Problems relating to Trade and Investment on Brazil

 
14. Taxation Systems
Issue
Issue details
Requests
Reference
(1) Complex, Wide Ranging Taxation System - Multi-layered taxation and commission systems additionally burden the operational costs of enterprises for clerical works relating to bookkeeping and taxation:
-- Federal taxes, state taxes, and municipal taxes amount in total to 18 kinds;
-- Various commissions and contributions amount to 27 in total.
- GOB levies complex, high rates of taxes of multiple kinds, which change very often. Brazilian taxes which are particularly different from Japanese taxes are:
1) Body Corporate must calculate every month its tax base and tax liability.
2) Currency fluctuation correction shall be made on fixed assets and capital account and any gain after correction of value is subject to tax collection.
3) While tax payments on consolidated basis do not exist in Brazil, equity method applies to persons with 20% or more of capital contribution in the related companies.
- Taxes imposed on auto-parts import are comprised of federal taxes, namely, import tariff, and Industrial Product Tax (IPI), and state taxes, namely, ICMS (Commodity distribution service tax). The rates of import tariffs and IPI vary by items, while ICMS vary by states (18% in Sao Paulo now).
- Upon import of auto parts into Brazil, apart from import duty, prepayment is necessary for multiple kinds of taxes, such as IPI, PIS, CONFINS, AFRMM, ICMS (about 70% or more, including import duty). A business entity focused mainly in import business cannot survive without substantial cash on hand.
- Complex treatment of taxes, especially, indirect taxes such as IPI and ICMS, is extremely complex, having a substantial impact on the enterprises operation costs.
- The taxation systems are so complex that each competing enterprise must retain experts.
- Complex and high tax rates (Corporate income tax, Industrial product tax, Financial transactions tax, Social integration plan tax (Sales tax), and Financial contribution to the Social Insurance (Sales tax), Contribution to social interest, Cheque tax, and Product distribution service tax).
- The complex taxation system comprising of federal, state, municipal taxes, COFINS and various other contributions complicate the work concerned with tax payments. It demands much time of tax payers to comprehend the taxation system, incurring much operational cost.
In addition, in regard to administrative procedures, the responsive action of the taxation authority takes much time, while the outstanding issues from the past years get further postponed.
- To begin with, the complexity in the taxation scheme itself gets in the way of cost calculation upon import, profitability estimate in trading, etc. in business. Consultation with an accountant is to no available as there is no telling if the results so calculated are indeed correct. As regards the cost of customs clearance, while approximate estimate is available, it is almost impossible to get the 100% correct number in advance.
- On top of the complex and inordinately numerous tax categorical varieties, the compulsion of data conversion into electronic form makes the administrative cost (IT infrastructure + personnel) sky high beyond control. It heavily squeezes the corporate profitability, while there is no curbing in the loss of the competitive edge of the made-in-Brazil products.
- VAT in multiple varieties makes tax classification vexatiously complex.
In addition, the variances in the tax rates in each destination state add complexity from differences in INPUT CODE, etc., giving vent to discrepancies in the tax amounts.
It is imperative to simplify the sales/delivery transactional procedures by the simplified taxation system.
- Complexity in the tax scheme makes business strategic planning difficult at times. For example, application of a different tax rate by each sales channel compels strategic change in business axis -- from the channel at high tax rates to another channel at low tax rates.
- It is hardly possible to manage taxes due to numerous tax categories and equally numerous exceptions. The taxation system is too difficult to comply with.
- Efficiency in business operation has been lost due to the differences in taxation scheme by central government, state, and fiscal year. It has claimed much time and human resources to understand the taxation scheme, and to construct the measures to take requisite actions, depriving efficiency from the company operation.		 - It is requested that GOB integrates and streamlines the taxation system and lessens the tax burden, and grants tax exemption incentives, etc. on foreign investment in Brazil.
- It is requested that GOB:
-- delineates clearly its policy including the tax guide involved in the construction work.
- It is requested that GOB introduces a commonly used taxation system.
- It is requested that GOB unifies various complex taxes into a single tax, which becomes payable upon sales to customer.
- It is requested that GOB:
-- turns all taxes into a VAT format,
-- reduces tax rates, and
-- streamlines the taxation system (by reduced tax varieties.)
- It is requested that GOB integrates and streamlines the taxation system and lessens the tax burden, and grants tax exemption incentives, etc. on foreign investment in Brazil.
- It is requested that GOB integrates and streamlines the taxation system and lessens the tax burden, and grants tax exemption incentives, etc. on foreign investment in Brazil.
- It is requested that GOB:
-- streamlines the taxation system, and
-- takes prompt responsive measures.
- It is requested that taxation authority makes available at its web site a calculation system (Form) that enables the totally correct trial calculation.
- It is requested that GOB, at the governmental level, fully realises the impending risk of Brazil being left behind in the international market, unless it makes drastic renovation in the comprehensive taxation scheme.
- The new cabinet members of the 2nd Dilma administration expressed their keen interest in the reform of the complex tax scheme. Its early realisation is keenly awaited.
- It is requested that GOB takes step to work toward simplifying the tax system.
- It is requested that GOB takes step to:
-- make the taxation scheme easier to comprehend, and
-- reduce the number of tax categories.
- It is requested that GOB:
-- streamlines the tax scheme, and
-- integrates federal and state taxation scheme..		 - Brazilian Taxation System
- Brazilian Tax Law
- Brazilian Tax Law No.563
- Federal Bureau of Tax, Ministry of Finance Decree No.572, etc.
- ICMS
- IPI
- PIS/COFINS
- Supplemental Act No.87 (Lei Complementar No. 87, de 13 de Setembro de 1996)
- Federal Constitution
- General Tax Law
- Various Tax Acts and Regulations
  (Action)
- GOB released in the Official Gazette the Act No.10485 to streamline payment of Social Integration Program (PIS), Social Security Financing (PASEP) and Civil Servant's Assistance Fund (COFINS) in the automotive vehicles sector. This Act dispenses with the tax levy at each stage of production process, enabling payment in one lump at 8.28%.
- The Brazilian Congress since 1995 has discussed renovation of the taxation system in response to the criticism such as levying tax on the total amount ("TAV"). However, State governments faced with the possible loss of their power partially or in whole are resisting to this proposal.
- According to "Doing Business in 2006" by the World Bank, the time required to file tax returns is the highest in Brazil.
- In case of shipment by sea, Merchant Marine Renewal Tax (AFRMM), Import Tax of 25% is levied upon ocean freight. Depending upon the volume of shipment, proposal can be made to the customer for use of airfreight that could save the Import Tax and it affects the due delivery time, of course.
  (Improvement)
- On August 6, 2003, GOB promulgated Decree No.4800, reducing as a provisional measure, the industrial products tax ("IPI") on automotive vehicles until December 1, 2003.
- On 28 February 2008, federal government submitted to the Congress of Brazil the new amendment bill for the Constitution on the taxation system reform that includes (1) integration of several federal taxes, (2) simplification of the complex current taxation system, (3) creation of the new ICMS tax, and (4) repeal of inter-state competition of the horizontal taxation system, more precisely as follows:
1) "Federal Value Added Tax (VAT)" is replaced by the current 4 taxes,
2) "New state VAT" (VAT-IVA-E) replaces the current ICMS. This tax, most of which is levied at the consumption stage, is also collected at the manufacturing stage at the rate of 2%. The shift from ICMS to IVA-E is due for completion by 2015.
3) "Equalization Fund" is created to complement the loss of state revenue during the transitional period from ICMS to IVA-E.
4) "Investment Incentive" encourages investment by grant of a tax incentive (rebate). The applicable rebate period of the current 24-months will be gradually reduced.
(2) Heavy Tax Burdens - Various tax burdens push up the operational cost (so called Brazilian Cost) and suppress profits, including social security, etc., which are doubly and triply imposed. Especially value added and inland taxes are costly.
Example 1: Import Duty of 20% on the amount of (F.O.B. + Freight + Insurance) applies to Finished Products shipped from Manaus FTZ to the external Brazilian domestic market.
Example 2: In addition, about 20% of Industrial Product Tax (IPI) and 6% of Commodity Distribution and Service Tax (ICMS) imposed on the amount after adding the Import Duty. However, IPI is exempted, if the products are manufactured into finished products in Manaus.
- Currently, there are roughly 50 varieties of tax (or 60) and tax burden is extremely heavy (more than 35% of GDP.)
- Due to the heavy tax, the sales prices of the products can be doubled or tripled in comparison with those in the developed countries. Heavy taxes in the distribution process make prices of illicit tax evading copied products a third or less compared to the price of the genuine products sold in the legitimate distribution channel in certain cases.
- Not only COFINS but also various other taxes are imposed on pre-profit gross sales amount such as temporary contribution on financial activities.
i.e., CPMF (0.38%), IOF (tax on financial transactions: 1.5% on interest) and CSLL (9%). All these taxes burden heavily, negating the viability of the import business.
- Heavy/complex taxation system caused swelling of the industry being driven into the Underground Economy (UE). While under the heavy taxes, including without limitation, ICMS 12%, tax on check 0.38%, legitimate firms remain groaning in heavy duty. However, by GOB's implementation of electronic sales slips (Nota Fiscal Electronica), the tax evasion conducts are on the way to decline.
- While thanks to the tax incentive measures, no tax is levied on materials, etc., heavy taxes are levied on other items:
-- ICMS: 17-18%
-- PIS/COFINS: 9.25%
-- Customs Duty: (varies by product)
-- The unparalleled high tax rates worldwide.
Moreover, there is no sign of improvement for the "tax upon tax" mechanism.
- MFS, importing into Brazil products for domestic distribution in Brazil, finds its P&L and cash flow are severely impacted by the high amount of various taxes, IPI, ICMS, and PIS/COFINS.
- After customs duty levy on imports, the levy of other Brazilian taxes follows. GOB announced in January 2015, the raise of PIS/cofins tax rate levied on imports (from June 2015).
- Industrialised Products Tax(PIS)/Social Security Financing Tax(COFINS) , Commodity Distribution Tax (ICMS), Industrialised Product Tax (IPI), and Service Tax (ISS) are levied upon sales. While these are taxes later refunded to the extent of the portion related to purchase, its heavy burden and complex mechanism makes it difficult to keep the both ends meet.
- The ST (Tax Substitution) System under ICMS State Consumption Tax has come to apply virtually in all states and on all goods. It increases the financial burden upon enterprises that proportionate to the payment terms, the longer, and the heavier.		 - It is requested that GOB:
-- reduces the tax rates,
-- reviews, integrates and streamlines the taxation system,
-- reduces ICMS (Tax on Goods and Services), and
-- reduces tax on production goods.
- It is requested that GOB:
-- reduces tax rates, and
-- reviews, consolidates, and simplifies the taxation system.
- It is requested that GOB:
-- alleviates the heavy tax burdens,
-- tightens its clamp down on illicit local products, illicit imports and smuggled products, and
-- refrains from raising various taxes to compensate for import tariff reductions.
- It is requested that GOB:
-- integrates and streamlines the taxation system and lessens the tax burden, and grants tax exemption incentives on foreign investment in Brazil,
-- delineates clearly its policy including the tax guide in the performance of construction work,
-- introduces General Taxation Policy, and
-- turns all taxes into value added tax with reduced tax rates.
-- streamlines the taxation system (by reducing the tax categories)
- It is requested that GOB:
-- clamps down on UE.
-- collects sales taxes from shallow but broad sources, and
-- relaxes the heavy tax rates.
- It is requested that GOB:
-- improves the tax levy scheme comparative to Japan's consumption tax,
-- improves the mechanism of tax upon tax levy,
-- streamlines the tax scheme.
- It is requested that GOB:
-- reduces the tax rates, and
-- extends the due payment period.
- It is requested that GOB alleviates the tax burdens on Imported Intermediate and Capital Goods.
- It is requested that GOB takes step to reduce the tax rates, in particular, ICMS whose tax rate is extremely high at plus or minus 18%.		 - Tax Law of Brazil
- General taxation laws
- Corporate Income Tax Law
- Law 9249, Article 25
- Ordinance No.4056 (Diario Oficial of 17 December 2001)
- Law No. 10883 (made effective on 30 December 2003)
- Diario Oficial of 3 January 2002
- Supplemental Act No.70
- Law Nos.10637, 10168, 10833 and 10865
- Supplemental Act No.116
- Administrative Decree No.7412
  (Action)
- The Tax Reform Bill under deliberation at the National Congress was approved at the first voting of the plenary session of the House of Representatives, and if this passes the Senate as is, there would be a further tax increase of 3.5%-4.5%, which translates into an increase to 41% from the current 36.45% in terms of the tax ratio against GDP.
- Effective January 1, 2004, as regards the services originating from overseas, GOB started to levy the service tax (Imposto Sobre Servicos=ISS) not only on the ongoing building and construction sector, but also on other sectors such as purchase of the software developed overseas, warehousing service, port service, trade show service through the local autonomous body where such services are rendered. (Supplemental Act No.116 of July 31, 2003).
- Partial amendment of the taxation system in September 2003 extended until 2023 regarding the tax incentive measures under the Manaus Free Trade Zone.
- On December 30, 2003, the Tax Reform Act (Act No.0883) was enforced. The tax rate for COFINS was raised from 3% to 7.6% of the total revenue of an enterprise, while export and export enterprises were excluded from the imposition of the COFINS tax.
- The Brazilian Ministry of Foreign Affairs responded to the December 2004 WTO Trade Policy Review by stating that it would review the problem of differing ICMS tax rates applied by individual States.
- Instituto Brasileiro de Geografia e Estatistica (IBGE) statistics show that the tax burden in Brazil against GDP has been increasing, 35.54% in 2003, 36.08% in 204 and 37.82% in 2005.
- "Doing Business in 2006" by World Bank shows that the total tax payment/gross profit ratio in Brazil has gone up to 148%, placing Brazil at the 140th out of 155 countries in the tax payment department, radically downgrading the Brazilian rank in terms of business environment from 96th to 119th position.
- On 4 January 2008, the Executive Branch promulgated Decree No. 6339 on Raising the IOF (financial transactions tax) rate, in order to compensate for loss in the national revenue due to expiry of Tax on Financial Transactions (CPMF) granted on financial transactions.
- On 7 January 2008, the Executive Branch promulgated Act No.6345, of stipulation of IOF regulations relating to IOF, including, among others, reduction of the IOF (financial transactions tax) rate to zero in inter-bank foreign exchange transactions.
- Decree No. 7567 of 16 September 2011 promulgated by the Executive Branch has raised Industrial Product Tax (IPI) to 30% on both domestic and imported vehicles, not satisfying certain conditions. IPI on vehicles (normally in the range of 7% to 25% commensurate with the engine displacement) has been raised to 30% across-the-board on imported vehicles. The validity of this temporary measure original good until the end of 2012 has been extended until the end of 2017.
- On 31 May 2012, MOF announced to raise IPI on imported motorcycle, microwave oven and air-conditioner from 10% to 15%, making the tax rate 35% for implementation beginning 1 September 2012.
- With effect from 1 September 2012, MOF would add 35% IPI levy on tax for imported motorcycle, microwave oven and air-conditioner.
- In October 2012, GOB released New Automotive Policy (INOVAR-AUTO) that enables tax reduction of IPI30% or more, subject to achievement of the affixed fuel consumption standard, etc. commensurate with the utilisation of local contents, etc. On this issue, GOJ pointed out a possibility, of infringement of WTO Agreement to the Minister of Development of Commerce and Industry of GOJ expressed concern at the WTO Council for Trade In Goods in November 2012, jointly with the U.S., EU, and Australia. (2013 Report on Compliance by Major Trading Partners with Trade Agreements)
- On 30 January 2015. Ministry of Treasury promulgated Provisional Measure No.668/2015 on imported products, which increased PIS / PASEP (from 1.65% to 2.1%) and COFINS (from 7.6% to 9.65%), in average, from 9.25% to 11.75%, for enforcement from May 2015.
