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Brazil macroeconomic and tax overview

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1 Brazil macroeconomic and tax overview
Brazil macroeconomic and tax overview PwC Tax Brazil November, 2010

2 Foreword Brazil has matured, both from an economic and political point of view. The economic prospects in 2010 are favorable. Amongst others, low level inflation, lower country risk (Brazil turned investment grade in 2008), favorable demographics and strong currency make Brazil a very attractive market for foreign investments. Prospective investors still encounter difficulties overcoming complex regulatory, tax and legal issues. Brazil macroeconomic and tax overview November, 2010

3 Agenda Section 1 Main drivers and challenges Section 2 Tax System Section 3 Taxation on import Section 4 Double Tax Convention Brazil - Norway Section 5 REPETRO regime Section 6 Specific regulatory & tax issues for vessel activities in Brazil Section 7 Individual’s taxation Section 8 Planning opportunities Brazil macroeconomic and tax overview November, 2010

4 Main drivers and challenges
Section 1 Main drivers and challenges Brazil macroeconomic and tax overview November, 2010

5 GDP GDP growth at constant purchase price (US$ billion at average exchange rate) Source: BACEN – Banco Central do Brasil IBGE – Instituto Brasileiro de Geofísica e Estatística Brazil macroeconomic and tax overview November, 2010

6 GDP GDP actual annual growth (% p.a.)
Source: BACEN – Banco Central do Brasil IBGE – Instituto Brasileiro de Geofísica e Estatística Brazil macroeconomic and tax overview November, 2010

7 Economic overview and population data
The largest economy in Latin America and the eighth in the world Primary economic sectors are: agriculture, automobile, utilities, transport, industry, mining and energy Main economic states: São Paulo, Rio de Janeiro, Minas Gerais and Paraná Population data Average life expectancy of 72 years Young population 40% is under 20 years of age Less than 7% is over 65 years Experts on O&G activities are increasing Brazil macroeconomic and tax overview November, 2010

8 Some points Growth potential and consumer market
Large number of infrastructure projects boosted by World Cup (2014), Olympic games (2016) and large pre-salt discoveries Multiple taxes with fast changing legislation affecting business plans and increasing risks of contingencies Complex tax and labor regulatory environment, with high taxes and social charges on payroll, sales and income Complex transfer pricing and foreign capital restriction rules Judicial Courts decisions is time consuming The Government offers tax benefits to attract new investors Increasing electronic tax compliance in the last years Convergence of the accounting standards to IFRS began in and is happening at a fast pace Brazil macroeconomic and tax overview November, 2010

9 Some points (cont.) Pre-salt discoveries potentially represent both a major increase in Brazil’s oil reserves and a huge technologic and logistics challenge (pre-salt areas generally >300km from the shore) World wide leader in the exploration of oil in deep waters. Petrobras Business Plan has a record US$ 118 billion investment in the E&P activities for (Brazilian suppliers expected to represent 53% of total E&P investment) Petrobras alone operates 18% of all O&G vessels (FPSO and others) in the world Petrobras oil production expected to reach 3,9 Mbpd in 2020 (2010: 2,1 Mbpd) Bids to contract 28 rigs in Brazil between and more than 200 supply and special vessels Petrobras alone estimates a HR GAP of 207,000 professional to fulfill its business plan Brazil macroeconomic and tax overview November, 2010

10 Some points (cont.) Concession bid requires “local content” (increase pressure from Brazilian suppliers) O&G Exploration and Production requires local company New regulatory mark for the pre-salt areas (Production Sharing Agreements) pending approval in Congress (expected for 2011) New entrants in the E&P activities with relevant business plans, such as OGX/OSX, Shell, BP, Statoil and Repsol Brazil macroeconomic and tax overview November, 2010

11 High country risk premium: why ?
Heavy Public Sector Deficit and Public Debt (% of GDP) Source: BACEN – Banco Central do Brasil Brazil macroeconomic and tax overview November, 2010

12 High country risk premium: why ?
Brazilian Public Debt is financed by one of the highest interest rates in the world…. Source: BACEN – Banco Central do Brasil Brazil macroeconomic and tax overview November, 2010

