Brazil: radical tax measures cuts incentives for investing abroad
Published 28 May 2014
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0.1 Detail
President Dilma signed Provisional Measure 627 into law on 14 May to curtail tax base erosion and profit shifting (BEPS) by its multinational corporations. Brazil now taxes all profits of subsidiaries of its multinationals, when earned and not just when repatriated, at its domestic corporation tax rate of 34%. Host country corporation tax paid can be deducted from the Brazilian corporation tax obligation – meaning all Brazilian companies should pay the same rate wherever they are located. The measure will come up for review in 2017.
Brazil’s weakening fiscal position influenced this approach. Spending has been rising at over 7% in real terms in Q1 2014 while tax revenue has grown just 2%. The primary federal budget surplus of 2% for Q1 2014 is much lower than the 3.1% generated in 2013. Last year, Standard & Poor’s downgraded Brazil’s debt rating to one notch above junk in response to fiscal concerns.
The Government is arguing that the new system brings tax certainty for Brazilian multinationals. The previous rules had resulted in some prominent court cases, notably the mining giant Vale going to the Supreme Court to fight a R$12bn tax bill. Industry had asked for clarity but the Government decided to expand its tax base and revenues.
Implications for the UK
The move removes one of the major incentives to greater Brazilian investment into the UK, the benefit of lower UK corporation tax. The UK risks losing Brazilian inward FDI to countries like France, Spain, Italy and Germany (federal + lander corporation tax) which charge corporation tax at rates similar to Brazil. However, the other pro-business environment advantages of the UK should continue to be a draw.
Brazil argues the change is in line with international moves in the G20/OECD to tackle BEPS, particularly strengthening controlled foreign company tax rules. Brazil’s tax authority, Receita corporation tax obligation – meaning all Brazilian companies should pay the same rate wherever they are located. The measure will come up for review in 2017.
Brazil’s weakening fiscal position influenced this approach. Spending has been rising at over 7% in real terms in Q1 2014 while tax revenue has grown just 2%. The primary federal budget surplus of 2% for Q1 2014 is much lower than the 3.1% generated in 2013. Last year, Standard & Poor’s downgraded Brazil’s debt rating to one notch above junk in response to fiscal concerns.
The Government is arguing that the new system brings tax certainty for Brazilian multinationals. The previous rules had resulted in some prominent court cases, notably the mining giant Vale going to the Supreme Court to fight a R$12bn tax bill. Industry had asked for clarity but the Government decided to expand its tax base and revenues.
The tax change also reduces incentives for Brazilian business to lobby for new bilateral double taxation agreements - a major ask of British companies interested in doing business in Brazil. New agreements are still needed to encourage much needed foreign investment into Brazil.
Most countries tax controlled foreign corporations (CFCs) by reference to the profits earned by foreign subsidiaries, including the UK. Brazil has simply gone for a full version of this approach, taxing its companies by reference to all profits earned in foreign subsidiaries. Most countries only tax certain types of income (e.g. share dividends) or only tax subsidiaries in low tax jurisdictions or those where tax evasion is suspected.
Industry here continues to lobby against the changes, asking for them to be repealed in a new set of tax measures currently under discussion
0.2 Disclaimer
The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report