  (Improvement)
- Since August 1999, automotive vehicles manufacturers have been exempted from payment of IPI, an indirect tax to parts suppliers. On the other hand, by amendment of the Act in April 2001, parts manufacturers, which were previously required to pay IPI for the imported raw materials, have also been exempted from payment of IPI since then.
- The Congress approved the Executive Order, eliminating partially social insurance fees (PIS/PASEP/COFINS, etc. and on September 11, 2002, it was enacted into Law No.10276 and promulgated in the Official Gazette.
- Sao Paulo State reduced ICMS on some business sectors.
- The 42nd Amendment of the Constitution promulgated in December 2003 provides that the ICMS tax is not taxable on export of goods and services, while the social security contribution taxes such as COFINS are taxable on import of goods and services.
- On January 16, 2004, by Executive Order No. 4955, the IPI tax was reduced on certain machinery products.
- By Decree No.5173 of August 6, 2004, the IPI tax was reduced on certain machinery products and capital goods:
-- Products prescribed in Article 1.1 and the Appendix of Executive Order No. 4955: 2%;
-- Products prescribed in Article 2 of Decree No. 4955: 6%.
- The "Invista Ja" released in September 2004 to encourage investment provides for: 1) grant of the special preferential tax treatment to investment on new facilities, 2) contraction from 4 years to 2 years, the period of the enterprises eligible for the COFINS refund, and 3) grant of the special preferential treatment allowing the accelerated depreciation of machinery.
- Since June 2005 GOB has repealed IPI tax on certain goods for manufacture (such as machine tools).
- In December 2005, Decrees Nos.5629 and5649 were promulgated that exempt payment of PIS/ PASEP and COFINS taxes on exporting enterprises (EE) participating in the capital goods purchase system (RECAP) when they purchase export products or import new capital goods (machinery & equipment, instruments and fixtures), subject to the EE satisfying the following qualifications:
1) More than 80% of the total sales is achieved by export sales, and
2) Agrees to continue for three years the 80% export requirement.
As regards the Manaus FTZ's, PIS/ PASEP and COFINS taxes are exempted for new import of capital goods under Decree No. 5628.
- It is now possible to pay distribution and service tax (ICMS) upon sales of goods, taking advantage of the common warehouse established as part of the Manaus-Rio de Janeiro Agreement.
- During the period of 2003 through 2005, GOB promulgated tax incentive measures. It is necessary for a Japanese enterprise to check in detail if the incentive measure is included clocks and watches.
- With effect from December 2011, IPI tax levy has been raised on certain imported vehicles, affecting sales of the enterprises with a heavier dependence upon imports.
- On 12 May 2012, by the temporary measure for reduction of IPI rate on certain vehicles effective until the end of October 2012, the volume of car sales has increased.
- In October 2012, GOB announced extension of tax reduction upon purchase of vehicles until the end of December from October under the original plan, as a part of the measures to stimulate economy.
(3) High Amount of Fines for Tax Payment Shortage - There have been cases where huge amount of fines resulted due to discrepancy in the amount of tax paid, arising from differences of interpretation of the tax calculation method, or mi-sentry of the code number that nevertheless resulted in no payment, although the payment in the correct amount had been made. - It is requested that GOB streamlines the taxation scheme. - Brazilian Taxation System
(4) Taxing Financial Transactions - Since 17 June 1999, GOB implemented income tax on financial transactions and 0.38% tax is imposed on the total transactions amount, each time an amount is recorded in the debtor of the ledger for a financial transaction.
(5) Uniquely Irrational Transfer Price Taxation System - As Brazilian TPTS is not based on the OECD Model, the compatibility is not secured between the Brazilian TPTS and the one in the country of Member Firm's customers, etc. are located.
As there is no clear legal provision regarding the APA, Member Film cannot confirm the TPTS risk beforehand, due to the market situation and the fluctuation of the exchange rate. As Brazilian calculation methodology for the export transfer price concerning the maximum profit for the importer having a special relationship with the exporter, defying a reasonable control under the Brazilian widely departs from the general business practices and the economic principles it is extremely hard to manage.
- GOB's own Transfer Price Taxation System (TPTS) exists, not following the OECD guidelines. It requires profitability management (Vitorino Recommendations) by each MCM No. that necessitates introduction of new software.
New Regulation was promulgated in 2012, changing (1) restricted scope of safe harbour application (from the previous no limit to less than 20%), (2) profit rate and application method (repealing distinction between resale and manufacturing parts & materials under import resale price method, while applying 20-40% profit rates by business lines.)
