Brazil: A New Foreign Exchange Mark in Brazil

Since the Getúlio Vargas Government (1933), it was only in late 2022 that several resolutions of the Brazilian Monetary Board (CMN) and the Brazilian Central Bank (BACEN) were updated containing the new norms on foreign exchange and international capital (foreign capital in Brazil and Brazilian capital abroad), so as to regulate Act No. 14.286/2021, which corresponds to the New Foreign Exchange Mark in Brazil.

Being the biggest changes since 1933, some of these changes are of special interest in their tax effects. Perhaps the most impacting is BACEN Resolution No. 277, of December 31st, 2022, which regulated the foreign exchange market and the remittance and inflow of funds into the country.

Companies based in Brazil face a considerable challenge when making remittances abroad, mainly for remunerating services, software, and reimbursement for group companies. The challenge is due to the complex taxation on the operations, which, depending on the nature and basis, may range from 15% to more than 50% (with Withholding Income Tax at Source (IRRF), Social Integration Program (PIS/Cofins), City Services Tax (ISS), Contribution of Intervention in the Economic Domain (Cide), and Tax on Financial Transactions (IOF)).

In addition to the complexity of qualifying the operation for tax purposes, that is, correctly interpreting the tax legislation, the documents/nature of the transaction, and defining how to pay the taxes, Brazilian taxpayers shall often combine this with the exegesis given to the transaction by the financial institutions authorized to operate in the exchange market, which actually carry out the remittance. In practice, this situation becomes even worse with an extense list of exchange codes that often does not match the nature of the transactions.

Effectively, BACEN Resolution No. 277/22 introduced four important changes that may mitigate some of these problems: (a) the classification of the transaction, which becomes a responsibility of the client (i.e. the company that hires the financial institution to perform the remittance); (b) the provision that it shall be the financial institution's responsibility to evaluate which information and supporting documents it should request or dispense with; (c) a smaller range of codes for classifying transactions; and (d) more precise explanatory notes on the use of the codes.

As a result, the bureaucracy and slowness experienced by companies today has been reduced. These changes provide the client with the right to choose the classification according to his or her own interpretation of the nature of the remittance (rather than simply being obliged to accept the classification made by the financial institution) and generate a greater number of framing opportunities, due to the new codes.

However, Act No. 14.286/2021 maintained the provision stating that remittances to abroad for profits, dividends, interest, amortization, royalties, scientific technical and administrative assistance and the like shall depend on proof of payment of the Withholding Income Tax (IRF). By upholding this provision, the solidary tax liability of the financial institutions authorized to operate in the exchange market remains.

This tax liability rule encourages exchange operators to maintain interpretations that are often excessively conservative when classifying remittances, seeking categories with higher tax payments, even when this goes against the real nature of the transaction.

This is currently the case with "shared services"; apportions and reimbursements, which should not be taxed, but are commonly classified as taxed services. 

Similarly, remittances for software licenses, especially with software applications as a service (reimbursements are given their own code in the new classification) are also misclassified as remittances for services.

Returning capital stock to non-residents is often interpreted as "income" and is subject to Withholding Tax at Source (IRF).

Act No. 14.286/2021 indirectly amended some norms concerning IRPJ/CSLL tax deductibility of royalties paid for the use of invention patents, manufacturing processes and formulas, for the use of trademarks (industrial or commercial), and payments for technical assistance, by no longer requiring that the aforementioned contracts be registered before the Brazilian Central Bank (BACEN).

Under the previous system, such payments, when made to companies abroad that have direct or indirect control of the Brazilian company, had to be registered before the Brazilian Patent and Trademark Office (INPI) and Brazilian Central Bank (BACEN). Now, without the need for registration before the Brazilian Central Bank (BACEN), registering before the Brazilian Patent and Trademark Office (INPI) is sufficient for tax deductibility.

Along the same lines, due to the change in the wording of article 9 and the repeal of articles 10 and 11 of Act No. 4.131/1962 by Act No. 14. 286/2021, the aforementioned royalties other than those paid to group companies, which previously had their tax deductibility dependent on the registration before the Central Bank of Brazil (BACEN), are now fully deductible without the need for registration, despite the absence of express repeal of article 71, sole paragraph, item "f", item 1 and item "g", item 1 of Act No. 4.506/1964.

Innovations of this Act are, for example: the possibility of having accounts in Brazil with foreign currency and the end of the requirement for simultaneous foreign exchange transactions for merely regulatory purposes.

The trend is that in 2023 such regulations shall come into practice, and thus there shall be an optimization of the current Brazilian exchange rate system, which until recently was still marked by the undemocratic spirit of the 1933 era.

Reference/ Citation

Based on the content of the referred legislation – Central Bank resolutions