Brazil’s accounting rules (New BR-GAAP) were aligned with IFRS in 2008. Subsequently, in 2009, a transition tax regime (RTT) was introduced with the purpose of regulating the computation of tax in view of such new accounting environment.
In general, the RTT provided—solely for tax purposes—that companies would have to “book” their revenues, costs, and expenses in accordance with the existing accounting rules prior to the conversion to IFRS (i.e., under Old BR-GAAP). Consequently, companies could eventually experience a situation whereby the accounting income calculated under New BR-GAAP (aligned with IFRS) could be greater (or lower) than the accounting income for tax purposes (under Old BR-GAAP).
Federal Reserve Bank’s question
Since the basis used for determining dividends is accounting net income calculated under New BR-GAAP, and also considering that dividend distributions are tax-exempt in Brazil, the Federal Revenue Bank (RFB) formally asked the Office of Attorney-General of the National Treasury (PGFN) whether the tax exemption on dividends would still apply when the accounting net income under New BR-GAAP was greater than the net income under Old BR-GAAP.
The Federal Reserve Bank was concerned with a possible situation that the excess of net income under New BR-GAAP in relation to the net income under Old BR-GAAP could give rise to a dividend distribution that would not be taxed in Brazil—either as net income, or as dividends. In this sense, the Federal Reserve Bank asserted that the tax exemption on dividend distributions was based on a principle that such dividends would have originated from net profits that were subject to taxation.
National Treasury’s opinion
In this context, the Office of Attorney-General of the National Treasury (PGFN) issued a formal opinion (Parecer / PGFN / CAT 202/2013) concluding:
- The tax exemption provided by Law 9,249/95 would apply to dividend distributions based on net income calculated under the Old BR-GAAP.
- Dividend distributions originated from an excess of net income as per the New BR-GAAP in relation to the income under the Old BRGAAP therefore would be subject to taxation.
Given this opinion, companies may need to reconsider their previous and current policies as to dividend distributions and evaluate any possible tax exposure and what would be the best course of action to manage this matter.
Read a March 2013 report prepared by the KPMG member firm in Brazil: Dividend distributions – Potential taxation on distributions based on profits not previously taxed at the level of the companies