LexUniversal | Legal Articles

Brazil: Brazil Eliminates Automatic Joint Tax Liability for Social Security Debts

2009-07-01

Originally published in the June 30 edition of World Tax Daily (Copyrights Tax Analysts)

Stockholders and officers of Brazilian limited liability companies are benefiting from the recent revocation of a 15-year-old rule that made them jointly liable for unpaid social security debts of companies they owned or managed. From now on, the government will have to prove that they have exceeded their granted powers or are in violation of the law or the company’s bylaws or articles.

Article 79, item VII of Law 11,941/2009, published in Brazil’s official gazette on May 28, revoked article 13 of Law 8,620/1993, which automatically included company owners and managers as jointly liable for unpaid social security debts. In practical terms, the rule enabled the government to seize owners’ and managers’ personal assets to expedite the collection of unpaid social security taxes.

The provision was highly controversial, and in many cases Brazilian courts rejected the automatic joint tax liability and required the social security section of the Federal Revenue Department to prove that stockholders and/or managers acted in violation of the law or the company’s bylaws or articles of association.

In one leading case ¹ that ended in taxpayers’ favor, the first section of the Superior Court of Justice (STJ) in 2004 unanimously voted to limit the joint responsibility of a former stockholder for the unpaid social security debts of the stockholder’s company.

In any type of commercial company, it is the company’s assets that must be used to satisfy the company’s debts. Officers are not liable for obligations assumed in the name of the company, but are jointly and fully liable for acts committed in excess of their granted powers or in violation of the company’s articles or bylaws under article 158, items I and II of Law 6,404/76 (the Corporations Law).

With the revocation of article 13 of Law 8,620/1993, the Federal Revenue Department, in charge of social security tax collection since 2007, now will have to follow the joint liability rule (article 135, item III) established in the National Tax Code.

Under article 135, item III, a company’s stockholders, officers, managers, or representatives are responsible for tax liabilities resulting from acts committed in excess of their granted powers or in violation of the law or the company’s bylaws or articles. The burden of proof lies with the government, and a mere allegation of violation of the law or the company’s bylaws or articles is not sufficient.

In ongoing cases in which stockholders and managers have already been held personally liable for their companies’ unpaid social security debts, the revocation adds a new argument (along with the STJ precedent) against the revoked rule, though they still will have to fight it throughout the remainder of their cases.

FOOTNOTE

¹ Special Appeal 260107, published in the April 19, 2004, edition of the judiciary official gazette.

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

Brazil: Brazil Broadens Interpretation of Low-Tax Jurisdiction

2009-06-25

Originally published in the June 19 edition of World Tax Daily (Copyrights Tax Analysts)

A subtle change to the wording of a Brazilian legal provision may have broadened the definition of low-tax jurisdictions with potential adverse consequences to taxpayers conducting transactions in those locations.

Article 29 of Provisional Measure 449/2008 — eventually converted into article 30 of Law No. 11,941/2009 — changed the wording of article 24-A of Law No. 9,430/1996, expanding the definition of low-tax jurisdictions for transfer pricing and withholding tax purposes.

Background

On June 24, 2008, articles 22 and 23 of Law No. 11,727/2008 introduced major changes to provisions dealing with transfer pricing and low-tax jurisdictions.

Article 22 of Law No. 11,727/2008 extended the definition of a low-tax jurisdiction to include countries and locations with legislation that does not provide access to information about the corporate structure of legal entities, their ownership, or the identification of the beneficial owner attributed to a nonresident.

Article 23 of Law 11,727/2008 added article 24-A to Law 9,430/1996 to make the transfer pricing rules applicable to any transaction subject to a special tax regime in the country where the transaction was conducted, even if the parties were unrelated. At the time, the following factors characterized a tax regime as a special tax regime sufficient to trigger the transfer pricing rules:

it does not tax income, or taxes it at a maximum rate of 20 percent;
it grants tax breaks to nonresident individuals or companies without requiring substantial economic activity in the country or location at issue, or based on the condition that there is no substantial economic activity in that country or location;
it does not tax foreign-source income, or taxes it at a maximum rate of 20 percent;
it does not allow access to information about the corporate structure of legal entities, the ownership of assets or rights, or economic transactions.

At the time Law No. 11,727/2008 was enacted, many tax practitioners argued that the characterization of a place as a low-tax jurisdiction under the aforementioned rule would require the cumulative presence of all four factors because of the absence of the word “or” after the third factor.

If that were the case, it would be very difficult for tax authorities to characterize any place as a low-tax jurisdiction because taxpayers would have to show the absence of only a single factor to exclude a case from the transfer pricing rules and the 25 percent withholding tax generally applicable to transactions involving low-tax jurisdictions. (The normal withholding rate is 15 percent.)

Article 30 of Law No. 11,941/2009 ended the controversy by changing the wording of the law. It now defines a special tax regime as any regime that presents one or more of the four factors listed above.

The change makes Brazilian tax authorities’ work easier because they have to document the presence of only a single factor to subject a transaction to the restrictive transfer pricing rules and the 25 percent withholding tax.

The point now is to determine the effective date for the new definition. When introducing the special tax regime concept, Law No. 11,727/2008 provided that the new concept would apply as of January 1, 2009.

