consult Refund]. It is possible to make a simple consultation by informing the CPF [Individual Taxpayer Number], year of declaration (2022) and date of birth. Who should declare tax income as an individual [IRPF] in Brazil? According to the Federal Revenue, tax income must be declared by: Citizen residing in Brazil who received taxable income above BRL 28,559.70 in the year, or around BRL 2,380 per month, including wages, retirements, pensions and rents; Who received free and non-taxable income or withholding tax above BRL 40,000; and who obtained, in any given month, a capital gain in disposal of assets or rights subject to taxation. Who had, on December 31, possession or ownership of goods or rights, including undeveloped land, with a total value greater than BRL 300,000. With regard to those who traded on stock exchanges, future and commodities exchanges, and similar ones. Only those, in the calendar year, who made sum of sales, including tax-exempt ones, superior to BRL 40,000, and operations subject to taxation, are obligated. With regard to rural activity, the citizen that obtained gross revenue in excess of BRL 142,798.50 must also declare; the one who intends to offset, in calendar year 2022 or later, losses from previous calendar years or from calendar year 2022 itself. Were you in doubt about any subject or did you not declare your income tax in previous years? Contact us at our chat or by email info@drummondadvisors.com! Written by Marcos Ferreira, Content Assistant to Drummond Advisors

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Digital Accounting Bookkeeping – ECD

Digital Accounting Bookkeeping, better known as  ECD, is a transmission file created for tax purposes, in which all details of the entry of the ledger, trial balances, balance sheets and other financial statements of active companies in the country are displayed. It is an accessory obligation carried out and delivered through an electronic program of the Brazilian government, specially developed to modernize and optimize the relationship between taxpayers and the Tax Authorities. Its main objective is to carry out procedures digitally, thus reducing the bureaucracy involved in processes previously delivered on paper.  Who is obliged to deliver the ECD? The mandatory delivery applies to the companies mentioned below: Those subject to Income Tax taxation based on Actual Profit; Those that were taxed based on Presumed Profit that distribute profits or dividends without incidence of Withholding Income Tax (IRRF), with a portion in an amount greater than the value of the tax calculation base minus all taxes and contributions to which is subject; Those immune and exempt who earned, in the calendar year, revenues, donations, incentives, grants, contributions, aid, agreements and similar income whose sum is greater than four million, eight hundred thousand reais (BRL 4,800,000.00) or value proportional to the period to which the bookkeeping refers; Silent Partnerships (SCP) are also required to present the ECD, in their own book, when they meet the condition of mandatory presentation of the ECD. For companies opting for Simples Nacional, delivery is optional, but in the absence of delivery of the ECD, registration of the accounting books will be required. Deadline: The deadline for delivering the  ECD  is the last business day of May of the year following the accounting data contained in the bookkeeping. In the absence of delivery by companies that have an obligation, a fine  defined in accordance with the Normative Ruling of the Federal Revenue will be applied and calculated for each month in arrears. For the year 2023, the delivery deadline is 05/31/2023. Did you know? Drummond is prepared to help your company in all matters involving accounting and taxes in Brazil, in case of doubts, do not hesitate to consult us. Written by Thais Rodrigues

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