Economist has a bitter sweet article on the Brazil Cost (the sum of our inneficiencies).
Telecoms in Brazil
Living the custo Brasil
A YEAR ago my Brazilian mobile phone stopped working properly. The problem was not the device, but the network. Despite being switched on and a good signal showing, calls would be routed to voicemail—and the voicemail only arrive in my inbox several hours later. Emails arrived sporadically. Often I was unable to make calls myself. When I did manage to talk to someone I could barely hear them. Calls would break up and end abruptly.
The procedure for approval has just started, and may take many years to be completed. It is a legal update most needed for Brazil, which is already to enter the information age, at least under a legal perspective.
CISG is closer to entering into force too. 2013 is being a good year.
BRASILIA/RIO DE JANEIRO, April 10 (Reuters) - Brazil's Supreme Court on Wednesday declared a partial end to double taxation of foreign units of Brazilian companies in a split decision that global miner Vale called a "victory" in its $15 billion tax dispute with the Brazilian government.
Vale's most-traded shares fell 3.5 percent as investors strove to interpret the court's complex rulings, as other companies in the world's seventh-largest economy expand abroad.
The world's No. 2 mining company and largest iron ore producer said the ruling will partly reduce its tax liability and leaves open the door to win relief on the rest.
"This was a great victory," Clovis Torres, Vale's general counsel told reporters and investors on a conference call. "It will reduce our liabilities significantly."
Vale has been facing about 30 billion reais ($15 billion) in back taxes on profits by foreign units that the company says were improperly double taxed. The bill is 15 percent larger than Vale's average annual profit for the last three years.
Wednesday's rulings, however, only apply to tax judgments against Vale in 1996 to 2001, just six of the 17 years under discussion in the case, a time when Vale had yet to become one of the world's largest and most global mining companies.
At the end of Wednesday's session, the court left most of the tax issue facing Vale and other Brazilian multinationals undecided. Vale is responsible for the bulk of such tax rulings.
As Brazilian companies expand abroad, the partial tax ruling is likely to cast doubt over the future of rapidly globalizing companies such as steelmakers Cia Siderugica Nacional and Gerdau SA, petrochemical group Braskem SA , meatpackers Brazil Foods SA and JBS SA , constructiongroup Odebrecht SA and aircraft maker Embraer SA.
The supreme court challenge stems from a 2001 decision by Brazil's tax authorities to change the way they determine taxable income from foreign units. At the time, the expansion of Brazilian companies abroad led to concerns that they would use foreign units to evade Brazilian taxes needed to fund the country's schools, health care, roads and other infrastructure.
The court on Wednesday said that any tax judgments based on the 2001 rule change cannot apply to anything before that ruling, Vale's Torres said.
The case is also based on how to apply the 2001 rules to two types of subsidiaries. Generally accepted accounting rules treat foreign subsidiaries in which a Brazilian company has clear voting control differently than those where Brazilians only own a minority, but influential stake.
Taxation on the affiliated companies is harder to determine because the Brazilian company, while it doesn't control the subsidiary, has influence on how investments are made and profits are paid out as dividends, the government argues.
Six of the court's 11 justices said Brazil's 2001 rules for taxing foreign affiliated companies are unconstitutional, as long as the foreign unit was based outside a tax haven.
The issue of whether Brazil's tax rules for controlled subsidiaries not based in tax havens or affiliated companies in tax havens are constitutional was left undecided.
The court declined to rule if Brazil's tax rules violate double taxation treaties designed to prevent two countries from taxing the same profit. They returned that issue to lower courts to reconsider in the light of their other rulings.
Brazil's Central Bank maintains a list of countries and overseas jurisdictions it considers tax havens, or places where accounting and other rules allow companies to evade taxation.
The country's main business lobby CNI, which led the constitutional challenge, called the ruling a "partial victory."
"Even though we didn't win the constitutional issue completely, the ruling was not totally negative, because the important points that we did not win have not been decided definitively," said Cassio Borges, the CNI's legal director.
And, because the court upheld an injunction allowing Vale to withhold any payments until the case is fully solved, Vale has no immediate payment to make.
"Now we will only know how much we have to pay the tax authorities after the end of the judgment," Vale's Torres said.