13 High country risk premium: why ?
…. And by one of the highest Tax/GDP ratios in the world. Source: IBPT – Instituto Brasileiro de Planejamento Tributário Brazil macroeconomic and tax overview November, 2010

14 Section 2 Tax System Brazil macroeconomic and tax overview
November, 2010

15 Federal taxes Corporate income taxation
Corporate Income Tax (IRPJ) and surcharge Social contribution net profit (CSLL) Income tax on individuals (IRPF) Social Security Financing Contribution (COFINS) Social Integration Program Contribution (PIS) Contribution to the Economic Domain Intervention (CIDE) Federal excise tax on industrialized products (IPI) Import tax (II) and Export tax (IE) Financial operations tax (IOF) Rural real estate tax (ITR) Brazil macroeconomic and tax overview November, 2010

16 State taxes & Municipal taxes
Value-added tax on sales and services (ICMS) Inheritance and gift tax (ITCMD) Automobile tax (IPVA) Municipal Taxes Service tax (ISS) Urban real estate tax (IPTU) Real estate transfer tax (ITBI) Brazil macroeconomic and tax overview November, 2010

17 Withholding Tax - IRRF Currently, the rates below are applicable to the following payments to non residents: Dividends Not Taxable Interest Royalties Management fees 15% (*) (**) Technical services and assistance Other services 25% (*) (*) These rates are effective unless otherwise specified by a tax treaty – Section 4 for more details. (**) Payments of any type (besides dividends) made to tax haven jurisdictions that do not tax income or tax income at a rate lower than 20%, will be subject to withholding at a rate of 25% (numerus clausus list of tax havens and special tax regimes at Ruling 1,037/2010 of the Internal Revenue Service) Brazil macroeconomic and tax overview November, 2010

18 Some important aspects of the Corporate Income Taxes (CIT)
Total corporate income tax burden of 34% Tax loss carry forward Tax losses may be carried forward indefinitely, but offset is limited to 30% of the annual taxable income prior to the compensation Tax losses of an acquired company can not be carried forward to be offset against the taxable income of a new activity if the following two conditions are simultaneously met: modification in the ownership of the company; and modification in the activity of the company. Brazil macroeconomic and tax overview November, 2010

19 Capital gains and dividends
capital gains obtained by local resident companies are taxed at the normal corporate rate (34%) capital gains of non-residents are taxed at the rate of 15% (unless otherwise specified by an international tax treaty), or 25% in case of payments made to tax havens the same regime applies in case of license transferring (e.g., farm out) Dividends to shareholders dividends are not subject to withholding income tax, if paid out of profits generated as of January 1, 1996, regardless of whether they are paid to a resident or non-resident shareholder. remuneration to shareholders can be based on the interest on net equity (please see Section 7). Brazil macroeconomic and tax overview November, 2010

20 Brazilian Controlled Foreign Corporation’s Rules
Foreign-source profits of controlled and affiliated foreign corporations were used to be taxed in Brazil only at the time they were considered “available” to the Brazilian controlling company (distribution, credit on account etc.) Tax law issued in 2001 changed that systematic by establishing that profits will be considered “available” to the Brazilian shareholder each year at 31 December following the closing of the CFC’s financial statements. The foreign profits are subject to Brazilian corporate income tax and social contribution at the combined rate of 34%; To avoid the above-mentioned taxation, Brazilian entities might consider the possibility of incorporating entities in certain tax-treaty jurisdiction to conduct their offshore activities (usage of this structure is under discussion in administrative courts). Brazil macroeconomic and tax overview November, 2010

21 Brazilian Tax Treaties Network
Argentina Austria Belgium Canada Chile China, P.R Czech Republic Denmark Ecuador Finland France Hungary India Israel Italy Japan Korea, Rep. of Luxembourg Mexico Netherlands Norway Peru Philippines Portugal Slovak Republic South Africa Spain Sweden Ukraine Treaties under negotiation or not yet ratified: Romania, Switzerland, the UK, the US and Venezuela Germany terminated its tax treaty with Brazil with effects as from January 2006 Reciprocal tax treatment with the UK, the US and Germany (individuals). Brazil macroeconomic and tax overview November, 2010

