Originally published in the February 25 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com
Brazilian President Luiz Inácio Lula da Silva has signed Provisional Measure 418, which introduces a new tax regime applicable to the country’s special export processing zones (ZPEs). The measure was published in the official gazette on February 15. ZPEs are regulated by Law 11,508 of July 2007, but the applicable ZPE tax regime was vetoed by Lula da Silva at that time because of controversies involving several tax breaks provided by the regime.
Provisional Measure 418 reduces the number of applicable tax incentives to make ZPEs more acceptable to competitors outside of the zones. The main features of the ZPE regime include the suspension of the import tax, federal excise tax, P.I.S. (Program for Social Integration contribution), COFINS (the Contribution for the Financing of Social Security), and the additional tax on freight on imports and domestic purchases carried out by companies authorized to operate within a ZPE. The taxes listed above also will be suspended for the acquisition of used assets and equipment that will be incorporated into the ZPE company’s capital. The ZPE incentives under Provisional Measure 418 no longer include an exemption from the financial transactions tax.
Provisional Measure 418 also:
- regulates situations where ZPE authorization may expire;
- establishes the jurisdiction of the ZPE National Council to regulate ZPE-related issues;
- restricts ZPE companies from operating, creating branches, or participating in other companies located outside ZPE areas;
- establishes requirements for ZPE authorization, including a list of the relevant products to be produced by the ZPE company, and guarantees tax breaks for a period of 20 years;
- requires a commitment by the ZPE company to earn at least 80 percent of its gross income from export sales; and
- prohibits companies from installing plants within a ZPE that are indicative of a mere transfer of industrial facilities already operating outside ZPEs.
In an unrelated matter, Provisional Measure 418 also clarifies the definition of the term “international bid” for purposes of the domestic drawback customs regime. Previously, the Federal Revenue Department took the position that domestic drawback customs regimes applied only to supplies of goods and services arising from international bids promoted by the public sector and regulated by the Public Bid Act (Law 8,666/93).1 The Revenue Department clearly rejected the idea that international bids promoted by the private sector could be eligible for domestic drawback incentives.
Subject to further regulation to be issued by way of a presidential decree, Provisional Measure 418 clarifies that both public and private international bids are eligible for the domestic drawback customs regime.
The drawback regime was created by Decree Law 37/1966 to promote Brazilian exports of products that use imported components. Under the regime, eligible taxpayers can import components from abroad free of import duties, provided that they export the final product to foreign clients. A minimum exchange gain (the export price over the import costs) is required in order for taxpayers to enjoy relief from import duties. To benefit from the drawback regime’s tax breaks, taxpayers must apply to the Ministry of Development, Industry and Commerce (MDIC).
In 1990, Law 8,032, as amended, extended the drawback regime’s tax breaks to imports of raw materials, intermediate products, and packaging materials destined for the manufacturing of machinery and equipment to be supplied locally (that is, within Brazil) under international bids. This was referred to as the domestic drawback regime, as no export was required.
The Federal Revenue Department had adopted a limited interpretation of Law 8,032/90, accepting domestic drawback tax breaks only for international bids promoted by the public sector. Many relevant industrial projects, such as paper and pulp processing plants, were left outside the regime, increasing the costs of productive investments. Provisional Measure 418 put an end to that controversy once and for all.
FOOTNOTE
1 Declaratory Interpretative Act 12/07, published in the official gazette on July 11, 2007
END OF FOOTNOTE
David Roberto R. Soares da Silva