Tax and Provisional Measure (MP) No. 627

Tax and Provisional Measure (MP) No. 627, which deals with the matter, may increase legal uncertainty for companies that have not yet distributed these results, according to tax assessors.

The dispute between the tax authorities and taxpayers is due to the difference between tax profit, calculated in accordance with accounting standards in force until 2007, and accounting profit, which follows international rules for preparing balance sheets. Between 2008 and 2013, companies took stock and paid dividends on profit recorded in accordance with IFRS. But the IRS understands that the distribution of the dividend is only exempt up to the limit of the tax profit. Income tax should be paid on the distributed surplus, according to corporate rules.

Provisional Measure No. 627, issued in November last year, established that companies that had distributed excess dividends until the norm was issued were exempt from any tax on this amount. But those who have not yet done the distribution, would have to pay the tax when they did.

The MP's rapporteur in Congress, deputy Eduardo Cunha (PMDB-RJ), extended the tax benefit for companies. The first version of the report establishes that the excess profit is exempt from taxation since it has been paid to the shareholders until the publication of the law, that is, until the date of the MP's vote by the parliamentarians.

In addition, the rapporteur ended the requirement made by the IRS that companies must necessarily adhere to the tax rules created by MP 627 as early as 2014, and not just in 2015, in order to be entitled to the dividend exemption.

The Federal Revenue's legitimate concern to avoid using international treaties as a form of tax avoidance has led to a solution that is not legally supported. It would be better if the Treasury had specific rules to curb the avoidance instead of treating all cases the same.

Revenue, roughly speaking, transforms the income obtained abroad into the company's income in Brazil, through a technical figure called the adjustment portion of the investment value. With that, it taxes the result obtained outside the country regardless of whether or not there are specific rules to avoid double taxation.

The tax authorities argue that rules to defend the tax base are a worldwide trend and MP 627 only reinforces this movement. The IRS was consulted about the changes made by the MP's rapporteur in the rules for taxing dividends, but informed that he would not comment at the moment.