Brazil's IRS Issues New PIS and COFINS Regulations

Brazilian tax authorities published Normative Ruling 1,911/2019, regulating all tax legislation related to PIS and COFINS, including (i) calculation of the tax owed in the domestic market; (ii) non-cumulative credits; (iii) PIS/COFINS-Import; (iv) special methods for specific industries, such as financial institutions, insurers and reinsurers and agribusiness; (v) the concentrated taxation method; and (vi) special tax benefits, such as DRAWBACK, REPES, RECAP, REIDI and RETAERO.

For the calculation of PIS and COFINS non-cumulative credits, Normative Ruling 1,911/2019 adopted the concept of inputs defined by the Superior Court of Judgment, based on the criteria of the essentiality and relevance of the expenditures in the context of the company's activity.

Regarding the exclusion of State-VAT (ICMS) from PIS and COFINS bases, allowed by the Brazilian Supreme Court, Normative Ruling 1,911/2019 has reiterated the position of Normative Opinion COSIT Nº 05/2018. In this sense, according to the tax authorities, the amount to be deducted from the PIS and COFINS bases is the ICMS effectively paid by the seller (tax owed net of the non-cumulative credits), and not the amount debited in the fiscal invoice. However, this restrictive opinion issued by the Brazilian tax authorities does not reflect the position of the Brazilian Supreme Court and the taxpayers will certainly challenge it.

Courts Held that Tax Credits Recovered Must Be Included in the Corporate Taxes Bases Only upon Their Offset

With the recovery of tax credits related to the exclusion of State-VAT (ICMS) from PIS and COFINS bases, Brazilian tax authorities have already taken the position that the credits recovered are subject to the corporate taxes (IRPJ and CSLL) upon the final court decision. However, because such decisions usually do not set a fixed amount to be recovered, the tax authorities accept the taxation when the credits are effectively calculated and booked in the companies' financial statements.

However, some judicial decisions held that the credits' legal or economic availability for the taxpayer occurs only upon the actual recovery (offset) of the credits, which means that such credits should be taxed only at that time. Nevertheless, this subject remains controversial and has not yet been settled in the Brazilian Superior Courts.

Brazilian Government Launches the "Lawful Taxpayer" Program

The Brazilian Government has launched the "Lawful Taxpayer" Program with Provisional Measure 899/2019, providing regulations for taxpayers and tax authorities to negotiate terms for the settlement of outstanding federal tax debts.

This measure authorizes federal tax authorities to reduce interest, penalties and charges by up to 50% of the total debts and allows payment in installments (up to 84 months). For small companies or individuals, the discount could reach 70%, with installments up to 100 months.

Provisional Measure 899/2019 must be converted into law within 60 days of its publication in order to remain applicable.

Brazil's Economic Freedom Act Has Been Recently Approved

In the context of government reform, inaugurated by the Labor and Pension Reforms, the Brazilian Congress has recently converted Provisional Measure 881/2019 into Law 13,874/19, also known as the "Economic Freedom Act," aiming to dismantle the bureaucracies imposed on Brazilian entrepreneurs.

From a tax perspective, the new legislation allows the electronic storage of private documents already stored in a government database and whose integrity has already been verified. Moreover, further regulation will specify some documentation that, even if uncertified, must be considered valid for tax audits.

CONFAZ Allows States to Release New ICMS Amnesty Programs

New ICMS Agreements issued by the Brazilian Finance Policy Council ("Confaz") authorize some Brazilian states, such as São Paulo, Mato Grosso, Acre, Rondônia, Mato Grosso do Sul, Sergipe, Rio Grande do Sul, Minas Gerais, Alagoas and the Federal District, to waive or reduce penalties and interest related to ICMS debts.

Some states have already enacted rules to launch these programs.

Brazil-Switzerland Social Security Agreement Enters into Force

Decree 10,038/2019 has promulgated in Brazil the Social Security Agreement entered into with Switzerland. This agreement gives each country's workers who are resident in the territory of the other country the opportunity to take advantage of the contribution periods in the two countries to obtain social security benefits.

Superior Court Held that Reintegra Credits Are Not Taxed by the Corporate Taxes

"Reintegra" is a Brazilian tax benefit aiming at promoting exports of manufactured goods through tax credits to exporters. In this regard, the Superior Court of Justice held that "Reintegra" credits are not considered income and, for this reason, are not included in the corporate taxes (IRPJ and CSLL) bases.

Even though the Superior Court of Justice has held against taxpayers on this matter before, this new decision is an important precedent, which might indicate a new position for future cases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.