If that position is adopted by the tax authorities, taxpayers could argue that because the new wording creates a new form of taxation, it can be levied only from the calendar year following the year that the relevant legislation is published in the official gazette (in this case, starting in 2010).

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

United States: NEPA Compliance for Projects Funded Under the American Recovery and Reinvestment Act of 2009: Is Your Project

2009-06-24

The American Recovery and Reinvestment Act of 2009 (“ARRA”), provides a $787 billion economic stimulus package with funding for investments in infrastructure, energy, healthcare, education and science, among other sectors. With billions of dollars in federal stimulus funds available, the ARRA presents private firms with opportunities for financing eligible projects. For example, federal stimulus funds are available for certain affordable housing projects, as well as transportation infrastructure, including highway, bridge, road, transit, and rail improvements that may be associated with a development project. Stimulus funds are also available for wastewater and drinking-water projects, as well as environmental clean-up and remediation, and a wide range of other construction projects.

ARRA-Funded Projects Require NEPA Compliance

The requirement that environmental review be “expeditious” and use the “shortest” applicable process is a direct signal to federal agencies to use a streamlined environmental review process. Therefore, the ARRA appears to favor and encourage Categorical Exclusions (“CatEx”) of Projects from NEPA, or initiation of Environmental Assessments (“EAs”) with Findings of No Significant Impact (“FONSI”), rather than full-blown Environmental Impact Statements (“EIS”), which can take multiple years and hundreds of thousands of dollars to complete. Furthermore, to ensure that NEPA review does not unduly delay the expenditure of federal stimulus funds and hold up projects, ARRA section 1609© requires the president to report to Congress on a quarterly basis on the status of NEPA review of projects funded by ARRA.

Categorical Exclusions (CatEx). For projects that do not involve significant impacts, or projects that take place within existing facilities and do not alter those facilities or increase emissions, it may be possible to satisfy NEPA requirements with the lowest level of documentation, known as CatEx. Examples of projects that may be eligible for CatEx include, among others: (1) bridge, sidewalk, park and street rehabilitation/reconstruction; (2) energy-efficient and other green retrofits; (3) rehabilitation/reconstruction of existing rail and bus buildings; (4) construction of bus shelters in commercial areas; (5) installation of low-water-use landscaping; and (6) replacement of traffic signals and street lighting with energy-efficient lighting technologies.
Focused Environmental Assessment (EA) / Finding of No Significant Impacts (FONSI). The federal agency that disburses federal funds is required to complete NEPA documentation for qualifying projects, but the President’s Council on Environmental Quality (“CEQ”)—the overarching federal agency charged with NEPA compliance across the federal agencies—recently issued an important guidance document encouraging the use of EA along with FONSI (“EA/FONSI”). For example, documentation prepared pursuant to various state NEPA statutes can be referred to and briefly summarized in, an EA/FONSI to facilitate the NEPA process for these federal projects. A streamlined EA/FONSI can be obtained within the time constraints set forth under the ARRA.

Given that ARRA favors “shovel-ready” projects while still requiring NEPA compliance, the projects most likely to qualify for ARRA funding are fully permitted and entitled projects that already have a federal approval and therefore already have complied with NEPA, or projects that are more likely to be exempt or excluded from NEPA review. Each federal agency maintains its own list of exempt projects, so a project applicant must refer to the NEPA regulations of the agency from which the applicant will receive federal stimulus funds to determine whether the project is categorically excluded from NEPA review.

Guidance on NEPA Compliance

The CEQ is preparing guidance for federal agencies on expedited environmental reviews for work funded under ARRA. As set forth in an April 3, 2009, memorandum from CEQ to the heads of departments and federal agencies”:

Recovery Act implementation should proceed expeditiously and in compliance with all environmental, health and safety requirements. In order to comply with NEPA, departments and agencies can: (a) ensure proposals that can potentially be categorically excluded have been or are being reviewed for extraordinary circumstances (40 C.F.R. 1508.4); (b) use concise and focused environmental assessments (40 C.F.R. 1508.9(b)); (c) prepare programmatic analyses in cases where consolidated analysis of similar, connected, or cumulative proposals will facilitate efficient compliance with NEPA (40 C.F.R. 1502.4©, 1502.20, and 1508.28); (d) review other federal agencies’ NEPA analyses and documentation for the project or activity for potential adoption (40 C.F.R. 1506.3) or incorporation by reference (40 C.F.R. 1502.21); and (e) engage CEQ to address any specific NEPA compliance concerns and issues.

Consequently, strategically managing the application process under the stimulus package for any project subject to NEPA review is critical to preventing NEPA from becoming an obstacle to securing timely project approval and funding. Firms seeking to obtain federal stimulus funding may want to plan for and begin NEPA review as soon as possible. The sooner the process is started, the sooner the federal agency dispensing the stimulus funds can determine that a project is categorically excluded from NEPA or issue a FONSI. Moreover, applications that timely and effectively address NEPA issues (e.g., including a draft EA with the application) may fare better against competitors for the same funding, especially if the total funds sought by all applicants exceed the amount of money made available by Congress for the program in question. Additionally, by strategically developing the appropriate NEPA scoping documents and preparing the draft EA, applicants may be able to distinguish themselves from other applicants and to streamline and focus the NEPA review process. Applicants may want to have NEPA counsel involved early to assist in developing a strategy for minimizing NEPA-related delays.

