Generally, repatriation of funds from Brazil may occur via dividends or Interest on Net Equity (INE) payments. In case of INE payments, the expense incurred for such payments can be considered deductible for Corporate Income Tax purposes as long as the limits imposed by Federal Law 9,249/95 are observed. The calculation of INE is based on the company’s Net Equity and currently there is uncertainty whether INE should be calculated based on the Net Equity under the New BRGAAP (aligned with IFRS) or under the Old BRGAAP.
Such uncertainty exists because Brazilian accounting rules were aligned with IFRS in 2008 (New BRGAAP). Due to this change, companies can find that the Net Equity calculated under the New BRGAAP can be higher or lower than the Net Equity calculated under the Old BRGAAP.
In the beginning of this year, tax authorities issued the normative opinion with the understanding that dividends must be calculated considering the profits generated in accordance with the Old BRGAAP. (Please refer to “Tax News” edition from March 27, 2013)
The Brazilian Federal Revenue issued new guidance recently indicating that the INE must also be calculated based on the Old BRGAAP. In other words, the Net Equity used as reference for the calculation of INE must be defined in accordance with the accounting rules in force on December 31st, 2007 (before the introduction of New BRGAAP).
This guidance is relevant and controversial. Companies should assess their previous and current policy regarding INE payments as to identify eventual tax exposures and alternatives to mitigate potential adverse tax consequences. KPMG will continue to monitor the development of this subject and can provide the adequate assistance in the development of an efficient tax strategy.
For more information, please contact a tax professional with KPMG in Brazil: