Brazil publishes guidance on PIS/COFINS impacts for debt forgiveness

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Brazil publishes guidance on PIS/COFINS impacts for debt forgiveness

Sponsored by

sponsored-firms-pwc.png
Brazil real - large

Brazil's federal tax authorities have published guidance noting that debt forgiveness ought to be regarded as financial revenue and should be taxed at 4.65%.

The federal Brazilian tax authorities (RFB) published guidance on October 4 2018 stating that revenues recognised as a result of debt forgiveness (in this case, a bank loan) should be subject to PIS/COFINS at a combined rate of 4.65% (Solução de Consulta - Cosit 176/2018, dated September 27 2018).

By way of background, Brazil has a variety of different transaction and indirect taxes and contributions, including a Contribution to the Social Integration Program (PIS) and Contribution for Social Security Financing (COFINS). Broadly speaking, these contributions apply on gross revenues as well as on the import of goods and services. The applicable rates depend on the particular transaction as well as the methodology the Brazilian taxpayer applies (the cumulative method does not allow for input credits whereas the non-cumulative method allows for input credits in specific circumstances).

In 2015, Decree 8.426 re-established that financial revenue should be subject to PIS and COFINS at the rates of 0.65% and 4%, respectively, for entities applying the non-cumulative methodology. Subsequently, Decree 8.451/2015 amended the original decree, introducing a number of scenarios where 0% should apply, specifically in relation to hedging and foreign exchange transactions.

In past situations where debt forgiveness was considered, there was a discussion whether the principal debt forgiven (as well as any interest on such debt) should be considered a revenue item subject to PIS/COFINS, and if so, at what rate.

Solução de Consulta - Cosit 176/2018 considers that the forgiveness of debt should be regarded as a revenue item. Citing the accounting rules (CFC No. 1.374/11), the RFB considered that the reduction of a debt originating from its forgiveness creates a requirement to recognise a revenue item.

In order to subsequently determine the implications from a PIS/COFINS perspective, the RFB considered whether the revenue should be considered financial revenue. Drawing parallels with the corporate income tax definition of financial income and associated guidance issued by the RFB, similarities were drawn between the forgiveness of a debt and a discount (or re-negotiation) of an original debt, both of which the RFB considered financial revenue. The RFB clarified that such a conclusion applies to entities that are not dedicated to financial activities.

Once determining that the forgiveness of the debt should be regarded as financial revenue, the RFB confirmed that the entity should apply the combined rate of 4.65%.

While Solução de Consulta does not represent law or legal precedent, it does provide further support and guidance for Brazilian entities in relation to how the RFB are treating such arrangements.

Priscilla Vergueiro

Priscila Vergueiro

 

Mark Conomy final

Mark Conomy

This article was written by Priscila Vergueiro (priscila.vergueiro@pwc.com) and Mark Conomy (conomy.mark@pwc.com) of PwC Brazil.



more across site & bottom lb ros

More from across our site

ITR’s most interesting stories of the year covered ‘landmark’ legal battles, pillar two, AI’s relationship with transfer pricing and more
Chinwe Odimba-Chapman was announced as Michael Bates’ successor; in other news, a report has found a high level of BEPS compliance among OECD jurisdictions
The tool, which will automatically compute amount B returns, requires “only minimal data inputs”, according to the OECD
The rules are intended to implement the substance of an earlier OECD report in its entirety
While new technology won’t replace the human touch, it could help relieve companies’ staffing issues, EY’s David Helmer and Daren Campbell tell ITR
The firm said the financial growth came from increased demand for its AI services and global tax reform advice
Chrystia Freeland had also been the figurehead of Canada’s controversial digital services tax adoption, which stoked economic tensions with the US
Panama has no official position on pillar two so far and a move to implement in Costa Rica will face rejection, experts tell ITR
The KPMG partner tells ITR about Sri Lanka’s complex and evolving tax landscape, setting legal precedents through client work, and his vision for the future of tax
Overall turnover at the firm also reached a record £8 billion; in other news, Ashurst and Dentons announced senior tax partner hires
Gift this article