22 Transfer Pricing rules – key aspects
Adherence to the arm’s length standard. Uses OECD Style Methods. Scope of Regulations. Specific Filings and Dates. Not at all, but in specific points of the legislation. Only the CUP and the Cost Plus Method. Imports/Exports of goods, rights, and services with related parties. Transactions entered into with countries with favourable taxation or which have secrecy laws or privileged tax regimes. 3. Interest not registered with BACEN. Special form in the Tax Return. Electronic data (“AUDIN”). As part of the Tax Return – June 30th. Upon request of the tax authorities (in case of audit). Brazil macroeconomic and tax overview November, 2010

23 Transfer Pricing rules Key aspects
Brazilian rules vs. OECD Guidelines Broad definition of related party Absence of methods based on income Maximum and minimum margins stipulated in legislation Methodology: Utilization of current market prices Documents to be maintained by taxpayers include only invoices, calculations supporting payments and electronic files (“AUDIN”) TP issues on the O&G activities (E&P and vessel companies, please refer to sections 5 and 6) Brazil macroeconomic and tax overview November, 2010

24 Thin capitalization rules
Effective as of January, 2010; Related parties, tax havens and ‘privileged tax regime’: concept borrowed from Brazilian Transfer Pricing rules Thin cap rules provide deductibility thresholds for interest accrued in all forms of financing (i.e, loans, bonds, debt notes, prepayments, and etc.) as follows: 2 x 1 debt/equity ratio for the sum of all debt with related parties; 1 x 0,30 debt/equity ratio for the sum of all debt with entities in tax haven and ‘privileged tax regime’ jurisdictions Interest expenses and gains are deductible (if within thin cap threshold) and taxable on accrual basis (Loan ballooning: no withholding tax until the time of payment but interest deduction on accrual basis) Brazil macroeconomic and tax overview November, 2010

25 Financial Transactions Tax (IOF)
IOF of 5.38% is charged on foreign loans with an average maturity of less than 90 days. All other foreign loans, from October 23rd, onwards, are subject to IOF at 0.38% rate Capital contributions are subject to 0.38% IOF Current IOF rate for payment of dividends and interest on net equity is also 0.38% Payments for the importation of goods and fixed assets are subject to 0.38% IOF Brazil macroeconomic and tax overview November, 2010

26 Taxes levied on the importation of goods
Taxes on imports are levied on top of one another, as follows: II is levied on the CIF price (FOB price plus insurance and freight); IPI is levied on CIF price plus II; ICMS levied on CIF price, plus II, IPI, PIS and COFINS due on imports. ICMS is included in its own basis; PIS and COFINS are levied on CIF price plus ICMS due on imports. They are included in their own bases. Import tax (II) is considered cost (not recoverable). ICMS, IPI, PIS and COFINS paid on imports are generally creditable against internal due ICMS, IPI, PIS and COFINS. Brazil macroeconomic and tax overview November, 2010

27 Taxes and contributions administrated by the Internal Revenue Services (Federal Level)
Brazil macroeconomic and tax overview November, 2010

28 Tax Incentives/Benefits applicable in Brazil
Federal Level ADA/ADENE areas (North and Northeast) – Income Tax (IRPJ) reduction (up to 75%) and tax exemption on the import of certain equipment Free Trade Zones (i.e. Manaus) – goods acquired in these free trade zones do have tax exemptions for PIS, COFINS, Import Duties (II) and Excise Tax (IPI) Special Customs Regimes – i.e. Temporary Admission, Drawback, Blue Line, RECOF, REPEX, REPETRO, REPORTO, RECOM, Bonded Warehouse, among others Exports – tax exemption from PIS, COFINS and Excise Tax (IPI) Exporters – PIS and COFINS exemption on the acquisition of fixed assets Brazil macroeconomic and tax overview November, 2010

