Tax - updated on Mar 23 at 3:00 pm
TAX RELIEF AND POLICIES TO FACE THE CORONAVIRUS CRISIS
Following the actions to tackle the spread of coronavirus around the globe, the Brazilian authorities have also been implementing several restrictions on the circulation of people and goods.
As expected, those measures have been impacting the once surging Brazilian economy at an alarming rate. In the last 20 days, the stock exchange market was dragged to the baselines of the 2008 subprime crisis with a strong hit on businesses due to the lockdown measures. The expected GDP growth for the year has been cut down to 0%, and the Brazilian currency has been devaluating against other currencies at a very high pace.
Under this scenario and considering the upcoming cash struggles that companies will likely be facing in the coming weeks, our clients have been asking on emergency measures of tax relief already announced by the different levels of the Government, as well as potential emergency alternatives to reduce taxes in the short term, and generate cash for fundamental company needs.
1) What are the measures announced by the Government to date?
As in other jurisdictions, the Brazilian Government has been taking initial financial aid to secure the continuation of small and mid-sized businesses, as well as fostering the basic needs of Brazilians in state of necessity. According to this initial plan, some other tax and contributions relief measures have already been announced, as follows:
Announced measures awaiting legislation:
- 3-month deferral on the payment of the contribution for the Brazilian Government Severance Indemnity Fund (FGTS);
- 50% reduction for the Social Contributions of the “Sistema S”;
- Temporary IPI (Excise tax) exemption on imported goods required for prevention of COVID-19.
- Temporary IPI exemption for goods manufactured locally that are necessary to face COVID-19.
Measures already implemented by law:
- 6-month deferral on the payment of the taxes levied upon the simplified regime known as Simples Nacional - aimed at small and mid-sized businesses – of March, April and May;
- Temporary import duties exemption on items for medical and hospital usage. This exemption is effective through year-end.
The National Treasury Attorney General (PGFN) has also implemented special conditions for the renegotiation of tax debts subject to litigation, observing the following conditions: (i) upfront payment of up to 1% of the tax debt; and, (ii) payment of the outstanding debt up to 84 months (or 100 months for small and mid-sized businesses).
At the State and Municipal level, local authorities have also been proposing Special conditions for the negotiation of debts (e.g. Municipality of São Paulo), and actions to postpone the payment of taxes and exempt items that are used for the fight against COVID-19.
2) Are there measures aimed at any specific industry?
Yes.
Specific measures for the airline sector have already been announced. This has been considered the worst crisis for the Brazilian airline industry since September 11.
To help this strategic sector of the economy, the Federal Government issued the Provisional Measure nº 925/2020. These measures focus only on the fulfillment of obligations arising from airport concession contracts and the reimbursement period for unused tickets, namely:
- The payment of fixed and variable contributions related to the 2020 calendar year, due to the Federal Government in airport concession contracts signed by the Federal Government, was postponed until December 18, 2020; and
- The term for reimbursement of the value related to the purchase of airline tickets will be twelve months, with consumers being guaranteed exemption from contractual penalties, through the acceptance of credit for use within twelve months, counted from the date of the contracted flight. This rule is valid for contracts signed up to December 31, 2020.
In this sector, demands are urgent, especially to reduce fixed costs. In addition to reducing the social security contribution on payroll, it is essential to reduce the IOF on leasing payments (a measure that can be adopted by presidential decree), the ICMS on kerosene and other inputs, airport taxes, among others.
3) What is next?
The Brazilian Authorities have made great progress so far, but it is still not enough for the preservation of businesses in Brazil. The seriousness of the situation calls for more drastic measures.
To date, there is a strong movement of taxpayer associations claiming the implementation of important measures for businesses, such as:
- Postponement of tax filling obligations for 90 days and suspension of penalties for lack of filling;
- Deferral on the payment of Federal Taxes for 90 days to adjust cash flow;
- Elimination on the restrictions on the use of Federal tax credits against estimated payments of corporate taxes;
- Lift restrictions on the use of tax losses for future periods, eliminating the 30% limitation against the taxable profit of a given year.
If those measures are not provided by the tax legislation, it is possible to argue that the force majeure institute tolerates the delay on payment of taxes and filling obligations. Based on the force majeure institute, it is possible to sustain that companies subject to force majeure should not be subject to penalties and interest.
If your company is not able to pay its own taxes, the recommendation is to evaluate the situation carefully. This is because some taxes need to be paid, under penalty of criminal liability (i.e. some income taxes and the State tax on circulation of goods and services).
4) What companies can do today?
In addition to the measures mentioned above, we highlight that the Brazilian legislation has some existing mechanisms that can help the taxpayers in those difficult times.
- Foreign exchange results
Under the Brazilian legislation, the taxpayers may elect if the foreign exchange results are taxed on an accrual or cash basis. This election is made on an annual basis and, as a rule, should be uniform through the fiscal year.
However, if the devaluation of the Brazilian currency exceeds 10% within a given month, the Tax Authorities allow companies electing the accrual method to switch to the cash method. At the time of the preparation of this report, the devaluation of Brazilian reais in March, 2020 exceeds 14%.
This solution may be relevant for companies with substantial exporting sales or massive intercompany debt.
- Use of credits of social security contributions against other taxes managed by the Brazilian Federal Revenue Agency
Under the Law No. 13,670/2018, companies that implemented the e-Social filling system of Social Contributions are allowed to offset the credits from social security contributions with debts from other taxes managed by the Brazilian Federal Revenue Agency. This may be a good cash flow solution for companies with Federal tax credits and Social Contribution debts.
- Use of PIS and COFINS (Turnover Taxes) credits over inputs
We are currently working with different clients on the technical review of controversial PIS and COFINS credits that were not used yet. This is mainly based on the interpretation of the Superior Court of Justice, which flexed the concept of creditable inputs for PIS and COFINS purposes.
The Brazilian companies are currently reviewing their risk profile on credits not taken in the past and future, and probably taking a more aggressive approach with cash struggles. If credits not appropriated in the past are verified, it is possible to recover them against other Federal taxes.
- Implementation of different Social Security and Tax Theories
Considering the existence of many disputes and controversies regarding the application of tax and social security rules, there are some options that companies can adopt in order to review its proceedings to create some tax credit.
It is usual that companies, for various reasons, ignore some theories that have positive rulings in the case law. It is possible to mention in this case, for example, the tax credits related to: (A) non-tax assessment over social security contributions with compensatory nature; (B) non-tax assessment of IRPJ/CSLL/PIS/COFINS over funds with compensatory nature; (C) non-tax assessment of PIS and COFINS over revenue from third parties; (D) tax deduction related to the interests on company’s own capital.
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In addition to the measures already mentioned, the Federal Government, within the scope of the Labor Reforms (Provisional Measure No. 927/2020) published to mitigate the impacts of the novel coronavirus: (i) extended the term of validity of the Tax Clearance Certificates from 60 to 180 days; and (ii) exceptionally allowed the Brazilian Federal Revenue and the National Treasury Attorney-General's Office to extend the validity of certificates already issued, when in the event of a public calamity.
In this sense, for the week that begins, it is expected the publication of a joint ordinance, of the aforementioned bodies, extending the validity of the current certificates.
This newsletter was updated on March 23, 2020 at 3pm. We will keep you apprised of any future developments. Our Tax team is available to assist our clients in the adoption of the above measures and to help companies overcome this crisis.