Overview of recent updates to Brazilian tax legislation

Leonardo Homsy

Mattos Filho, Rio de Janeiro

leonardo.homsy@mattosfilho.com.br

Thais R Bandeira de Mello Rodrigues

Mattos Filho, Rio de Janeiro

thais.rodrigues@mattosfilho.com.br

The year 2023 brought significant changes to the Brazilian tax landscape, including, among other things, the approval of a tax reform encompassing the taxation of consumption, the introduction of new taxes (IBS, CBS and IS) and the abolishment of others (PIS, COFINS, IPI, ICMS and ISS), as well as the alignment of the Brazilian transfer pricing rules with the Organisation for Economic Co-operation and Development’s (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations through the conversion of Provisional Measure No 1,152/2022 into Law No 14,596/2023. This article provides a brief summary of the key changes from the past year and from early 2024.

Tax reform

Constitutional Amendment No 132/2023, which resulted from the approval of Constitutional Amendment Bill No 45/2019, was published in Brazil’s Official Gazette on 21 December 2023. The reform introduces a value added tax (VAT) model to consumption taxation in the country, consolidating the taxes currently levied on revenue (PIS and COFINS), industrialised products (IPI), the circulation of goods, the rendering of communication, interstate and intermunicipal transportation services (ICMS) and on services of any nature (ISS) into two new taxes, namely, the contribution on goods and services (CBS) and the tax on goods and services. Additionally, a new excise tax named the selective tax (IS) has been introduced.

As opposed to the current tax system, the CBS and IBS will be subject to the same rules, including in relation to taxable events, tax calculation bases, non-levy hypothesis and taxpayers, favoured taxation regimes and non-cumulative rules. The CBS and IBS will be established by the same supplementary law, the bill of which should be presented by the Executive Branch of the Brazilian Government within 180 days from the approval of Constitutional Amendment No 132/2023.

Until the publication of the aforementioned supplementary law, many aspects of the IBS and CBS still lack a definition, including the IBS and CBS rates. Nevertheless, the Constitutional Amendment sets forth that states, federal districts and municipalities will be able to set general IBS rates, which must be the same for all goods and services. The final rate will be the sum of the state and municipal rates. A reference rate will be established by the Senate through a so-called Senate resolution.

The Constitutional Amendment foresees a transitional period starting in 2026. During this period, the new taxes will be charged as follows:

• In 2026, the CBS and IBS will be levied at test rates of 0.9 per cent and 0.1 per cent, respectively. The amount paid will be offsetable against PIS and COFINS debts, if any, offset against any federal taxes or will be reimbursed within 60 days, depending on the taxpayer’s request;
• From 2027 onwards, the PIS and COFINS will be abolished, as a result of the definitive introduction of the CBS;
• During the years 2027 and 2028, the IBS will be charged at a total rate of 0.1 per cent (0.05 per cent state and 0.05 per cent municipal rate), with a corresponding reduction in the CBS rate by 0.1 per cent;
• From 2029 to 2032, the ISS and ICMS will be charged in the following proportions to the rates established in the respective laws:
•       9/10 (nine tenths) in 2029;
•       8/10 (eight tenths) in 2030;
•       7/10 (seven tenths) in 2031; and
•       6/10 (six tenths) in 2032.
• From 2033 onwards, the ISS and ICMS will be abolished, and the IBS will be fully introduced.

New Brazilian transfer pricing rules

Law No 14,596/2023, which resulted from the conversion of Provisional Measure No 1,156/2022, was published on 15 June 2023, with the objective of aligning the Brazilian transfer pricing rules with the OECD guidelines.

The rules adopt a more subjective approach, replacing the predetermined margins previously in force in Brazil and establishing a new regime based on the arm’s length principle.

On 29 September 2023, the Brazilian Internal Revenue Service (IRS) enacted Normative Instruction No 2,161, providing further guidance on the transfer pricing framework and aiming to regulate the new transfer pricing rules.

Taxation of government incentives and changes to the JCP calculations

Law No 14,789/2023, which results from the conversion of Provisional Measure No 1185/2023, sets forth new rules for taxing so-called government subsidies (subvenções), ie, tax incentives granted by federal, state and municipal governments to allow legal entities to set up or expand their business.

