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Lobo & De Rizzo Q&A: Navigating The Tax Regime In Brazil
WHAT ARE THE MOST IMPORTANT TAX CONSIDERATIONS INTERNATIONAL CLIENTS SHOULD KNOW BEFORE CONDUCTING THEIR FIRST DEAL IN BRAZIL?
AS a first warning, international clients should know that they are subject to one of the most complex tax systems in the world, if not the most complex, with cumulative federal, state and municipal taxes, the payment of which is invariably followed by an obligation to comply with an enormous volume of ancillary obligations.
There are basically three headline aspects that should be carefully considered: (i) analysis of the applicable taxation and a search for the best alternatives for a taxation as efficient as possible; (ii) care during compliance with the various ancillary obligations, which not only give rise to the imposition of heavy fines but can also create other serious headaches (such as, for example, prevent the company from obtaining its tax clearance certificates, which are required to execute agreements with the Government, filing company acts with the registry offices, among others); and, in line with the compliance with ancillary obligations, the need formassive investments in information technology, without which compliance with the ancillary obligations is unfeasible.
Nevertheless, notwithstanding the high tax burden to which companies doing business in Brazil are subject, the Brazilian tax law contemplates benefits to foreign investors, such as the possibility of tax deduction of the premium paid in the acquisition of equity interest and the lack of taxation oncapital gains earned by non-resident investors selling equity interest through the capital market.
ARE THERE ANY INDUSTRY SECTORS WHERE TAX ISSUES ARE PARTICULARLY PREVALENT?
However, it is possible to state that the services sector has been excessively burdened by the Tax Authorities, to the extent that this sector issubject to a cumulative tax (the ISS Municipal Services Tax, which is levied by the municipality) and the so-called non-cumulative federal tax laws do not authorize the deduction of credits on wages.
Companies that operate in foreign trade are subject to an even higher than average tax complexity, whether in view of the numerous taxes levied on the import of goods and services or in view of the frequent difficulty in recover ingcredits from taxes paid in the domestic market on exported products.
WHAT IS THE EXTENT OF THE RECENTLY PROPOSED CHANGES TO THE TAX SYSTEM?
We are not saying that some of these changes are not required or welcome but we should have in mind that small changes relating to specific issues will not result in the desired simplification of the Brazilian taxs ystem.
WILL THIS NEW TAX PACKAGE MAKE THE BRAZILIAN SYSTEM MORE USER-FRIENDLY?
And, simultaneously to the numerous measures required to simplify the tax system, there are many other essential measures that should be taken to improve the regime from an economic perspective, such as the execution of a considerably higher volume of agreements to avoid double taxation and to provide an encouragement to the internationalization of Brazilian companies, which are currently seriously taxed with respect to the results obtained by their subsidiaries abroad.
TAX INCENTIVES ALREADY EXIST FOR INFRASTRUCTURE INVESTMENT. HOW SUCCESSFUL HAVE THOSE INCENTIVES BEEN?
WHY IS IT IMPORTANT TO INSTRUCT A FULL SERVICE FIRM LIKE LOBO & DE RIZZO TO ADVISE ON TAX ISSUES?A full service firm like Lobo & de Rizzo can see the different perspectives that need to be taken into consideration to inform the decision-making process. It is usually said that, in Brazil, the option between doing something in one or another form depends on the tax impact of each alternative. Since the environment is very complex, it is important to be able to depend on the advice of consultants who see beyond the tax matters under discussion.
Lobo & de Rizzo Advogados