“(originally published in the Jan 24 edition of World Tax Daily – Copyrights Tax Analysts – www.taxanalysts.com)“
Brazilian President Luiz Inácio Lula da Silva on January 22 formally reintroduced an economic and tax package “(Programa de Aceleração do Crescimento, or PAC)“ that is expected to accelerate Brazil’s economic growth in the next few years. The PAC initially was announced on November 23, 2006, by Finance Minister Guido Mantega, but was postponed to give citizens more time to consider the measures.
While the PAC focuses mainly on economic issues such as public investments in key sectors of the economy, official credit lines, and the creation of a fund to invest in infrastructure projects, it also includes a number of tax cuts designed to stimulate investment in some key sectors, combined with measures to reduce tax bureaucracy and make tax collection more equitable.
Actually, the tax portion of the PAC is a mix of new measures combined with others already in place or in the process of being implemented. For example, two measures that have already been adopted but that were included in the PAC announcement are the adjustment of the personal income tax brackets (in place since late December 2006) and the introduction of the General Small Business Act.
In the past few weeks, some of the measures previously announced by members of the executive branch have been removed from the final version of the PAC. Among those measures was a reduction, from 24 months to 18 months, of the time for taxpayers to fully use P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security) credits on purchases of machinery and equipment.
It is important to note, however, that the official announcement of the PAC is only the first step. Most of the PAC tax measures still require a provisional measure, a law, or a decree to enter into force. The drafting of those pieces of legislation is still in progress.
The major tax issues under the PAC announced on January 22 are:
• A reduction of the time period for the use of P.I.S. and COFINS credits on investments in buildings booked as taxpayers’ assets. Under the current rules, P.I.S. and COFINS paid by the taxpayer on acquisitions of construction materials are recovered during the same period as depreciation, usually 20 to 25 years. The change would shorten that term to 24 months. The government expects to waive BRL 1.5 billion (approximately US $705 million) in tax revenues in 2007 and BRL 2.3 billion (approximately US $1.08 billion) in 2008 as a result of this measure. The shorter term for using the P.I.S. and COFINS credits would apply to companies that invest in their own real estate and facilities (plants included). It would not apply to public construction companies and real estate developers. The change would be implemented by way of a provisional measure.
• The suspension of P.I.S. and COFINS on acquisitions of materials and services related to new, long-term infrastructure projects involving transportation, ports, energy, and sanitation. The government has not estimated the amount of tax revenues that would be waived as a result of this measure, as it would depend on the actual regulation of the tax cuts, which would be implemented by way of a provisional measure.
• The creation of tax-exempt investment funds for infrastructure projects. As originally announced in November 2006, corporate investors in the funds would be exempt from corporate income tax and the social contribution on net income (CSL). However, the funds now would be tax-free only for individual taxpayers. Income from the funds would be exempt from withholding tax and personal income tax after five years of acquisition by individual investors. This measure would be implemented by way of a provisional measure.
• The creation of a Digital TV Incentive Program (Programa de Incentivos ao Setor da TV Digital, or PATVD) to promote the research, development, and production of equipment related to digital television. Eligible companies applying for the PATVD would enjoy a zero rate for the federal excise tax (IPI), P.I.S., COFINS, and royalty tax (CIDE) not only on sales of equipment, but also on purchases of capital goods, technology, and software. Because this is a new sector in Brazil, the government has not estimated how much tax revenue it would waive as a result of these tax incentives, which would be implemented by way of a provisional measure.
• The creation of a Semiconductors Incentive Program (Programa de Incentivos ao Setor de Semicondutores, or PADIS) to promote the research, development, and production of semiconductor products. Eligible companies applying for the PADIS would enjoy a corporate income tax exemption and a zero rate for IPI, P.I.S., COFINS, and CIDE, not only on sales of semiconductors, but also on purchases of capital goods, technology, and software. Again, because this is a new sector in Brazil, the government has not estimated how much tax revenue it would waive as a result of these tax incentives, which would be implemented by way of a provisional measure.
• The extension of P.I.S. and COFINS exemptions to sales of personal computers. Currently (under Law 11,196/2005), sales of desktop computers valued at up to BRL 2,500 and notebook computers worth up to BRL 3,000 are exempt from P.I.S. and COFINS. One of the PAC measures would extend the P.I.S. and COFINS exemptions to all sales of personal computers (including desktops and notebooks) valued at up to BRL 4,000. The government expects to waive tax revenues of approximately BRL 200,000 per year as a result of this measure. The extension of the P.I.S. and COFINS exemptions would be implemented by way of a decree.
• A reduction from 5 percent to zero of the IPI on some steel products used in public construction. It is estimated that this measure would result in a loss of tax revenues of approximately BRL 60 million per year.
• An extension through December 31, 2008, of the accelerated depreciation rates for acquisitions of machinery and equipment for purposes of the CSL. That tax benefit originally was scheduled to expire on December 31, 2006.
• An extension through December 31, 2008, of the cumulative P.I.S. and COFINS regime for public construction companies. That tax benefit originally was scheduled to expire on December 31, 2006.
• A change of the payment date for payroll taxes for social security (from day 2 to day 10 of each month) and for P.I.S. and COFINS (from day 15 to day 20 of each month). Government officials say that change would allow corporate taxpayers to better reconcile their tax payments with their cash flow. Unfortunately, the three taxes would still be payable on a monthly basis; taxpayers had hoped they would be due every two months, or even quarterly.
In the area of tax administration, the PAC includes only measures that are already in the process of being implemented, such as the merger of the Federal Revenue Department with the Social Security Revenue Department and discussion of the unfinished 2003 tax reform.