- Brazil is not a member of the Organisation for Economic Co-operation and Development (OECD), and instituted its own Transfer Price Taxation System which is not based on the OECD Model. As a result, it is irrational and complex. Moreover, it compels increased tax burden, while it is infested with frequent changes in administrative system, forcing importers into great difficulty, for having to negotiate with the Competent Tax Authority, and to cope with the language problems over the interpretation of laws, etc. For example, as a means of calculating Transfer Price, GOB does not recognise the use of neither Comparable Profit Method (CPM) used by U.S. Government and OECD Member States, nor Transactional Net Margin Method (TNMM) used by many countries. GOB instead recognises the following 3-methods:
(1) CUP = Comparable Uncontrolled Price Method (Precos Independentes Comparados, PIC)
(2) CPM= Cost Plus Method (Custo de Producao mais Lucro, CPL) (3) RPM=Resale Price Method (Precos de Revenda menos Lucros, PRL)However, (1) CUP and (2) CPM are not workable in practice considering the actual workload involved. Therefore,
(3) RPM is the only choice that remains. However, the concerned subsidiary (MFS) deducts the Profit Rate by each Business Division (20% in case of Machinery Parts) across the board from the Resale Price, and then the resulting figure is deemed as the price between Independent Enterprises. In this fashion the calculation method is far apart from the actual transactions. [The foregoing Issue, contained at p388 of the 2013 Version, is repeated here because of its importance.]
- Compared to EU/the U.S., GOB demands an extremely high margin rate, inhibiting the trade between parent companies and their subsidiaries.
- The Brazilian Transfer Price Taxation System (TPTS) narrows the business opportunities on running import and domestic distribution in Brazil as it provides for securing a constant profit, item by item individually, rather than in the total annul perspective.
- In comparison with other countries the scope of Brazilian TPTS is extremely broad relative to TPTS, i.e., transactions with a firm with capital contribution of 10% or more are included. It demands a vast amount of clerical burden. Furthermore, GOB adopts the method of requiring the fixed high profit rate irrespective of special characteristics of the business or mode of transactions. And the transactions viable in other countries can be difficult to run in Brazil because of the Brazilian TPTS.		 - It is requested that GOB assures conformance of its TPTS to the OECD Model.
- Certain improvements have been materialised such as the inclusion of provision for adjusting the margin rate commensurate with the precise picture of each business sector by finance ministry's normative institutions. It is requested that GOB considers the establishment of the advance pricing agreement, etc. to resolve the question (2) on the left column on the question over the application of business sectors. Furthermore, as regards the scope of safe harbour application, it is requested that GOB removes restrictions as has been done previously. It is further requested that GOB structures the framework for avoidance of the double taxation (including the amendment of the tax treaty).
- It is requested that GOB administers TPTS in accordance with "The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations", the OECD Standard Model.
- It is requested that GOB reduces the Margin Rate.
- It is requested that GOB takes step to have the law amended so that as long as the statutory profit level is secured in the perspective of the total annul transactions, it does not run afoul of TPTS.
- It is requested that GOB takes steps to review the Brazilian Transfer Price Taxation System, widely deviating from the OECD TPTS Guideline, which is the international standard model, apart from the issues described in the left column.		 - Transfer Pricing Taxation System
- Law No. 9,430/1996 with which GOB introduced TPTS, followed by various revisions.
[2012] RFB Normative Instruction No.1/2012 (later converted into Law 12,755/2012), Normative Instruction No. 1,312/2012 and 12,766/2012 => Effecting Amendments over total issues relative to TPTS such as Profit Rate under RPM=Resale Price Method (Precos de Revenda menos Lucros, PRL).
- Law No. 9430, 1996, The Basic Notification of the Federal Tax Bureau
- Tax Law, Law No.9430, amending Article 18 of Articles 18-24.
- Circular of Federal Tax Agency on Detailed Rules of Implementation No.243, Articles Nos. 8, 12, 13, 23,.24, 25 and 26.
- Law Nos. 12715, 12766
- Regulation Nos. 1321, 1322
- 9.430/96
- 12.715/12
- 12.766/12
- 1.312/2012
  (Action)
- In 2006, Camara de Comercio e Industria Japonesa do Brasil (CCIJB) made the following recommendation that:
1) GOB applies profit margins that individually different according to business sectors,
2) GOB changes its taxation system by calculating tax rates according to product groups, rather than individually on a model by model basis,
3) GOB flexibly applies its taxation system so that it recognizes the difference between "assumed" vs. "actual" rates of foreign exchange, and that
4) GOB makes the APA (advance pricing agreement/arrangement).
As a result, GOB has accepted a special case in the context of the recommendation 3).
- On 26 December 2007, Ministry of Finance promulgated Portaria No.329 "On adjusting mechanism for determining TP for the calendar year 2007", to alleviate the negative impact arising from the appreciation of REAL against other foreign currencies.
- Under the Cost Plus Method (CPL) on import transactions, the 20% markup rule exists. It approves the profit rate of up to only 20% on "manufacturing cost plus taxes and dues". A locally incorporated affiliated subsidiary of A Japanese enterprise is unable to establish the selling price of imported goods that allows a sufficient markup.
- At the Japan-Brazil Joint Committee on Promotion of Trade and Investment held in September 2009, Japan side brought up practical issues and requests such as GOB's inflexible profit margin setting, and the opening of APA. In return, GOB effected certain changes, such as review of the extremely high profit rate applied to parts and materials under the Resale Price Method.
- The provisional legislation intended to effect a partial amendment of the TPTS, such as the change in the profit margin under the Resale Price Method, was abandoned and lost its effect as it failed to pass the National Congress before its due date of 1 June 2010. It is said that GOB intends to reintroduce to the National Congress the provisional bill with the same contents.