Tax incentives will now be subject to corporate income taxes (IRPJ/CSLL) and to federal taxes on revenue (PIS/COFINS). However, a tax credit corresponding to 25 per cent of the tax incentive may be granted provided that certain requirements are met.   

In addition to the changes introduced in relation to subsidies, the approved text has also modified the legal framework related to the calculation of interest on net equity (Juros sobre Capital Próprio (JCP)) as of 1 January 2024. The new rules set forth the net equity accounts that should be considered for the purposes of calculating the JCP, namely, paid-up capital, certain capital reserves, profit reserves except those related to tax incentives, treasury shares and accumulated profits and losses.

Moreover, the law also set forth that positive variations in the net equity account, resulting from corporate acts between dependent parties (not involving the entry of assets into the company), should not be included in the JCP calculation basis, while negative and reducing adjustments, even if not expressly foreseen by the law, should be taken into account.

Incentivised self-regularisation of federal tax debts

Law No 14,740/2023, published on 30 November 2023, creates a new self-regularisation programme that allows taxpayers to pay outstanding tax debts with a 100 per cent reduction in the fines and interest by paying a minimum 50 per cent of the debt in cash and the remaining balance in a maximum of 48 instalments. The instalments will be updated according to the basic interest rate of the Brazilian economy, otherwise known as the Selic interest rate.

Taxpayers may include any federal tax debt not formalised as of 30 November 2023, including debts that are the object of ongoing tax audits, or those formalised between 30 November 2023 and the 90-day deadline for joining the programme. Debts not formalised may be included by taxpayers in the programme through the amendment of their tax returns indicating the tax debts. Taxpayers may pay up to 50 per cent of the debts by using their own tax losses or tax losses from its controllers, subsidiaries or affiliates, regardless of the sector or industry.   

Normative Instruction No 2,168/2023, published on 29 December 2023, regulates the incentivised self-regularisation programme, and states that taxpayers may join the programme from 2 January until 1 April 2024.

Vetoes analysis

On 21 September 2023, Law No 14.689/2023 was enacted, regulating the reinstatement of the casting vote within the Administrative Tax Appeals Council (CARF). This tiebreaker voting mechanism comes into play when any tied vote needs a resolution and such a decision is entrusted to a judge appointed by the Brazilian tax authorities. However, the Brazilian President vetoed several provisions in this legislation. These vetoes were subsequently reviewed by the National Congress in December.

In a joint session held by the National Congress, the presidential vetoes to many of the provisions in Bill No 2.384/2023 were analysed. It is noteworthy that two significant vetoes were overturned:

1. the impossibility of the early settlement of guaranteed insurance policies offered as a warranty in tax foreclosures before res judicata;
2. the cancellation of fines in tax assessments, whether the debt is enrolled or not by the Federal Union to be charged via a tax enforcement action, which exceed 100 per cent of the tax debt.

New state VAT tax (ICMS) rates

Complementary Law No 194/2022 established that fuel, natural gas, electricity, communications and public transportation are considered essential goods and services. As a result of this law, the collection of ICMS for these items was reduced.

In an effort to mitigate this impact, the Brazilian states decided to increase the ICMS rates starting in 2023. Below is a table outlining the new rates.

The new infrastructure debenture modality

On 10 January 2024, Law No 14,801/2024 came into effect, introducing a new type of infrastructure debentures aimed at enhancing private funding for the sector.

The new law allows special purpose entities, concessionaires, permit holders, authorised entities formed as companies (S/A) and their controllers (direct and indirect) to issue publicly distributed debentures for the purpose of raising funds for priority infrastructure projects or research, development and innovation.

As per the regulation, issuers of these new infrastructure debentures can deduct from the calculation base of the corporate income tax (IRPJ/CSLL) the interest paid upon debenture maturity, along with an additional deduction equivalent to 30 per cent of the interest paid to the bondholders.

Certain restrictions have been outlined, prohibiting the acquisition of debentures by individuals affiliated with the issuer, including those residing or domiciled abroad. This benefit applies to debentures issued between the publication date of the law and 31 December 2030.