Brazil: Brazil Clarifies Regulations of Transitional Tax Regime

2009-06-18

Originally published in the June 18 edition of World Tax Daily (Copyrights Tax Analysts)

Brazil’s Federal Revenue Department on June 16 published Normative Instruction 949/2009 to regulate the Transitional Tax Regime (Regime Transitório de Transição or RTT) created by Provisional Measure 449/2008 and converted into Law 11,941/2009.

Law 11,638, which entered into force on January 1, 2008, introduced new accounting rules that bring Brazilian accounting standards closer to international financial reporting standards. The RTT will be effective until a new law specifically regulates all the tax aspects of Law 11,638, after which the RTT will be replaced by the resulting tax regime.

Normative Instruction 949/2009 regulates article 16 of Law 11,941/2009, which clarifies that the changes in criteria for income recognition and the computation of costs and expenses introduced by Law 11,638 will have no tax effect on corporate taxpayers.

It provides that for tax purposes, the taxpayer should follow the accounting criteria and methods effective as of December 31, 2007 (that is, before the enactment of Law 11,638). For that purpose, it also provides that taxpayers under the RTT should generally use the following procedure to adjust the new accounting criteria for tax purposes to neutralize any tax effects arising from the new accounting standards:

1. Adopt the methods and criteria of corporate law (new standards) to determine, for accounting purposes, the business results before income tax and after the deduction of participations.

2. Use methods and criteria determined by tax laws (without new accounting standards) to determine the company’s business results for tax purposes.

3. Calculate the difference of business results between (1) and (2). Adjust the business results in the auxiliary income tax book to neutralize tax effects arising from the new accounting standards.

Articles 7-9 of Instruction 949 create a transitional income tax control book (Controle Fiscal Contábil de Transição) to control adjustments arising from the new accounting standards. But it applies only to corporate taxpayers that, cumulatively, calculate income tax in accordance with the actual income tax regime (lucro real) and are subject to RTT. The tax control book must be prepared electronically using software to be released by the Federal Revenue Department by October 15. It must be filed with the Federal Revenue Department by November 30 — for the 2008 calendar year.

Articles 5 and 6 of Instruction 949 regulate specific adjustment procedures applicable, respectively, to subventions for investments and donations received by corporate taxpayers from the government and for premiums arising from the issuance of debentures.

Instruction 949 also regulates the RTT aspects for companies under the presumed income tax regime (lucro presumido) (articles 10 and 11) and the application of the RTT to the P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security).

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

Brazil: Brazil Increases Fuel Tax to Compensate for Other Tax Cuts

2009-06-17

Originally published in the June 15 edition of World Tax Daily (Copyrights Tax Analysts)

Brazil’s official gazette of June 9 published Decree 6,875/2009, which increases the fuel tax (CIDE-fuel) on diesel oil and gasoline used in vehicles.

The government increased the CIDE-fuel from BRL 30 to BRL 70 per cubic meter (BRL 0.07 per liter) for diesel oil and from BRL 180 to BRL 230 per cubic meter (BRL 0.23 per liter) of gasoline. After the CIDE-fuel increases, gasoline prices for consumers will remain the same, while the price of diesel oil will be reduced by 9.6 percent.

The increase was determined at the same time that Brazil’s state-owned oil company PETROBRAS announced price reductions for diesel oil and gasoline sold to fuel distributors.

In May 2008 the government reduced the CIDE-fuel to BRL 30 per cubic meter of diesel oil (BRL 0.03 per liter) and BRL 180 per cubic meter of gasoline (BRL 0.18 per liter) to avoid inflation resulting from increasing PETROBRAS fuel prices.

As fuel prices stabilized in international markets, PETROBRAS decided to lower diesel oil and gasoline prices. The price reduction for distributors reached 4.5 percent for gasoline and 15 percent for diesel oil, which could have a positive impact on consumer prices.

However, with recent tax cuts for durable goods such as vehicles, motorcycles, and home appliances, the government saw an opportunity to increase the CIDE-fuel without affecting inflation and to recover some tax revenues lost with recent tax cuts.

Sources from the Federal Revenue Department estimate that the CIDE-fuel increases could generate BRL 1.5 billion in tax revenues for the remainder of 2009 and 2.6 billion per year thereafter, which could help minimize the losses in tax revenues from recent tax cuts, estimated at BRL 11 billion in 2009 alone.

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

Brazil: Brazil's São Paulo State Eliminates VAT on Manufacturing Sector

2009-06-15

Originally published in the June 15 edition of World Tax Daily (Copyrights Tax Analysts)

São Paulo state decree no. 54,422/2009, which suspends the state VAT (ICMS) on imports of fixed assets by São Paulo taxpayers, was published in the official gazette on June 6. It also allows immediate ICMS tax credits for purchases of fixed assets between São Paulo taxpayers. These measures are very important because the ICMS rate can be as high as 18 percent of the purchase price of a given asset.

The decree lists 119 manufacturing sectors that will benefit from the new ICMS measures upon acquiring fixed assets for their businesses.

For imports of new machinery and equipment, the decree requires that no similar product is being manufactured in Brazil and that customs clearance be conducted within state boundaries (that is, fixed assets cannot be imported through out-of-state ports or airports).

Under the new regime, qualifying manufacturers will no longer be required to pay ICMS at the time of customs clearance. The tax will be paid in 48 monthly installments after the imported asset has been delivered to the taxpayer’s premises.

For domestic purchases, the decree allows São Paulo purchasers of fixed assets, machinery, and equipment to take an immediate credit for the ICMS paid on those items. Previously, these taxpayers were required to take ICMS credits in 48 monthly installments, which had a significant impact on cash flow.

As a condition, the decree requires that the seller also be a São Paulo ICMS payer, which means that interstate purchases are not eligible for the immediate tax credit and are still subject to the 48-month tax credit rule.

For a São Paulo company to be eligible for the ICMS benefits, it must have no pending tax issues with state authorities. The benefits are effective from June 6 through December 31.

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

Brazil: Brazil's Proposed Green Tax Reform

2009-06-12

Originally published in the June 8 edition of World Tax Daily (Copyrights Tax Analysts)

Since late April, Brazil’s Chamber of Deputies has been reviewing a tax reform plan that would introduce environmental components into Brazilian tax policy and the guidelines established by the Brazilian Constitution.

Constitutional Amendment Project (Projeto de Emenda Constitucional, or PEC) 353 was presented to Brazil’s Chamber of Deputies on April 24 by Deputy Roberto Rocha. It adds provisions to the Brazilian Constitution that allow tax reductions for environmentally friendly actions by taxpayers.

PEC 353 adds paragraph 4-A to article 149 of the Constitution, which deals with social contributions such as royalty (CIDE) and fuel taxes (CIDE-fuel). The new paragraph provides that the rates for the contribution will be established based on the taxpayer’s acts of social responsibility.

Although the provision would require further regulation from Congress and the executive branch, it would enable taxpayers that take measures to protect the environment to reduce some of their social contributions.

PEC 353 also adds three activities to the tax immunity clause of article 150, Item VI of the Constitution. A tax immunity is a tax exemption granted by the Constitution that cannot be revoked by legislation other than a constitutional amendment. According to PEC 353, the following services and products cannot be subject to any tax:

environmental sanitation services;

recycled materials; and

antipollution machinery and equipment.

That means those products and services could not be subject to any tax at any level — federal, state, or local. Sanitation services, for instance, could not be taxed by local service tax, while the sale of recycled materials or antipollution machinery, equipment, and devices could not be taxed by the federal excise tax (IPI) or the state VAT (ICMS).

The tax immunity does not extend to the profits of companies performing those activities, which means companies would continue to pay corporate income tax and the 9 percent social contribution on net income.

Also, the tax immunity extends only to true taxes, which excludes the so-called social contributions, such as the Program for Social Integration contribution (P.I.S.) and the Contribution for the Financing of Social Security (COFINS).

PEC 353 also adds an environmental component to the rural property ownership tax (imposto territorial rural, or ITR). It changes article 153, paragraph 4 of the Constitution to state that ITR rates will be determined in a way that promotes respect of the environmental aspects of the property.

Although it is still vague, that provision could enable an ITR reduction for rural properties used for environmentally friendly activities, such as those that generate carbon credits. It also could reduce deforestation of the rain forest in northern Brazil.

PEC 353 adds a similar provision to other taxes with paragraph 5-A of article 153 of the Constitution, which states that rates of other taxes considered under the article (import and export taxes, income tax, federal excise tax, and financial transaction tax) will also be established based on the environmental aspects of the taxpayer’s activities. Clauses like these are not only ambiguous, but could be discriminatory. Activities with a significant environmental impact could be subject to significant tax increases despite environmental protection measures taken to mitigate that impact.

PEC 353 also changes the state vehicle ownership tax (IPVA) detailed in article 155, Item III of the Constitution by stating that the IPVA will have varying rates according to the vehicle’s emission levels and energy consumption. Because owners pay IPVA of up to 4 percent of the vehicle’s market price per year, any IPVA reduction is not only welcome but should also motivate owners to seek less polluting vehicles.

PEC 353 changes the urban property ownership tax (imposto predial e Territorial urbano, or IPTU) detailed in article 156, paragraph 1 of the Constitution to state that IPTU rates will also take into account respect for the environment.

PEC 353 alters two Constitutional provisions (articles 158 and 161) regarding the sharing of public revenue by states and municipalities. The provisions seek to encourage states and municipalities to adopt environmental protection policies in order to increase their participation in federal funds.

Conclusion

Although proposals like PEC 353 benefit Brazilian society, some clauses, as proposed, may allow legislators to increase taxes on activities they consider harmful to the environment, regardless of the measures taxpayers adopt to mitigate any environmental damages.

Rocha said he studied similar proposals implemented worldwide, particularly in the U.K., Germany, Norway, Sweden, Finland, Denmark, the Netherlands, and Switzerland. He said many countries had found that the tax burden could be redistributed to increase the taxation of polluting activities and grant tax relief for investments, payroll, and income.

PEC 353 now goes to the House Commission of Constitution and Justice. If it is approved, a special House commission will be formed to deliver an opinion on it before it is submitted for a vote by the full House of Delegates.

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

Brazil: Brazil Creates Unprecedented Tax Payment Schedule

2009-06-01

Originally published in the June 1 edition of World Tax Daily (Copyrights Tax Analysts)

Brazil’s official gazette of May 28 published Law 11,941/09, which creates an unprecedented new tax payment schedule that allows taxpayers to pay unpaid federal taxes over a period of up to 15 years.

In addition to the long term for payment, the new payment schedule grants favorable discounts for interest and penalties due on those unpaid tax debts. Law 11,941 is the result of the conversion into law of Provisional Measure 449 of December 4, 2008, and confirms most of the items included in the provisional measure.

The new payment schedule differs from the payment schedule originally created by Provisional Measure 449 for small tax debts, which has been confirmed by Law 11,941.

Congress proposed the new tax schedule during Provisional Measure 449’s legislative approval process.

Tax Payment Schedule

Law 11,941 creates a new tax payment schedule for any unpaid federal tax debts due by November 30, 2008, regardless of whether collection procedures have begun. It applies to both individual and corporate taxpayers.

The payment schedule is divided into categories depending on the number of installments desired by the taxpayer. Different discounts apply for each category, as follows:

lump sum payment: discount of 100 percent for penalties (delay and assessed), 45 percent for interest, and 100 percent for Federal Revenue Attorney General’s Office (Procuradoria Gerald a Fazenda Nacional, or PGFN) fees for debts under PGFN collection procedures; 2 to 30 installments: discount of 90 percent for penalties (delay and assessed), 40 percent for interest, and 100 percent for PGFN fees; 31 to 60 installments: discount of 80 percent for penalties (delay and assessed), 35 percent for interest, and 100 percent for PGFN fees; 61 to 120 installments: discount of 70 percent for penalties (delay and assessed), 30 percent for interest, and 100 percent for PGFN fees; or 121 to 180 installments: discount of 60 percent for penalties (delay and assessed), 25 percent for interest, and 100 percent for PGFN fees.

Payment Schedules for Specific Tax Debts

Law 11,941 extends the same discounts and payment schedules to the following tax debts:

all federal excise tax (IPI) debts, regardless of amount, due by or before May 31, 2008, originating from undue IPI credits from acquisitions of raw material, intermediate products, and packaging materials taxed at zero IPI rate or not subject to IPI;
balances from three previous payment schedules: REFIS, created by Law 9,964/2000, PAES, created by Law 10,684/2003, and PAEX, created by Provisional Measure 303/2006;
unpaid social security debts, which according to article 38 of Law 8,212/91 could be paid in up to 60 monthly installments; and COFINS (Contribution for the Financing of Social Security) tax debts due by professional service companies (this tax was ruled constitutional by the Supreme Court on September 17, 2008).

For the two first categories of debts listed above (IPI and previous payment schedules, except PAEX), the original version of Provisional Measure 449 granted other, albeit less favorable, discounts. Provisional Measure 449 did not make balances from the PAEX payment schedule eligible for the measure’s new payment schedule.

Provisional Measure 449 allowed a maximum number of 60 installments and smaller discounts for interest and penalties than the new law provides. The payment conditions created by Law 11,941/09 are unquestionably more favorable.

Election

Taxpayers are entitled to elect which tax debts they will include in the new payment schedule. The election must be filed by the last business day of the sixth month following the publication of Law 11,941/09, or November 30, 2009.

There is no need to provide guarantees of any kind unless the guarantees have already been offered in the course of a collection action. In this case, the guarantee will be kept as is.

Further regulations will be issued within 60 days by both the Federal Revenue Department and the PGFN.

Use of Tax Losses

Paragraph 7 of article 1 of Law 11,941 is innovative in that it allows taxpayers to use tax loss carryforwards — both from income tax and the 9 percent social contribution on net income (CSL) — to pay the remaining amounts of penalties (delay and assessed) and interest under the new tax payment schedule.

This is a welcome opportunity for a taxpayer with tax loss carryforwards because usually they can only be used to offset up to 30 percent of the taxpayer’s taxable income. Law 11,941 allows the taxpayer to reduce the balance of tax loss carryforwards without the 30 percent limit.

In practical terms, that means a taxpayer can use its tax loss carryforwards to pay for all interest and payments levied on unpaid tax debts and can include only the principal in the payment schedule. Law 11,941 specifies that the amount of tax loss carryforwards eligible for payment of penalties and interest is equivalent to the corporate income tax and CSL rates (25 percent and 9 percent, respectively) applied over the existing balance of tax loss carryforwards.

Although further regulations on this issue are required, the law appears to describe a situation such as the following. Assume a taxpayer with eligible tax debts of $2 million, of which $1 million is principal, $200,000 is assessed penalties, and $800,000 is a few years’ interest. Also, assume that the taxpayer has $3 million in tax loss carryforwards.

