Originally published in the May 28 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Provisional Measure 428, part of Brazil’s new Productive Development Policy (PDP) announced May 12, will introduce a broad range of tax reforms designed to boost industrial development.
Provisional Measure 428 is one of a series of acts published in Brazil’s official gazette May 13. Together, the acts implement some of the measures announced under the new PDP.
Among other things, Provisional Measure 428 introduces reforms to P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security), corporate income tax, the 9 percent social contribution on net income (CSL), the federal excise tax (IPI), and the social security tax on payroll.
- P.I.S. and COFINS Tax Credits
Provisional Measure 428 reduces the time period for the use of P.I.S. and COFINS credits on investments in capital goods (machinery and equipment). Under the current rules, P.I.S. and COFINS paid by the taxpayer on those acquisitions are recovered during a 24-month period. The change shortens that term to 12 months for machinery and equipment to be listed in future regulation, as long as they are destined for production of goods and services.
The measure applies for local purchases and imports as long as the relevant pieces of machinery and equipment are new and acquired as of May 2008.
- P.I.S. and COFINS Suspension
Imports of some fuel destined to cabotage navigation1 will now be eligible for P.I.S. and COFINS suspension.
- Zero Rate P.I.S., COFINS
Provisional Measure 428 changes several provisions of Law 10,865/2007 regarding zero rate P.I.S. and COFINS on local purchases and imports of parts and components destined for the construction, conservation, modernization, and conversion of vessels registered under Brazil’s Special Vessel Registry.
- P.I.S. and COFINS — Export Requirement
The government has reduced the export requirement for companies under the special Regime for Acquisition of Capital Goods for Export Companies (RECAP) and the special Tax Regime for Exports of Technology Services (REPES) created in June 2005.2
Under the existing rules, RECAP/REPES companies that export at least 80 percent of their products are eligible for a suspension of P.I.S. and COFINS on purchases of capital goods.
Provisional Measure 428 also reduces the export requirement to 60 percent for REPES and 70 percent for RECAP. For REPES, the measure delegates powers to the executive branch to reduce the export requirement to 50 percent.
- Depreciation — IT Companies
Provisional Measure 428 changes a series of tax provisions related to information technology (IT) companies, adding the possibility to fully depreciate within the same year of acquisition newly acquired machinery, equipment, devices, and instruments destined for research and development activities. The corresponding deduction is valid for corporate income tax purposes.
IT companies may also be eligible for deductions of up to 180 percent of the amount of R&D expenses both for corporate income tax and CSL purposes.
- REPORTO Tax Benefits
Concessionaries of rail transport may now enjoy the special REPORTO tax breaks, which suspend IPI (federal excise tax), COFINS, and P.I.S. for domestic purchases or imports of machinery and equipment used in the loading, unloading, and movement of cargo. REPORTO was initially conceived for port operators, but Provisional Measure 428 extends its benefits to railroad concessionaries.
REPORTO tax breaks were recently extended until December 31, 2010, by Provisional Measure 411/2007.
- Zero Withholding Tax
The following payments abroad are subject to a zero withholding tax when made by exporters:
payments for promotion, advertising, and market research of Brazilian products and services to be exported, including rents and leases of space in exhibitions and trade fairs, and payments for installation and maintenance of business and representative offices, storehouses, and deposits; and
payments to cover storage, movement, and transport of cargo and expenses for issuance of documents outside Brazil.
Depreciation Rates for CSL
Provisional Measure 428 extends until December 31, 2010, the depreciation rules for acquisitions of machinery and equipment for CSL purposes. The increased depreciation, introduced by Law 11,051/2004, would have expired on December 31.
Law 11,051/2004 increased the depreciation rate from 10 percent to 25 percent per year for machinery, equipment, and other devices and instruments purchased by corporate taxpayers between October 1, 2004, and December 31, 2005 (now extended to December 31, 2010).
Nevertheless, a few restrictions apply to the higher depreciation rate. For example:
it is applicable only to industrial companies;
eligible machinery, equipment, devices, and instruments must be listed by an act of the executive branch; and
the depreciation allowance is limited to the amount of CSL due, with no possibility of carryforward or future use.
Accelerated Depreciation
Without forgoing the usual depreciation, automakers and manufacturers of auto parts and capital goods may enjoy accelerated depreciation rates equivalent to four times the regular depreciation rate. The new accelerated depreciation applies for purchases of new machinery, equipment, devices, and instruments between May 1, 2008, and December 31, 2010, as long as the relevant assets are destined for the taxpayer’s fixed assets and employed in the taxpayer’s industrial process.
- Corporate Income Tax — IT/ICT Companies
Article 13 of the measure allows IT and information and communication technology (ICT) companies to exclude from taxable income the training costs and expenses associated with software development personnel, without forgoing the usual deduction for corporate income tax purposes. In other words, the measure allows a double deduction of those qualified training expenses.
The extra exclusion, however, is limited to the amount of taxable income, and any excess cannot be carried forward.
- Social Security Payroll Tax — IT/ICT Companies
Provisional Measure 428 grants a reduction from 20 percent to as low as 10 percent of the employer payroll tax paid by IT/ICT companies. The reduction depends on the participation of export income in the company’s gross income.
The following activities qualify as IT/ICT services:
- system analysis and development;
programming; - data processing and similar activities;
- software development, including video games;
- licensing of computer programs;
- computer consulting;
- computer technical support, including installation, configuration, and maintenance of computer programs and databases; and
planning, construction, maintenance, and update of electronic pages (Web pages).
FOOTNOTES
1 Cabotage is the transport of goods or passengers between two points in the same country.
2 REPES and REPAC were originally created by Provisional Measure 252 of June 15, 2005, but because Congress and the executive branch were unable to reach an agreement on the measure, all of its tax incentives expired the following October. That led the executive branch to include the tax cuts in another provisional measure (No. 255) then under review in Congress. Provisional Measure 255 finally was converted into Law 11,196 of November 22, 2005.
END OF FOOTNOTES
David Roberto R. Soares da Silva