29 Tax Incentives/Benefits applicable in Brazil
State level Special Programs, such as, FOMENTAR (State of Goiás); PROVIN (State of Ceará), PRODEP (State of Pernambuco), DESENVOLVE (State of Bahia) and FUNDOPEM (State of Rio Grande do Sul), which grant deferral of ICMS payment and/or reduction of the tax calculation basis; Tax war among the Brazilian States – legality of the tax incentives granted by such States; State Tax Package – possibility to negotiate a package of tax incentives with the State government upon the installation of the company in that State; Free Trade Zones (i.e. Manaus) – goods acquired in these free trade zones do have tax exemption for ICMS; and Exports – tax exemption for ICMS. Brazil macroeconomic and tax overview November, 2010

30 Tax Incentives/Benefits applicable in Brazil
Municipal Level ISS rate reduction (5 to 2%) – lower rates available in Municipalities located close to large centers in order to attract service providers; Municipal Tax Package – possibility to negotiate a package of tax incentives with the municipal government upon the installation of the company in the corresponding municipality; Exports – tax exemption for ISS; and Macaé Municipality reduces in 50% the ISS rate for services provided to Petrobras, limited to 2%. Brazil macroeconomic and tax overview November, 2010

31 Section 3 Taxation on import Brazil macroeconomic and tax overview
November, 2010

32 Taxation on import of assets
Imports of Assets Exporters are entitled to benefit from PIS/COFINS exemption on imports of assets provided exports are 80% of company’s gross revenue Express Customs Clearance – Assets and goods may be released within 4 to 8 hours (Company’s General Tax Compliance is required) Ex-Tarifario: Temporary Import Duty reduction for imported fixed assets (need to be negotiated with Federal Tax Authorities). May also apply to IPI ICMS: Potential reduction/exemption according to investment amount and economic substance within the State Possibility of negotiation for land Brazil macroeconomic and tax overview November, 2010

33 Taxation on import of assets
Imports of Assets Tax event materialized at the customs clearance Imports of used equipment highly regulated Need of Import License when import tax benefits apply High bureaucracy for obtaining licenses and permits (Health, Environment, etc) Customs regulation not standardized Poor Infra-Structure (port inefficiency; quality of roads, etc) Brazil macroeconomic and tax overview November, 2010

34 Taxation on import of services
With gross-up Without gross-up Service payment 100 IRRF (15%) (on 125) 18,75 (on 100) 15 ISS (5%) 6,25 5 Net remitted value 80 CIDE (10%) 10 COFINS / PIS(*) (9.25%) Approx. 13 Approx. 10 IOF (0.38%) 0.38 Total cost for Brazilian company (approx.) 148.38 120.38 Norway Co Service Payment Brazil Co Brazil macroeconomic and tax overview (*) value of the tax base includes the own PIS/CONFINS and the ISS November, 2010 November, 2010 Page 34

35 Double Tax Convention Brazil - Norway
Section 4 Double Tax Convention Brazil - Norway Brazil macroeconomic and tax overview November, 2010

36 Double Tax Convention Brazil - Norway
Income Article of the Double Tax Convention Usual Brazilian withholding rate Treaty rate Dividends Article 10 Exempt 15%, tax sparing credit of 25% (1) Interests Article 11 15% 0% if loans and credits granted by the Norwegian Government 15% in all other cases tax sparing credit of 25% in all cases Royalties Article 12 25% if royalties paid for the use of a trade mark, etc 15% in all other cases (also ICS equipment, but special case Norway) tax sparing credit of 25% in all cases; Capital gains Article 13 May be taxed in both countries - obligation to grant tax credit (2) Other income Article 7 (3) and 22 15%, 25% Income not mentioned also taxable in Brazil (1) Expired as of 1999; Dividends from profits as of Dec/96 are not subject to WHT in Brazil) (2) Capital gain in the sale of BrazilCo. shares by Norwegian parent - withholding tax levied at 15% in Brazil (3) Non distributed profits may not be taxed in the other State Brazil macroeconomic and tax overview November, 2010

