Another measure of the recently announced economic and tax package _ was the issuance of provisional measure 352, published in the extra edition of Brazil’s official gazette of January 22, and which grants tax breaks to semiconductors and digital TV. Because measure 352 is an extensive piece of legislation with more than 60 articles, this article addresses only the provisions related to the Semiconductors Incentive Program _(Programa de Incentivos ao Setor de Semicondutores, or PADIS).
Measure 352 creates the Semiconductors Incentive Program (Programa de Incentivos ao Setor de Semicondutores, or PADIS) to promote the research, development, and production of semiconductor products in Brazil.
Eligible companies are those that invest in research and development of semiconductors and also carry out certain production activities related to (i) semiconductors, such as conception, development, project (design), physical-chemical processing, testing, or (ii) LCD, plasma and other displays, such as conception, development and project (design), manufacturing, assembling, testing. It is important to note that eligible companies must carry out listed activities exclusively, which means that taxpayers cannot carry out other business activities unrelated to the eligible ones.
Taxpayers under PADIS can enjoy zero rates on local purchases and imports of new machinery, devices, instruments, equipment and software, destined to taxpayer’s fixed assets, of the following federal taxes: P.I.S., COFINS and IPI (where applicable). However, instead of granting full and broad tax breaks, measure 352 provides that the zero rates will apply only to goods and materials listed by the executive branch. They will also enjoy a zero rate of the 10 percent royalty tax (CIDE) on payments abroad for the use or purchase of patents, trade marks, technology and technical assistance. Only royalties related to semiconductor activities benefit from the zero-rate CIDE.
The provisional measure also authorizes the executive branch to reduce to zero the rate of the import tax for new machinery, devices, instruments and equipment imported into the country and related to the semiconductor industry. The tax reduction, however, applies only to listed products, which must also be booked by taxpayers as fixed assets destined to eligible activities. A presidential decree will establish the terms, conditions and period that taxpayers will be able to enjoy import tax rate reductions.
Measure 352 reduces to zero the P.I.S., COFINS and IPI rates on sales of semiconductors products produced under PADIS. Companies under PADIS also enjoy corporate income tax exemption on income generated out of PADIS activities (sales of semiconductors products), including sales of design of semiconductor products made by local companies under PADIS. The income tax exemption does not apply to the 9 percent social contribution on net income.
Still with respect to corporate income tax exemption, it is important to note that the amount of corporate income tax that has not been paid because of the exemption cannot be distributed to equity holders; instead, that amount must be kept as a capital reserve and used only to absorb losses or to increase the company’s capital. Misuse of this capital reserve will result in the loss of the exemption and will require the taxpayer to pay corporate income tax with interest and delay penalty of up to 20 percent.
The PADIS tax reductions cannot be enjoyed cumulatively with tax benefits of other incentive programs, except for certain tax breaks under the REPES special tax regime (Law 11,196 of Nov. 21, 2005).
Approval of PADIS projects will be issued jointly by the ministries of finance, of science and technology and of development, industry and foreign trade, according to regulations to be issued in the future by the executive branch. Approval will be conditioned to lack of pending tax issues with the Federal Revenue Department and the Social Security Revenue Department.
In order to benefit from PADIS, eligible taxpayers are required to invest annually at least five percent of their domestic gross income in research and development activities. Research and development, however, are limited to certain areas of knowledge related to microelectronics, semiconductors, optoelectronics, software, and methods and processes related to eligible PADIS products. From the five percent in R&D investments, at least one percent must be applied in R&D agreements with certain approved R&D entities.
By July 31 of every year taxpayers under PADIS must submit to the ministry of science and technology reports evidencing compliance with the R&D investment requirements. If any of the minimum R&D investment requirements is not met in any year, the taxpayer is required to pay, by the end of March of the following year, the missing balance to the National Fund of Scientific and Technological Development (Fundo Nacional de Desenvolvimento Científico e Tecnológico, or FNDCT) with interest and a penalty of 20 percent.
- Lack of filing of reports to the ministry of science and technology or having those reports rejected;
- Lack of compliance with the R&D investment requirements;
- Violation of any provision of the PADIS regulation (still to be issued);
- Pending tax issues with the Federal Revenue Department or the Social Security Revenue Department.
Suspension will be converted into cancellation of PADIS benefits if the taxpayer does not eliminate the relevant suspension situation within 90 days. Cancellation will also apply to taxpayers causing two suspension situations within two consecutive years. Regulations will be issued to clarify PADIS suspension and cancellation.
Finally, the ministry of science and technology will notify the Federal Revenue Department with respect to violation of PADIS rules in order for the latter to take any necessary measures to collect unpaid taxes.
David Roberto R. Soares da Silva