Originally published in the May 14 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
The Brazilian government on May 12 announced the country’s new industrial policy, which includes a series of tax breaks for some economic sectors.
The tax changes are designed to make eligible sectors more competitive and willing to invest in production and exports.
The tax measures are not effective immediately. They will require enactment and issuance of laws, decrees, and, possibly, provisional measures to come into force. Some of the measures will probably not become a reality for several weeks.
The new industrial package, named the Productive Development Policy (Política de Desenvolvimento Produtivo, or PDP), was announced in an official ceremony at the headquarters of Brazil’s National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social, or BNDES) in Rio de Janeiro.
Among the most important PDP tax measures are:
- extension until 2010 of the accelerated depreciation rate for some machinery, equipment, devices, and instruments purchased by corporate taxpayers; and a tax credit of 25 percent of that depreciation to be used against the 9 percent social contribution on net income (CSL);
- reduction of the time period for the use of P.I.S. (Program for Social Integration) and COFINS (Contribution for the Financing of Social Security) credits on investments in capital goods; under the current rules, P.I.S. and COFINS paid by the taxpayer on those acquisitions may be recovered within 24 months (in special circumstances); the change would shorten that term to 12 months;
- reduction to zero of the 0.38 percent financial transactions tax levied on financing granted to the private sector by BNDES and other public credit entities (the Special Agency for Industrial Financing and the Study and Projects Financing Agency of the Ministry of Science and Technology);
- exemption from federal excise tax, P.I.S., and COFINS for production of parts used by Brazilian shipyards;
- reduction from 20 percent to as low as 10 percent of the employer payroll tax paid by software and information technology (IT) companies; the reduction would depend on the participation of export income in the company’s gross income;
- reduction of some software and IT companies’ social contribution on payroll to as low as zero; the reduction will also depend on the participation of export income in the company’s gross income;
- double deduction, for corporate income tax and CSL, of some training expenses for software and IT companies;
- additional deduction of research and development expenses for technology companies;
- suspension of P.I.S. and COFINS in purchases
of materials used in manufacturing of goods to be exported under the drawback regime;
- reduction to zero of withholding tax on payments abroad for logistics services connected to Brazilian exports; and
- reduction to zero of withholding tax on payments abroad for commercial promotion of Brazilian products.
The new industrial package, according to the executive branch, has four main goals:
- increase capital investments from 17.6 percent of the country’s GDP in 2007 to 21 percent in 2010;
- increase investments in R&D from 0.51 percent of GDP in 2007 to 0.65 percent in 2010;
- increase the number of micro- and small-business companies that export goods and services by more than 10 percent (in 2006 they totaled 11,792, according to the government); and
- increase Brazilian exports in general to make the country’s participation in world trade increase from 1.18 percent in 2007 to 1.25 percent in 2010.
Many of the PDP’s measures deal with new credit lines and government financing of private activities, such as funding BNDES to grant financing to the private sector, export financing, reducing spreads and interest rates, and increasing payment terms in public credit lines.
Depending on how some of the PDP’s measures are implemented, Brazil may be challenged at the WTO by other countries, including the United States and the European Community. Recently some WTO members have requested additional information regarding tax incentives granted to Brazilian exporters in recent years.
But battles at the WTO may not be limited to tax incentives contained in the PDP. Subsidized tax rates in public financing may also be targeted. Therefore, Brazil should be careful when implementing PDP measures to avoid challenges at the WTO.
David Roberto R. Soares da Silva