37 Section 5 REPETRO regime Brazil macroeconomic and tax overview
November, 2010

38 REPETRO Regime REPETRO provides three special tax regimes to the O&G companies: Temporary Admission Regime - full suspension of federal taxes (II, IPI, PIS-Importation and COFINS-Importation) levied on the items imported in a temporary basis Drawback Regime - full suspension of federal taxes levied on the items imported to be used in the asset imported under the temporary admission regime Symbolic Exportation Regime – equalizes the tax treatment applied to the goods imported under REPETRO to the tax treatment applied to the goods acquired in the Brazilian market (full suspension of federal taxes) Valid up to December 31, 2020. Brazil macroeconomic and tax overview November, 2010

39 REPETRO Regime Brazil Overseas E&P Company Purchaser Brazilian
Temporary Admission Rental of Assets in Temporary Basis Payment Hard-currency Purchaser Customs Clearance Brazilian Producer Sale of Goods Sale of goods Delivered in Brazil Brazil Overseas Brazil macroeconomic and tax overview November, 2010 November, 2010 Page 39

40 REPETRO Regime REPETRO special regime is granted to the Brazilian E&P companies Some of the assets that may be subject to Repetro are: Platforms used in the exploration, production and production phases; Christmas trees; Sub-sea equipment; Support vessels. Assets must be rented or chartered from a foreign entity to the Brazilian E&P companies (or by the Brazilian service provider to the E&P companies) Brazil macroeconomic and tax overview November, 2010

41 REPETRO Regime Convention 130/07 – expands REPETRO benefits (federal regime) to encompass the state ICMS tax For importation of goods to be used in the exploration phase: each State can choose between granting ICMS exemption or reduction of the ICMS due to 1.5% (e.g., Rio de Janeiro State chose exemption); For importation of goods to be used in the development/production phases: ICMS at 3%, without credits; or ICMS at 7.5%, with credits. Brazil macroeconomic and tax overview November, 2010

42 High tax burden on Importation of Services and Goods
Taxes levied on importation of services and goods Tangible Imported Intangible Import Duty – II 15.00% 15.00 IPI 8.00% 9.20 ICMS 19.00% 24.30 ISS 5.00% 6.25 PIS/COFINS 9.25% 13.48 12.59 WHT 15% 18.75 CIDE 10% 10.0 IOF 0.38% 0.38 Total Tax Burden without REPETRO - $ 100 62.36% 47.97% Brazil macroeconomic and tax overview November, 2010

43 High tax burden on Importation of Services and Goods
Taxes levied on importation of services and goods Tangible Imported Intangible Import Duty – II 15.00% IPI 8.00% ICMS 19.00% 17.65 ISS 5.00% 6.25 PIS/COFINS 9.25% 12.59 WHT 15% 18.75 CIDE 10% 10.0 IOF 0.38% 0.38 Total Tax Burden with REPETRO - $ 100 18.03% 47.97% Brazil macroeconomic and tax overview November, 2010

44 Specific regulatory & Tax Issues for Vessel Activities in Brazil
Section 6 Specific regulatory & Tax Issues for Vessel Activities in Brazil Brazil macroeconomic and tax overview November, 2010

45 Regulatory constraints
Regulatory bodies: ANTAQ and the Brazilian Navy Foreign shipping companies (FSC) Can operate freely in international sea navigation; Charter with Brazilian companies is allowed, subject to annual disclosure of the agreement conditions to ANTAQ; “Market reserve” for Brazilian shipping companies (BSC) Brazilian contractor is forced to terminate charter with FSC if Brazilian shipping company (BSC) claims in a bid that it has a similar Brazilian-flag vessel available. Special rules for BSC to contract charters of foreign vessels without the restrictions imposed to FSC: BSC may require authorization to ANTAQ to charter foreign vessels up to the tonnage of vessels under construction in a Brazilian shipyard to participate in the bid. Brazil macroeconomic and tax overview November, 2010

