Growth and robust investment activity continue to characterise Brazil over the past 12 months and are expected to continue as the country prepares for two major world events, the Fifa World Cup in 2014 and the Summer Olympic Games two years later.However, ...
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Growth and robust investment activity continue to characterise Brazil over the past 12 months and are expected to continue as the country prepares for two major world events, the Fifa World Cup in 2014 and the Summer Olympic Games two years later.
However, some problems and some unanswered questions are fuelling uncertainty. One problem is Brazil's slowing growth. Though Alexandre Tombini, the Central Bank governor, has slashed the bank lending rate from 12.5% to 8% over the last year, the government would like to see it lower as it tries to boost the economy. "There's an expectation that there will be more money available for investment, in more productive areas, so there's an expectation that more money will flow into the economy," said Roberto Barrieu, head of tax at Souza Cescon, Barrieu & Flesch Advogados.
A source of uncertainty for Brazil's business community is speculation that the government will put an end to goodwill amortisation. "Goodwill was basically introduced during the privatisation in the 1990s, when the government was encouraging companies to pay more upfront when acquiring state-owned assets," explained Celso Costa, a tax partner at Machado Meyer.
"Ever since, this tax benefit has been used in most corporate restructuring and M&As in Brazil," he added. While this subject has fuelled quite a bit of litigation in the courts over the past decade with the administrative courts tending to side with the tax authorities, Costa has seen a shift in the past year with courts issuing several decisions favourable to taxpayers.
Nélio Weiss and Philippe Jeffrey of PwC cite two of these cases, saying that the decisions provide a bit of legal and judicial certainty in relation to M&A transactions that are adequately structured.
"Although the text of the decisions has not yet been published in its entirety, it seems to generally state that when the goodwill is effectively paid by the Brazilian acquirer, the sale is carried out between non-related parties, and the evaluation of the acquired company/future profitability projections are made in accordance with the applicable legislation, then the amortisation of such goodwill for such tax purposes is generally considered legitimate, and not associated to a tax evasion planning," they wrote in an International Tax Review article.
And transfer pricing rules have also been changed significantly. "The main change regards the new margins for the Resale Price Method (Preço de Revenda menos Lucro – RPM), which was the object of intense litigation between the Brazilian Internal Revenue Service and the taxpayers," said Costa. "According to the previous legislation, the parameter price (comparable) was calculated based on 20% fixed profit margins for the resale activities, and 60% in the case of local production." The new rules no longer make the distinction between resale activities and local production and the RPM has only one profit margin.
The profit margins depend on the economic sector and can be changed by the Ministry of Finance. If the taxpayer is active in more than one sector, the applicable margin will correspond to the destination of the goods. "If the goods are used in different production processes, the amount of the imported goods will be apportioned, according to the destinations," Costa said.
Another notable change in the rules is that freight costs, insurance fees and import duties will no longer be added to the transaction price, provided that such costs are paid to third parties that do not reside in tax havens.
While the rules go into effect in 2013, taxpayers have the option to adopt them in 2012, Costa said.
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