Before Vale declared victory, the company's shares fell as investors bet otherwise. Vale preferred shares, the company's most-traded class of stock, fell 3.5 percent in late trading in Sao Paulo. Its common shares fell 3.3 percent.
"It's still very confusing. The market is still trying to figure it out, but most are seeing this as negative for Vale, that they lost," said Douglas Pinto, a trader with BGC Liquidez, a Sao Paulo brokerage.
NOTE: You may also want to see How to calculate Brazilian Import Costs I was about to write a post commenting the recent decision of Brazilian Supreme Court, which altered the calculation of one of the taxes over imports.
But I have read the article below, written beautifully by Mr. Arnaldo Bleuez, with whom I have been working lately, and decided to post it here unabridged.
Mr. Bleuez is British Chartered Accountant and alumnus of PricewaterhouseCoopers, is currently a partner at Bleuez & Partners consulting, dealing on Finance, Taxes, and Business Opportunities. His accountancy firm is based in Brazil.
You may reach him at email@example.com. More detailed contact info at the end of the post. I should add that the decision is not valid for everyone (it is not erga omnes). Each importer must look for the courts in order to have the calculation of PIS/COFINS reevaluated for its own imports The article below focus exclusively on the impact of the elimination of the State Tax (ICMS) from the calculation of PIS COFINS over imports. The total tax reduction would be slightly larger than the one indicated at the end, due to some other adjustments in the calculation that were also included in the ruling.
The impact of the STF decision on excluding ICMS
from the base of calcuation of PIS and COFINS for exports to Brazil
On 20th March 2013, the STF (Supremo Tribunal Federal) has decided that the inclusion of ICMS within the base of calculation of PIS and COFINS for exports to Brazil is unconstitutional. As a consequence, exporters to Brazil may expect a decrease of the tax burden.
That sounds good, but we still need to know how relevant is this decision for exporters to Brazil?
This demonstration intends to explain to our clients and prospects how this change will impact the overall tax burden.
Let’s start with a calculation of the overall tax burden for an exporter to Brazil. It’s complex.
Here is an illustration with an example of a pharmaceutical product:
Importation of a laboratory / pharmaceutical product (NCM code: 3926.90.40) into Brazil:
customs value: 100
rate of ICMS: 17%
TEC (or II): 18%
II (Tax on Imports, ‘Imposto sobre Importaçao’)
IPI (Tax on industrialized products, ‘Imposto so bre Produtos Industrializados’)
PIS & COFINS: social contributions
Result of this simulation in Euros:
The basis for the calculation of the II is the customs value.
II: 18% * 100 = 18
The basis of calculation of the IPI is the customs value, plus the II.
IPI: 10% * (100 +18) = 11.8
PIS and COFINS are calculated based on: VD, ICMS, PIS and COFINS! To calculate PIS and COFINS, it is first necessary to calculate the ICMS.
ICMS is calculated on the basis of VD + II + IPI + ICMS + other (in this example, other = 0):
ICMS = 17% (100 + 18 + 11.8 + ICMS + 0)
ICMS = 17% (129.8 + ICMS)
ICMS = ICMS 21.96 + 0.17
ICMS 0.83 = 21.96
ICMS = 26.46
PIS: 1.65% * (100 +26.46 + COFINS + PIS) = 2.30
COFINS: 7.6% * (100 +26.46 + COFINS + PIS) = 10.6
List of calculation above
This calculation above does not take into account related expenses (freight, insurance, etc..).
As a consequence of the decision taken by the STF, ICMS (26.46 in our example) must be taken away from the basis of calculation of PIS and COFINS. Let’s see the impact :
PIS: 1.65% * 26.46 = 0.44% to be taken away from PIS
COFINS: 7.6% * 26.46 = 2.01% to be taken away from COFINS
List of calculation above
PIS 1.86% (2.3 – 0.44)
COFINS 8.59% (10.6-2.01)
Following the SFT decision, one can expect a decrease of 2.45% on the tax burden (69.16 – 66.71).
This 2.45% result is correct for a 17% ICMS. It will different if your rate of ICMS is different.
This is good news for all companies exporting to Brazil and subject to ICMS.
The Federal Government still needs to comment on this decision and apply this it. There are also some doubts about the possibility of asking for a reimbursement of the excess of PIS and COFINS paid by exporters during the previous years.