46 Regulatory constraints (cont.)
Foreign shipping companies (FSC) Restriction to coastal, domestic inland and port or maritime support navigation: foreign vessels have to be chartered by Brazilian shipping companies (BSC) Subject to both prior authorization by ANTAQ and non-availability of similar vessels with Brazilian flag; No authorization required to BSC when: Brazilian-flag vessel; Foreign vessel for international sea or international inland navigation; and Foreign vessel under bareboat charter, with suspension of the flag of the country of origin, for coastal, domestic inland and maritime support navigation, limited to twice the gross tonnage of similar vessels ordered to a Brazilian shipyard. Brazil macroeconomic and tax overview November, 2010

47 Taxes on charter payments
Taxation on charters A regular charter by a BSC will be subject to the following taxes: Corporate income taxes: 34% (on taxable income); PIS and COFINS: 9.25% (on monthly gross turnover); AFRMM: 25% (on freight value, including port expenses); ISS: 5%. ISS Which Municipality is entitled to collect the tax municipality? Company’s headquarters vs. where the service is rendered Services provided offshore Brazil macroeconomic and tax overview November, 2010

48 Relevant tax issues on Charter Activities
REPETRO In the last months, federal tax authorities in Rio de Janeiro were restrictive on granting the REPETRO regime to the import of vessels under time charters; Some players chose to perform a regular temporary admission regime, with payment of 1% of the taxes due on the importation per each month the vessel stayed in the Brazilian territory; Rio de Janeiro does not allow regular temporary admission for importations from a controlling or affiliate company, which would then expose Vessel companies to paying 19% ICMS on each transaction; Recent development: Federal Decree clearly stated that the REPETRO regime encompasses time charter operations Brazil macroeconomic and tax overview November, 2010

49 Relevant tax issues on Charter Activities
Transfer pricing on charters (BSC and FSC as related parties) Pros Cons Issues PIC Straightforward method – low tax risk May jeopardize the use of Brazilian TP as tax planning Lack of price parameter: May be hard to build a defense file PRL May provide flexibility for tax planning Not applicable during the development /construction phases: Complex calculation Profit margin of 60% may be high PRL was designed for the manufacturing industry Volatility of oil prices PRL can not be used in case vessel is chartered to a Brazilian related party CPL Production cost of the charter agreement from an intermediary entity may be questioned. Moderate tax risk CPL could be used if the related party is a mere intermediary entity? Brazil macroeconomic and tax overview November, 2010

50 Relevant tax risks on Charter Activities
Price split in Charter and Service Agreements: Usually most of the price is paid to a legal entity offshore for the bareboat charter and only a reduced percentage to the Brazilian company that operates and supports the vessel (Affiliated companies), although this structure is being disputed by the Federal tax authorities The price allocated to the service provider usually does not cover its local costs There is no specific percentage determined by the tax law – the margin should be enough for the service provider to make reasonable profit in Brazil Brazil macroeconomic and tax overview November, 2010

51 Relevant tax risks on Charter Activities (cont.)
Price split in Charter and Service Agreements: Three major risks have been identified: Values remitted from the offshore entity to provide the necessary funds to its affiliated in Brazil (usually as equity) may be deemed as income of the Brazilian company (some assessments have been issued by the tax authorities); or Tax authorities may disregard the Charter Agreement and consider that the whole agreement should be taxed as services by the Brazilian entity; or Tax authorities may consider that the offshore company has a permanent establishment (PE) in Brazil and tax the profits originated in Brazil. Brazil macroeconomic and tax overview November, 2010

52 Relevant tax risks on Charter Activities (cont.)
WHT tax exemption on charter payments: Payments, credits or remittances made by a Brazilian tax resident to an individual or legal entity resident or domiciled abroad related to charters agreements of vessels are subject to 0% of WHT, except when the beneficiary is located in a tax heaven country; Taxpayers’ Council claim that the platforms do not qualify as vessels – WHT 0% rate would not apply; Administrative decision subject to Court Review. 1st degree decision favorable to the taxpayer, maintaining the 0% WHT. Brazil macroeconomic and tax overview November, 2010

53 Individual’s taxation
Section 7 Individual’s taxation Brazil macroeconomic and tax overview November, 2010

54 Type of carrier/ Operation above: Exploration and prospecting
Immigration Crew nationality Type of carrier/ Operation above: Marine support Exploration and prospecting Cabotage 90 days 1/3 - 1/5 180 days 1/2 360 days 2/3 720 days Brazil macroeconomic and tax overview November, 2010

