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?
In an environment with high tax complexity, it is not possible to state that one particular industry sector is more affected by tax matters than anyother. In fact, the different federal, state and municipal taxes potentially reach any sector whether industry, trade or services and each has its own particularities.
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?
In view of the political deadlock that is preventing a broad and required reform to the tax system, the Federal Government is trying to make specific changes in the law. And because these changes are so specific (i.e., because they are specifically focused on eliminating burdens on industries, exchange control or changes in the rules relating to compliance with ancillary obligations) these changes have almost no effect on the structure of the tax system as a whole.
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?
No. Making the Brazilian tax system more user-friendly would require a wide tax reform. In fact, generally speaking we can state that the number oftaxes levied by the Federal, State and Municipal Governments on different (or even on the same) concrete taxable event makes a user-friendly system unviable. For that purpose, a radical simplification of the Brazilian tax system would require deep changes in the Federal Constitution to allow, among numerous other consequences, collection ofthe domestic VAT at the destination and not in the origin, unification of the federal social contributions, reduction of charges levied on the payroll and rationalization of the taxes levied on imports.