- At the Japan-Brazil Joint Commission for Trade and Investment held in November 2012, Japan side requested to the Brazilian side for it to improve the Transfer Price Taxation System issue.
(6) Deemed Profit Tax Levied at High Gross Margin Rate - Due to the two kinds of formulae for calculating the maximum allowable pricing of the imported goods under Decree No. 9430 (1996) or notification No.2435 (2012), numerous legal proceedings have emerged on tax issues. Contentions of the taxpayers' are:
(1) Fixed Margin Rate should be flexible taking into account the differences in business sectors,
(2) The Average Gross Margin of product group should be allowable, not by single unit,
(3) Prior Enquiry System should be established for APA (Advance Pricing Agreement), etc.
Provisional No.563 (April 2012) changed the Gross Margin Rate to 20% on General Goods, while to higher 40% to 30% on Certain Goods including Digital Still Cameras, which lead to the necessary adjustment with the tax authorities Provisional No.563 made into law in September 2012 changed the Maximum Allowable Comparable Import Price from CIF Price plus Import Duty to F.O.B. Price. Taking the opportunity for promulgation of its Detailed Implementing Regulation 12715/12, Enterprises will file their request to GOB via CNI (National Confederation of Industry Brazil), FIESP (Federation and Center of Industry in Sao Paulo), and ELETROS (Associacao Nacional de Fabricantes de Produtos Eletroeletronicos=National Manufacturers' Association of Electric / Electronic Products).
- Law No.12715 of 2012 elucidates the calculating method, including some improvements, provided, however, that gross profit rates of 40% on optical equipment / pharmaceutical products, and 30% on chemical goods leave room for improvement. Moreover, the Brazilian TPTS is uniquely one of a kind, in substance, forming a kind of tariffs, a Brazilian's own TPTS, claiming the utmost caution: manpower, money and time to deal with.		 - A Member Firm is not convinced about GOB's mechanical additional tax levy under TPTS without due process of investigation, rebuttals, and verification. It is requested that GOB amend in part the gross margin rate: i.e.,: Reduction is requested from 40% to 20% on Digital Still Camera (DSC), because 40% gross margin on DSC is too high.
- It is requested that GOJ continues dialogues with GOB toward making the Brazilian TPTS compatible with the international norm (OECD).		 - Transfer Pricing Taxation System
- Law No. 9430, 1996
- Law 12715/12 (September 2012)
- Law No.12715/2012
- Circular of Federal Tax Agency on Detailed Rules of Implementation No.243, Articles Nos. 8, 12, 13, 23,.24, 25 and 26.
  (Action)
- Under the Cost Plus Method (CPL) on import transactions, the 20% markup rule exists. It approves the profit rate of up to only 20% on "manufacturing cost plus taxes and dues". A locally incorporated affiliated subsidiary of A Japanese enterprise is unable to establish the selling price of imported goods that allows a sufficient markup.
- At the First Japan-Brazil Joint Commission's Meeting on Promotion of Investment and Industrial Cooperation in October 2013, Japan side made a request for clarification for computation basis of the tax rate on each product under transfer price taxation system. It was agreed to establish a forum for exchange of professional discussion. (The 2015 Report on Compliance by Major Trading Partners with Trade Agreements).
(7) Nebulous Comparable Transaction Price under TPTS - In export transaction, the permissible limit for excluding the application of Transfer Pricing Taxation System (TPTS) is stipulated as 'the case where the transaction price (TP) with the overseas' related party is not less than 90% of the TP (after tax) in the domestic market'. However, regarding some commodities, the domestic TP is not clearly established or no domestic transaction has taken place. - It is requested that GOB:
-- clearly establishes the basis of the domestic TP, and
-- clarifies the basis of establishing TP, in case no domestic transaction is taken place.		 - Current Act 9.430/96
- Draft Detailed Rules 243/02, on the shelf since last year
- Draft Act 478/09 (yet to be submitted to National Congress?)
(8) Irrational PIS/COFINS Tax Levy - GOB levies PIS/COFINS on capital interests which holding companies receive. (No tax is collected on normal interest).
- PIS/COFINS, one of the indirect taxes, have been exempted on basic food, including instant noodles. However, PIS/COFINS continue to accrue upon purchase of raw materials so that MFS will have accrual of PIS/COFINS credit balance. Subsequently, MFS following the setoff of PIS/COFINS against corporate income tax, MFS received setoff of PIS/COFINS against corporate income tax, and refunded as to the 2012 portion. Nevertheless, as of today, MFS retains 40 million real in aggregate, with credit of 5 million real per annum.		 - It is requested that GOB excludes PIS/COFINS collection on capital interests.
- It is requested that GOB totally repeals PIS/COFINS.		 - Law No. 12.839 of 9 July 2013
(9) Delays in Tax Refund - Including the social charges (PIS/CFINS), etc., should credit position accrue in federal government, taxpayer is entitled to request tax refund to the government, in lieu of deducting from the future accrual of tax liability. However, its practical implementation is in question for absence of the clear instructions on the requisite clerical work and the time to complete the preparation. It seems tax refund system does not function.
- Credit refund takes much time on communication services and other general supplying of goods (ICMS).		 - It is requested that GOB promptly discharges its responsibility to refund PIS/COFINS, etc.
- It is requested that GOB expedites in refund of ICMS Credit.		 - ICMS is determined by the Federal Constitution.