55 Individual’s taxation
Work permits for crew and administrative personnel Permanent visa Mandatory for foreign individuals who will hold decision-making position in the Brazilian entity. Temporary work permit visa (type V) with employment contract in Brazil Maximum validity of 2 years and extendable. Temporary work permit visa (type V) without employment contract in Brazil Technology transfer or technical service agreements (1 year extendable) or short-term technical assistance to Brazilian companies (30 or 90 days); Sea crew of foreign carrier/ship or platform (2 years); 100% of the remuneration must be paid by the foreign entity. Brazil macroeconomic and tax overview November, 2010

56 Individual’s taxation (cont.)
Visas under which employment is forbidden Temporary Type II (Business) - Can stay in the Country for 180 days within the calendar year, but must leave every 90 days; Tourist No visa requirement Sea Employees carrying Seaman’s book (“laissez-passer”) on long term trips between foreign and Brazilian ports; on 30 days trip on worldwide navigation (cabotage) freightage ships. Requirements upon arrival in Brazil: RNE and CPF Brazil macroeconomic and tax overview November, 2010

57 Individual’s taxation (cont.)
Residency rules for foreigners Brazilian residency depends on the type of visa held and on the physical presence in the country: As of the date of arrival: Holders of permanent visa; and Holders of temporary visas under an employment contract with a Brazilian entity After 183 days: all other temporary visa holders Brazil macroeconomic and tax overview November, 2010

58 Individual’s taxation (cont.)
Individual’s filing obligations in Brazil Monthly income tax payments: Foreign-sourced income (“carnê-leão”); Capital gains (e.g., disposal of real estate); Variable income Annual Income Tax Return (due on April); Brazilian Central Bank Reporting Exit Procedures (Communication of Permanent Departure, Exit Income Tax Return and Tax Clearance Certificate Request) Brazil macroeconomic and tax overview November, 2010

59 Tax planning opportunities
Section 8 Tax planning opportunities Brazil macroeconomic and tax overview November, 2010

60 Background and limitations
Please note that the strategies present herein are in a draft form and further development of these strategies depend on discussions and negotiation with and by the parties evolved This document is proposed to provide you with a general overview of the possible structures that can be implemented to reduce the tax burden on specific transactions and should be further developed and discussed with PwC local offices It goes without saying that these structures should be fine tuned based on the actual facts and circumstances Brazil macroeconomic and tax overview November, 2010

61 Brazil planning – interest on net equity
Instead of paying normal dividends it could be envisaged to pay interest on net equity. Interest on net equity is normally deductible at 34% in Brazil and qualified as a dividend by the receiving country (paid out of earnings) Withholding tax 15% Is it possible to argue that interest on net equity is treated as a dividend for Norwegian purposes ? Paragraph 4 of article 10 and paragraph 4 of article 11 both of Brazil/Norway tax treaty. Norway Co Interest on net equity Brazil Co Brazil macroeconomic and tax overview November, 2010

62 Brazil planning – goodwill amortization through downstream merger
Set up of a holding company in Brazil by which target is purchased. The premium (goodwill) could subsequently be amortized for corporate income tax purposes in case of a downstream merger. Buyer 1. purchase price for Target shares Seller 1. Incorporation of HoldingCo 2.Down- stream merger Target Target Brazil macroeconomic and tax overview November, 2010

63 Brazil planning - leasing
Lease structure under which the ownership of the asset is kept offshore. If structured correctly the Dutch entity should be able to claim for the so called tax sparing credit, basically reducing the effective tax rate to zero. Lease payments should be normally deductible in Brazil. NorwayCo “royalty” payment operational lease DutchCo “royalty” payment operational lease BrazilCo Brazil macroeconomic and tax overview November, 2010

64 Thank you! This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the PwC firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2010 [insert legal name of the PwC firm]. All rights reserved. In this document, “PwC” refers to [insert legal name of the PwC firm] which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.


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