Brazil

The Brazilian Supreme Federal Court (STF) confirms that the ICMS (State VAT) should not be included in the taxable basis of PIS and COFINS (Federal VATs)

The STF concluded the long-awaited judgment of the motion for clarification in the process in which it was determined that the ICMS amount informed by the companies in their invoices should not be included in the taxable basis of the PIS and COFINS.

The understanding of the STF allows companies to stop including such amount of ICMS in the PIS and COFINS calculation basis as from 15 March 2017. For companies that did not file a judicial or administrative measure until 15 March 2017, the retroactive recovery of the undue amount is limited until that date.

Brazilian Double Tax Treaties (DTTs) recently ratified

The DTT signed between Brazil and Uruguay became effective in Brazil, providing reduced withholding tax (WHT) rates for certain cross-border transactions involving royalties (and dividends, in case they become taxable in Brazil). Brazil has recently signed or ratified DTTs with Colombia, Poland, and the United Kingdom (UK). Such DTTs, however, are not yet in force.

ICMS (State VAT) rate restrictions on operations with fuels, electrical power, and telecommunications

In November 2021, the STF decided that higher ICMS rates for operations involving electrical power and telecommunications are not in line with the selectivity nature of this tax, as adopted by the State legislators, due to the essentiality of said items in daily life (as observed in Recurso Extraordinário nº 714.139).

Considering the expected financial impact to the Public Treasury of the decision above, the STF decided to modulate the effects of its decision to start only in 2024.

Nevertheless, in March 2022, the Brazilian National Congress presented Bill nº 18/2022, which aimed to change Brazilian federal legislation to consider fuels, electrical power, telecommunications, and public transportation as essential goods and services, imposing restrictions to the Brazilian States concerning the ICMS rates adopted.

Following an expedited procedure in the National Congress, in June 2022, the Bill was approved and converted into Supplementary Law nº 194/2022 with its effects starting as of the date of publication.

As a result of the changes set forth by the federal legislation mentioned above, some Brazilian States have already started to issue tax rules in order to regulate the applicable ICMS rates for these items.

New transfer pricing rules

On 29 December 2022, the Brazilian government issued the Provisional Measure (MP) 1152/22 seeking alignment with the arm’s-length principle in accordance with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. The MP was amended and ratified by the Congress, a process that was concluded on 10 May 2023. Afterwards, the MP was converted into Law 14,596, published on 15 June 2023.

Law 14,596 is mostly principles-based and delegates substantial authority to regulations issued and to be issued by the Brazilian Federal Revenue Office (RFB), through Normative Instructions (INs).

IN/RFB 2,161/2023, the first set of regulations to rule Law 14,596/23, provides guidance on the interpretations of the arm’s-length principle, related parties, controlled transactions, delineation of transactions, methods, and documentation (the procedures related to the filings of the reports, among other measurements and future implementation of transfer pricing return); however, it does not regulate important ’specific provisions‘ from the new law that, as per the RFB, will be addressed in future INs.

Brazil VAT / excise reform

Although there are different proposals for VAT reforms under discussion, the most advanced one is the Constitutional Amendment Proposal 45 of 2019 (PEC 45), which overhauls Brazil’s federal, state, and local consumption and transactional taxes.

This constitutional amendment is the fundamental pillar of the broad tax reform, which also requires a Law Complementary to the Constitution (LC), to be proposed in 2024 for likely enactment by 2025.