If the taxpayer elects for the 180-month installment payment, the $2 million debt first would be reduced to $1.68 million as follows:

1 million of principal (no discount according to Law 11,941);

80,000 of penalties ($200,000 reduced by the 60 percent discount); and

600,000 of interest ($800,000 reduced by the 25 percent discount).

If the taxpayer applies 25 percent (income tax rate) and 9 percent (CSL tax rate) over its $3 million balance of tax loss carryforwards, it gets $1.02 million, $680,000 of which could be used to pay the remainder of penalties and interest due under the new tax payment schedule (that is, after the schedule’s discounts).

If so, the taxpayer would end up with a tax debt of $1 million that could be paid in 15 years.

Interest Rate

Congress originally conceived that the new tax payment schedule would have an interest rate that was the greater of: the long-term interest rate, currently 6.25 percent per year; or 60 percent of the SELIC interest rate (used on unpaid federal tax debts), currently 10.25 percent per year.

At the time of promulgation of Law 11,941 President Luiz Inácio Lula da Silva vetoed such an interest rate, saying that the law already granted very favorable conditions for taxpayers to pay their unpaid tax liabilities.

Therefore, payments under the new tax schedule will be calculated according to the SELIC rate.

Other Provisions

Regarding the new tax payment schedule, Law 11,941 also provides the following provisions:

The payment schedule of a corporate taxpayer may be paid, partially or totally, by its individual owners. This could be useful for small companies.

No installment can be smaller than BRL 100 for corporate taxpayers or BRL 50 for individuals.
Three unpaid installments will disqualify the taxpayer from the schedule.

Taxpayers that have elected for the payment schedule originally created by Provisional Measure 449 may apply to switch (with all applicable discounts) to the new payment schedule by November 30.

During the payment term, the taxpayer may elect to amortize, partially or totally, the unpaid balance of the payment schedule with discounts. Amortization cannot be smaller than 12 installments.

Tax debts under judicial litigation secured by cash deposits are eligible for the new tax payment schedule with all applicable discounts. In that case, the taxpayer must formally request that the cash deposit be converted into a payment. Any excess of the cash deposit will be refunded to the taxpayer.

Many points of Law 11,941 remain unclear and require regulations for full application. The law states that the Federal Revenue Department and the PGFN will issue further regulations within 60 days.

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

United States: Fiscalização Antitruste Agressiva: O que as Empresas Devem Esperar das Políticas Anunciadas Recentemente pelo Governo Obama

2009-05-15

O governo Obama anunciou seu roteiro inicial para uma fiscalização antitruste mais agressiva. Em um discurso feito em 11/05/2009, Christine A. Varney, diretora da divisão antitruste do Departamento de Justiça, anunciou que as iniciativas eram consistentes com as promessas, feitas durante suas audiências de confirmação, de promoção da fiscalização civil antitruste e de “reajustar as teorias legais e econômicas na análise e fiscalização antitruste”. O que isto significa para o cumprimento das leis antitruste pelas corporações sob o governo Obama? O discurso de Varney identificou várias áreas nas quais as empresas podem esperar uma maior fiscalização:

Fiscalização Vigorosa da Conduta de uma Única Empresa Segundo a Seção 2.

Durante o governo Bush, o Departamento de Justiça não moveu nenhuma ação contra uma empresa dominante sob alegação de violação da Seção 2 da Lei Sherman. Varney anunciou que a Divisão Antitruste “mudará de curso e adotará uma nova direção” em relação à fiscalização da Seção 2. Varney retirou um relatório controverso sobre a Seção 2 emitido pelo governo Bush em setembro de 2008, alegando preocupações de que o relatório “perde de vista a meta final das leis antitruste –a proteção do bem-estar do consumidor” e “defende uma hesitação extrema diante dos abusos potenciais de empresas monopolistas”. Varney rejeitou expressamente a conclusão do relatório, de que a conduta provavelmente só deve ser considerada anticompetitiva quando atender ao chamado “teste de desproporcionalidade” e resultar em dano à concorrência que supere substancialmente os benefícios pró-competitivos. Varney criticou esta abordagem, declarando que “na prática coloca uma camisa de força nos fiscais antitruste e nos tribunais ao lidarem com abusos monopolistas, permitindo assim que todas as condutas, exceto as mais ousadas e predatórias, passem impunes ou desimpedidas”. Varney defendeu um “retorno aos princípios fundamentais da fiscalização antitruste” no que se refere à avaliação da conduta de uma única empresa. Varney não propôs o uso de algum teste específico para avaliar as questões da Seção 2, mas citou vários casos— incluindo as decisões da Suprema Corte em Lorain Journal v. United States, 342 U.S. 143 (1951) e Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), assim como as recentes decisões em apelações em United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (en banc); Conwood Co. v. United States Tobacco Co., 290 F.3d 768 (6th Cir. 2002), e United States v. Denstply International, Inc., 399 F.3d 181 (3rd Cir. 2005)—como fortes exemplos de contestações bem-sucedidas de conduta excludente que a Divisão Antitruste analisará ao determinar se a conduta de uma empresa dominante prejudica a concorrência e os consumidores.

