The Brazilian Internal Revenue Service (IRS) published, on Septemberr 17, 2013, Normative Instruction RFB No. 1,397, dated September 16, 2013, which establishes accounting and tax rules to be observed by legal entities included in the RTT.
Among the rules established by the Brazilian IRS, we can highlight the following:
- Profits or dividends exempt are only those calculated using the accounting methods and criteria in effect on December 31st, 2007. The amount paid in excess shall be subject to the payment of Corporate Income Taxes (IRPJ and CSLL), if the beneficiary is a legal entity, or to Withholding Income Tax (IRRF), if the beneficiary is an individual;
- Interest on Net Equity (INE) shall be calculated based on the net equity accrued in accordance with the accounting methods and criteria in effect on December 31st, 2007. There is no provision for payment of INE in excess;
- As of calendar year 2014, legal entities shall prepare the ECF (Tax Accounting), in order to demonstrate the Assets, Liabilities and P&L Accounts calculated using accounting methods and criteria in effect on December 31st, 2007. Until that date, legal entities were only required to demonstrate, in the so-called FCONT, the adjustments made to the P&L as a result of GAAP differences;
- The calculation basis of PIS and COFINS non-cumulative credits shall be calculated using the accounting methods and criteria in effect on December 31st, 2007, with the accounting balances shown in the ECF;
- The legal entity shall transcribe in the Corporate Income Tax Book (LALUR) the following accounting statements, calculated in compliance with the methods and criteria in effect on December 31st, 2007: (a) balance sheet, (b) income statement, and (c) retained earnings statement;
- The evaluation of any investment in subsidiaries should be carried out based on the accounting methods and criteria in effect on December 31st, 2007. That is, the equity method should used for tax purposes, for the investments in subsidiaries, or in affiliates in which the investor holds 20% or more of the share capital.
In accordance with item 3 of Section 15 of Law No. 11,941/2009, RTT became mandatory for all legal entities, including for those using the deemed or arbitrated profit, as of January 1st, 2010. Therefore, Normative Instruction RFB No. 1,397/2013 should be observed by all legal entities that have adopted the new accounting methods and criteria introduced by Laws No. 11,638/2007 and 11,941/2009.
Nevertheless, considering that some of the rules introduced by the Normative Instruction have no legal basis, innovating the legal system rather than merely interpreting and regulating the current legislation, we believe that taxpayers have good arguments to discuss its legality and implementation.
Observations in this update about Brazilian law are by Tauil & Chequer Advogados. They are not intended to provide legal advice to any entity; any entity considering the possibility of a transaction must seek advice tailored to its particular circumstances.