Originally published in the July 17 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Declaratory Interpretative Act (ADI) 12/07, which will affect hundreds of companies that have enjoyed tax breaks from Brazil’s domestic drawback regimes, was published in the official gazette on July 11. ADI 12/07 provides that Brazil’s tax-beneficial domestic drawback customs regimes apply 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).
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 have been required to 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.
As a condition, the law also required that the purchase price had to be paid in foreign currency derived from financing granted by foreign governments, international financing institutions, or Brazil’s National Bank for Economic and Social Development.
Because the law did not specify the type of international bid it required, many taxpayers took the position that it applied to all types of international bids, including those promoted by the private sector. Those taxpayers maintained that international bids also included those promoted by Brazilian companies in which foreign companies could also participate.
For years, taxpayers have applied to the MDIC and been granted domestic drawback tax incentives for international bids promoted by the private sector. Sporadically, the Federal Revenue Department has challenged those benefits, based on the argument that international bids include only those promoted by Brazil’s public sector and state-owned companies.
The result was the issuance of ADI 12/07, which formally states the Federal Revenue Department’s position on the matter. According to the Federal Revenue Department, ADI 12/07 was issued after the Federal Revenue Attorney General’s Office (PGFN) issued a legal opinion that Brazil’s domestic drawback regimes apply only to international bids promoted by Brazil’s public sector, as regulated by the Public Bid Act.
Because the act is interpretative, it is also retroactive, which leaves the door open for the Revenue Department to assess import duties unpaid during past years as long as it is not barred by the statute of limitations.
The amount at stake may reach billions in federal taxes on imports (for example, the import tax, the federal excise tax (IPI), the P.I.S. (Program for Social Integration contribution), and the COFINS (Contribution for the Financing of Social Security)) that many companies have not paid because of domestic drawback tax breaks. Some major private international bids — many of them for infrastructure projects — have benefited from domestic drawback regimes.
Now some companies are trying to prevent tax assessments by filing for injunctions before the federal courts, as the MDIC is starting to cancel domestic drawback regimes it has granted in the past for private international bids. In 2006 alone, the MDIC canceled more than 50 drawback regimes being used by more than 30 companies. Taxpayers argue that because of the MDIC’s original approval (that is, because it used to consider that international bids included private ones), no subsequent cancellation can be legal or valid.
At least one injunction was granted by the Federal Regional Appellate Court for the First Region in a case filed by Man Ferrostaal do Brasil Comercio e Industria Ltda (Motion 2007.01.00.004940-4). The case was filed before the issuance of ADI 12/07 against the Foreign Trade Department, the MDIC’s department in charge of granting and canceling drawback regimes.
Taxpayers that have enjoyed domestic drawback regimes involving private international bids should consult with their legal counsel to determine potential risks and exposure, and also should examine alternatives to prevent assessments by tax authorities.
David Roberto R. Soares da Silva