- Federal Constitution
- General Tax Laws
  (Action)
- At the Japan-Brazil Joint Committee on Promotion of Trade and Investment held in September 2009, Japan side brought up the issue on refund of PIS/COFINS and Brazilian side expressed its appreciation of the problems.
- On 5 May 2010, Ministry of Development, Industry and Commerce (MDIC) announced a set of incentives, including expedited refund of indirect tax upon export in order to beef up the industrial competitive edge of the Brazilian industry in response to the increased imports of car parts, etc.
- On 5 May 2010, Ministry of Finance (MOF) of Brazil announced a set of measures to expand enterprises' export, one of which is the expedited refund of tax deductions by Federal Revenue Bureau of Brazil (FRA) to enterprises that meet certain conditions. The refund OF 50% to qualified enterprises will be completed within 30-days on Social Security (PIS/PASEP), Contribution for the Financing of Social Security (COFINS), and Federal Tax on Industrial Products (IPI). As matters now stand, it takes maximum 5-years to complete the tax refund.
- ICMS is taxable upon import of goods, distribution, telecommunications, transport service, etc. Due to application of different ICMS tax rates between intra-state and interstate transactions, the ICMS balance accrues at importers. In some cases. It takes much time to get the ICMS credit balance, whereas, Sao Paulo State prohibits by Law (State Law Article 6.374-45) filing of tax refund request.
  (Improvement)
- Tax exemption system has been introduced for indirect tax, such as PIS/COFINS, etc. on re-export of products imported a few years ago. Since 2010, GOB has introduced a similar tax exemption system and have applied it to on export of products purchased domestically in Brazil.
(10) Ambiguous Definition on Rules for Tax Loss - Due to the ambiguous provisions on tax loss of Corporate Income Tax Law, enterprises (find it difficult) to employ the tax loss in case of the deficit operation. - It is requested that GOB clarifies the definition of the tax loss. - Corporate Income Tax Law
(11) Irrational ICMS Tax Levy - Under the taxation system the state of Rio de Janeiro, member firm's subsidiary (MFS) operates a crude oil production project jointly with other partner that performs crude oil lifting. Rio State levies ICMS tax upon the loan in kind transaction that temporarily arises between the partners, in the case where partner enterprise's crude oil lifting does not reach the MFS's entitled volume of crude oil. (In practice, another reverse loan in kind transaction arises from the subsequent crude oil lifting that solves the loan situation between the partners.)
- Communication services and other general supplying of goods (ICMS) of 18% is prepaid upon import of products into Sao Paulo State, out of which 4% is withdrawn when sold to a party outside the state border. The balance of prepayment that accrue no interest heavily impacts cash flow. While a part of the balance is refundable, it is said to take a long time.
- The ICMS-ST scheme paid on behalf of retailers, it is felt, is unreasonable. It involves a complex calculation, and basically pre-shipment payment obligations arise.
- No refund is available on the prepaid ICMS. It amounts to nothing but a retroactive false accusation of non-tax payments. Its complexity defies enhancing efficiency by IT. It is questionable if the purchase cost of IT service on ICMS prepayment scheme is recognised as a deductible expense.		 - It is requested that GOB converts its taxation system responding to the actual project operation.
- It is requested that GOB takes step to improve its taxation system or expedites the procedures for the partial refund of the prepaid ICMS.
- It is requested that GOB takes step to repeal the ICMS prepayment scheme.		 - Brazilian Taxation System
(12) Vexatiously Complex ICMS Levy differing in Each State - Brazilian commodity distribution tax (ICMS) is a state tax, a kind of VAT levied mainly on commodity distribution.
- The tax rate is determined in each State so that in inter-state transactions, lower tax rate in other state results in accumulation of prepaid tax. No refund is written into law. In the absence of a supplier in one state, purchasers need to "import" from other state(s).
- In selling products across the state border, the seller makes advance payment of inter-state sales tax, which is later collected from customers. Due to the varying state tax rates, it is difficult to estimate the payable amount.		 - It is requested that GOB takes step to:
-- convert ICMS from state tax to federal tax,
-- streamline the tax rate into a single tax.
- It is requested that GOB takes step to change the law so that no tax is payable in the domestic transactions.
- It is requested that GOB takes step to harmonise ICMS into a single rate in all states, and to make it payable by the end customer.		 - Supplemental Law No. 87/1996
(13) Irrational Tax Levy on the Global Personal Income - GOB levies Personal Income Tax not only on the income gained within Brazil but also on the total worldwide revenue, resulting in the levy of high tax amount. (As regards Pension Premium, the Social Security Treaty between Brazil and Japan was ratified in 2012 to prevent the double payment.)
- Personal income tax is extremely heavy in the end, as the worldwide income is taxable in Brazil.		 - It is requested that GOB reviews the taxation system in Brazil. - FRB Detailed Regulation IN213/02
(14) Absence of Scheme for Consolidated Tax Payment - There is no Consolidated Tax Payment System (CTPS) in Brazil.
- A Holding Company in many case, finds itself in deficit position, while companies under its umbrellas are in taxable position from the yields of their own business operations. In many cases, it inflates the overall taxable amounts.
- Consolidated tax payment is not recognised in Brazil.		 - It is requested that GOB establishes CTPS.