Continuidade da Ênfase na Fiscalização Criminal com um Foco nas Atividades de Cartel e Fraude em Aquisição.

Varney elogiou o sucesso sem precedente nos últimos anos da Divisão Antitruste na fiscalização de cartéis internacionais e domésticos, e indicou que a Divisão Antitruste prosseguirá em seus esforços agressivos para detectar e processar a atividade de cartel. Ela indicou que, além de suas atividades tradicionais de fiscalização de cartéis, a Divisão Antitruste está visando a conduta anticompetitiva potencial relacionada aos processos públicos de aquisição –“Nós estamos especialmente preocupados com a possibilidade da recente injeção de vastas somas de fundos federais em setores em dificuldades, assim como o dinheiro e estímulo para os governos federal, estaduais e locais, possa levar a um maior conluio e atividade fraudulenta”. Para combater esse risco, Varney anunciou que o programa Iniciativa de Recuperação da Divisão Antitruste foi lançado para auxiliar as agências que lidam com os fundos federais de recuperação econômica na prevenção e detecção de fraude e abusos nos processos de aquisição pública.

Fiscalização Expandida de Fusão e Não Fusão e Ajuste da Análise Econômica da Divisão.

Além da maior fiscalização da Seção 2, Varney anunciou que a Divisão Antitruste promoverá outros tipos de investigações de fusões e não-fusões, com uma ênfase em particular na (1) exploração das teorias verticais de dano e (2) avaliação de questões relacionadas à concorrência envolvidas em mercados de alta tecnologia e baseados em Internet. Varney também indicou que, apesar da manutenção da análise econômica rigorosa na base da política antitruste da Divisão, ela vê uma necessidade de ajustar a análise econômica da Divisão ao princípio central de que a concorrência no mercado é a melhor forma de assegurar que os consumidores tenham acesso aos melhores produtos aos preços mais baixos.
Sustentando cada uma destas iniciativas específicas está a promessa do governo Obama de que a vigorosa fiscalização antitruste exercerá um papel importante na resposta do governo à atual crise econômica. Varney citou “fiscalização antitruste inadequada” como um dos fatores que contribuíram para as atuais condições econômicas do país e rejeitou expressamente a noção de que os fiscais antitruste devem permitir que os mercados se “autopoliciem” e “autocorrijam”. Portanto, apesar de ainda ser necessário verificar como as iniciativas de fiscalização propostas afetarão nos casos específicos e tribunais, as empresas devem se preparar para uma maior atuação dos fiscais antitruste sob o governo Obama.

Artigo Relacionado: http://lexuniversal.com/pt/articles/7791

United States: Department of Homeland Security Announces Shift in Focus to Criminal Prosecution of Employers That Hire Undocumented Workers

2009-05-06

The U.S. Department of Homeland Security (DHS) on April 30 issued a new Fact Sheet on its Worksite Enforcement Strategy, announcing a shift in focus by U.S. Immigration and Customs Enforcement (ICE) to target the employers of undocumented workers, rather than the workers themselves. “Effective immediately, ICE will focus its resources in the worksite enforcement program on the criminal prosecution of employers who knowingly hire illegal workers in order to target the root cause of illegal immigration.” ¹

This announcement by DHS was not unexpected. Secretary of Homeland Security Janet Napolitano has repeatedly pledged that, under the Obama administration, her agency will aggressively prosecute employers that violate the law by hiring aliens who are not authorized to work in the United States. Along with a renewed focus on criminal aliens, ICE has been instructed to target “employers who cultivate illegal workplaces” for civil fines, debarment and criminal prosecution in federal court. In addition, undocumented workers discovered in the course of worksite enforcement actions will continue to be arrested and processed for deportation.

In a marked shift from enforcement practices under the Bush administration, ICE officers will be held to “high investigative standards” under which they are instructed to “look for evidence of the mistreatment of workers” as well as evidence of trafficking, smuggling, harboring, visa fraud, identification-document fraud, money laundering or other criminal conduct by employers. ICE will also be expected to obtain indictments, search warrants or cooperation from a local U.S. Attorney’s Office to target the employer of “illegal workplaces” before raiding a worksite and arresting undocumented employees. DHS announced further that “existing humanitarian guidelines” will apply to enforcement actions involving 25 or more undocumented workers, as opposed to the previous threshold of 150 workers. Finally, the Fact Sheet reiterates the agency’s commitment to “employee verification tools,” such as E-Verify, which “improve the accuracy” of eligibility determinations and “combat illegal employment.”

Employers may want to ensure that they are in compliance with all workplace laws, including proper verification of new hires, reverification of existing employees and maintaining accurate, updated Forms I-9. Employers should be careful not to overreact to DHS’s announcement, because erroneously firing an employee who is authorized to work may result in a discrimination lawsuit. An employer that is concerned about the immigration status of a particular employee may want to consult the company’s attorney before taking any employment action against the individual.

H-1B Cap Update

On April 27, 2009, U.S. Citizenship and Immigration Services (USCIS) provided an update regarding the number of filings for H-1B petitions for the fiscal year 2010 program. As of that date, USCIS had received approximately 45,000 H-1B petitions counting toward the congressionally-mandated 65,000 cap. The agency continues to accept petitions subject to the general cap.

