Provisional Measure No. 627, Of Nov. 11, 2013 – Main Changes To The Tax Legislation And Repeal Of The Transition Tax System

Provisional Measure no. 627, published on Nov. 11, 2013 ("MP no. 627/13") brought profound changes to the tax legislation in force, affecting the ascertainment of the Income Tax of Individuals ("IRPF"), Corporate Income Tax ("IRPJ"), Social Contribution on Net Income ("CSLL"), Contribution to the PIS (Employee Profit Sharing Program), and of the Contribution to the Social Security Funding ("COFINS").

This MP was published in order to definitively deal with the tax effects arising from the profound changes to the accounting criteria and methods introduced in the tax legislation as per the enactments of Laws no. 11,638/07 and 11,941/09, revoking the Transition Tax System ("RTT") that had been created by articles 15 and 16 of Law no. 11,941/09, in addition to addressing other matters, such as profits abroad and installment plans.

As a general rule, the effects deriving from MP no. 627/13 come into force as of Jan. 1, 2014 for legal entities opting for applying the provisions of this MP in the calendar year of 2014, and as of Jan. 1, 2015 the application of the MP will be mandatory for all legal entities.

We present below the main changes brought by the mentioned MP no. 627/13.

1 - SPED: Taxable Income Bookkeeping

With the enactment of MP no. 627/13, the bookkeeping of the taxable income - provided for in article 8 of DL no. 1,598/77 - will be delivered digitally to the Public System of Digital Bookkeeping ("SPED"), with the due demonstration of all the records related to the adjustments to the net income, under penalty of fines, which will not be lower than R$ 500.00 and may reach up to 1% of the gross revenue earned by the legal entity in the period.

This mandatory requirement is in accordance with the SPED project created by the Tax Authorities, and is to be complied with as of Jan. 1, 2014 by legal entities opting for the MP at issue, and as of 2015 for all legal entities.

2 - Concept of Revenue

Another major change brought by MP no. 627/13 concerns the concept of gross revenue, which was extended in order to comprise, in addition to the proceeds of the sale of assets and the price of service rendering, the results earned in operations in third parties' accounts and other revenues arising from the activity or principal purpose of the legal entities.

With this, the legal entities will start using this concept of gross revenue in the ascertainment of the IRPJ and CSLL based on the presumptive profit, and for the calculation of the estimation of these taxes based on the gross revenue, for the purpose of ascertainment of these taxes based on the taxable Income. With this, the legal entities will start using this concept of gross revenue in the ascertainment of the IRPJ and CSLL based on the presumptive profit, and for the calculation of the estimation of these taxes based on the gross revenue, for the purpose of ascertainment of these taxes based on the taxable Income.

As to the net income, this is obtained from the gross revenue after the discount of returns and cancelled sales, discounts granted unconditionally, taxes levied on these revenues, and from the amounts deriving from the adjustment at present value of operations tied to the gross revenue.

3 - Assessment at Fair Value: Effects on the IRPJ and CSLL

Among the several changes to the accounting criteria and methods, we highlight the need for the legal entities to assess elements of the assets and liabilities according to the fair value, pursuant to article 183 and 184 of Law no. 6,404/76 and to Accounting Pronouncement Committee 46 - Measurement of Fair value.

According to MP no. 627, the gains and losses deriving from the assessment of an asset or liability at fair value will only be computed in the determination of the taxable Income and tax basis of the CSLL as the asset is realized (depreciation, amortization, exhaustion, disposal or write-off), or when there is the liquidation/write-off of the liability, and provided that it is possible to evidence this assessment in the bookkeeping, through a subaccount tied to an asset or liability. If it is not possible to have this separation at the accounting, the gains will be taxed and the losses will not be deductible.

In the event of takeover, spin-off, or merger, gains deriving from the assessment at fair value of the assets will not be considered for the calculation of the cost of the asset or right in the successor, and will receive a similar tax treatment to what they would have in the succeeded entity.

As to gains and losses deriving from the subscriptions of capital with assets (assets / ownership interest) or securities assessed at fair value will only be computed in the taxable income and tax basis of the CSLL in the provided events, namely: at the disposal or liquidation of ownership interest or securities; at the distribution of profits, dividends, interest, or ownership interest in each period, in the amount corresponding to the gains deriving from the assessment; at the realization of the asset, proportionally. It should also be pointed that such gains and losses are to be shown in the bookkeeping and tied to the asset or ownership interest that gave rise thereto.

4 - Dividends and Interest on Net Equity

MP no. 627/13 establishes that profits and dividends calculated based on the results ascertained between Jan. 1, 2008 and Dec. 31, 2013, by legal entities taxed based on the taxable income, presumptive or estimated, effectively paid by Nov. 12, 2013, at amounts superior to those calculated in accordance with the accounting methods and criteria in force on Dec. 31, 2007, will not be subject to the withholding income tax ("IRRF"), nor will they integrate the tax basis of the IRPJ In relation to Interest on Net Equity ("JCP"), the rule provides for the possibility of the legal entity calculating its limit, for the calendar years of 2008 to 2013, based on the shareholders' equity account...