- It is requested that GOB takes steps to introduce the Scheme for Consolidated Tax Payment
- It is requested that GOB authorised consolidated tax payments.
(15) Absence of Tax Refund System for Bad Debt - The Brazilian Taxation System is void of refund facility upon occurrence of Bad Debt on Accounts Receivables on which Sales Tax is levied. It impacts heavily upon enterprises, in as much as both the Tax Rates and the risks of Bad Debt are high in Brazil. - It is requested that GOB systematises the bad debt tax refund on the Sales Tax, even if it is restricted to bankruptcy / composition.
(16) Preparation lags behind on ICMS Detailed Implementing Regulation, following the Tax Reform - Overhaul of the implementing regulation lags behind after the amendment of the Import ICMS. - It is requested that GOB takes steps to ensure simultaneous promulgation of the amendment of taxation system and implementing regulation. - Law No.12715
- Internal Revenue Detailed Regulation IN1312/12
(17) Opaqueness and Increased Cost brought about by Frequent Modifications in the Taxation System - Enterprises incur increased cost from frequent amendments of taxation system.
- By levy of complex and high rates of various taxes, enterprises must bear the heavy tax burden in actual amounts. Moreover, the complexity and frequent changes in taxation system and tax payment procedures necessitates the payment of fees to tax accounting offices and heavy clerical burdens.
- (1) Bypassing the sufficient talks with the industries, President frequently promulgates Interim Decrees in the Official Gazette. Due to the absence of feasibility study (in contents, enforcement date, relation to the existing legislation, etc.), examination at the national congress takes time.
(2) Notwithstanding frequent legislative amendments, hardly sufficient information is reaching the public.
Including publication of tax incentives, (pre or post) announcement of the relevant information is not made public. It compels enterprises to secure manpower and its cost to keep an eye round the clock on the interpretation of the amended laws and the existing laws round the clock.
(3) On the other hand, GOB has made transparent only the taxpayer's information.
Excessive electronic declaration and incidental notion of "illegality" /diversification of punitive regulations.
Automated tax collection procedures.		 - It is requested that GOB ensures consistency in effecting changes made under thorough preparation.
- Structural Reform (Streamlining of the Taxation System) is requested.
- It is requested that GOB takes step to amend the law, not on ad hoc basis, but in accordance with an adequate schedule after exhausting discussions with the Industries.
- It is requested that GOB takes step to make the law interpretation transparent, not on ad hoc or patchwork basis but on the systematic legal rules and amendments.		 - Tax Acts of various kinds.
(18) Cumulative ISS Tax Levy - In a case where a project owner contracts EPC (Engineering, Procurement and Construction) under the "Turn-Key" terms, ISS of 5% is levied on the contract amount. However, where the EPC contractor contracts with subcontractors, the same tax levy applies without grant of the credit. ISS cumulates proportionate to the increment in the number of subcontractors. - It is requested that GOB approves the ISS credit. - Executive Order No.406, Supplemental Act No.116
(19) Discrepancy in Withholding Tax upon Payment of Capital Interest between the Tax Treaty and the Domestic Tax Law - Under the Japan-Brazil Tax Treaty, Withholding Tax of 12.5% applies upon the payment of interest on capital fund from Brazil to Japan, while the Withholding Tax of 15% applies to payments made domestically between the parties in Brazil. In the case where a Japanese enterprise invests into a Brazilian enterprise via a holding company, the following problems arise due to the differences in the applicable Withholding Tax rates:
Investment Form:
Japanese Enterprise(Japan) == Invest into ==> Holding Enterprise(Brazil) ==Invest into ==> Brazilian Enterprise(Brazil)
Applicable Tax Rates upon Payment of Interest on Capital Fund:
Japanese Enterprise <== 12.5% == Holding Enterprise <== 15% == Brazilian Enterprise
Problems:
While the Holding Enterprise upon payment to Japanese Enterprise of interest on capital fund is being withheld 12.5%, 15% is being withheld as to Holding Enterprise when it receives from Brazilian Enterprise interest on capital fund, giving rise to the difference of 2.5%. If Holding Enterprise has no revenue other than interest on capital fund, (1) Holding Enterprise must add 2.5% out of its own capital fund in its payment to Japanese Enterprise, (2) while Holding Enterprise is unable to deduct 2.5% from other taxes payable. It results in double tax payment.		 - In the case where the business purpose of Holding Enterprise is confined solely to investment into the Brazilian Enterprise, the Withholding Tax Rate is determined by the Japan-Brazil Tax Treaty upon payment of interest on capital fund from Brazilian Enterprise to Holding Enterprise (payable to Japanese Enterprise).It is requested that GOB amends its Tax Act to withhold Tax at 12.5%.
(20) Wage Tax using Sales Amount as Tax Base - Article 55 of Law No.12715 (Issued on 18 September 2012) enables taxpayers to choose between 20% on wage and 1% on sales, depending upon business sectors. - It is requested that GOB reduces employers' burden on account of expenses incidental to wages. - Law No.12715 (Issued on 18 September 2012)
(21) Insufficient Grace Period for introducing Digitisation of Tax Return - Investment into the computer system is not insignificant for responding to the move toward digitisation of filing tax returns. - In initiation of the new scheme, it is requested that GOB allows a sufficient grace period (minimum 2-years after nailing down of the Specifications) for each firm. - Brazilian Taxation System

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