Additionally, the agency has received approximately 20,000 petitions for aliens with advanced degrees (“master’s cap cases”). The first 20,000 of these types of petitions are exempt from any fiscal-year cap on available H-1B visas. When USCIS has determined that it has received 20,000 master’s cap cases, any further petitions received will be placed in the general H-1B cap pool.

For cases filed for premium processing during the initial five-day filing window, which began on April 1, 2009, the 15-day premium processing period began April 7. For cases filed for premium processing after the filing window, the premium-processing period begins on the date USCIS takes physical possession of the petition.

For more information regarding the H-1B cap, please see our March 16, 2009 Alert.

Notes

¹ Fact Sheet on Worksite Enforcement Strategy, U.S. Dep’t of Homeland Security (Apr. 30, 2009), http://www.aila.org/content/default.aspx?docid=28757.

Brazil: No Tax Credits for Merchants' Credit Card Fees, Brazil's Revenue Department Says

2009-04-17

Brazil’s Federal Revenue Department (FRD) has published a clarification denying tax credits for the Program for Social Integration contribution (P.I.S.) and Contribution for the Financing of Social Security (COFINS) on credit card fees paid by merchants to credit card companies.

Private Letter Ruling (PLR) 05/2009, issued by the FRD Superintendence for the Third Fiscal Region,¹ is dated January 21 but was published in Brazil’s official gazette of February 2. It says that for purposes of calculating P.I.S. and COFINS credits, the taxpayer cannot consider fees paid to credit card companies as financial expenses because such fees do not arise from loans or financing granted to the taxpayer.

PLR 05/2009 is binding only on the filing taxpayer and does not immediately affect other taxpayers in similar situations, but it may serve as a precedent to tax agents. Although the complete facts and circumstances of the relevant case are unknown, it is clear that the taxpayer sought confirmation that credit card fees paid by merchants should generate P.I.S./COFINS while applicable. It is not clear which fees charged by credit card companies were included in the taxpayer’s ruling request.
The summary of PLR 05/2009 reads as follows:

For purposes to calculate credits under non-cumulative COFINS [and P.I.S.], the “management fees” paid by the taxpayers to credit card companies cannot be considered as financial expenses, since they do not arise from loans or financing granted to the taxpayer pursuant to Articles 3, items V of Law Nos. 10,637/2002 and 10,833/2003 (in their original wording), as amended by Law No. 11,196, of 2005; as from the latter law only [COFINS and P.I.S.] tax credits arising from lease payments paid by legal entities, except those under the Simplified Tax Regime (SIMPLES), were eligible.

Under the original versions of laws 10,637/2002 and 10,833/2003, corporate taxpayers under the noncumulative P.I.S./COFINS regime could claim P.I.S./COFINS tax credits for financial expenses incurred in loans and financing taken from third parties. At the time, financial income was also taxed by P.I.S./COFINS. Law 10,684/2003 added lease payments as capable of generating P.I.S./COFINS credits. In 2004, Law 10,865/2004 and Decree 5,164/2004 reduced the P.I.S./COFINS rates on financial income to zero in most cases and thereby eliminated the possibility for taxpayers to claim P.I.S./COFINS credits on financial expenses. The exception was lease payments, for which Law 10,865/2004 continued to allow P.I.S./COFINS credits.

Merchants that accept credit card payments in their sales have historically considered fees paid to credit card companies as financial expenses for tax purposes. Therefore, during the period that financial expenses generated P.I.S./COFINS credits, it would make sense that those fees would generate P.I.S./COFINS credits that merchants could use to pay their P.I.S./COFINS monthly liabilities.
PLR 05/2009 narrows the interpretation of the P.I.S./COFINS statute — namely article 3, Item V of both Law 10,637/2002 (for P.I.S.) and Law 10,833/2003 (for COFINS) — stating that fees paid by merchants to credit card companies do not qualify as financial expense because they do not arise from loans or financing made to the taxpayer. This interpretation is harmful to taxpayers, particularly those with significant sales paid by credit cards such as supermarkets, department stores, online stores, and rental car companies.

The good news for taxpayers is that PLR 05/2009 should affect a limited period of time because of changes to applicable laws and assuming that taxpayers have treated credit card fees as financial expenses, as seems to have been the case with the taxpayer in PLR 05/2009. From a practical standpoint, it should apply to transactions carried out before August 1, 2004, because thereafter, only lease payments could legally generate P.I.S./COFINS credits (still assuming that taxpayers have treated credit card fees as financial expenses). Also, because the applicable statute of limitations for P.I.S./COFINS is five years from the taxable event, in theory, only tax credits taken from February 2004 through July 2004 could be subject to questioning and assessment by tax authorities.

If, however, merchants have treated credit card fees as something other than financial expenses and still claim P.I.S./COFINS credits over those fees, they should review their procedures to assess the potential tax contingencies that could arise from the position taken in PLR 05/2009.

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

Footnote

¹ The FRD Superintendence for the Third Fiscal Region has jurisdiction over the northeastern states of Ceará, Piauí, and Maranhão.

Originally published in the March 3 edition of World Tax Daily (Copyrights Tax Analysts)

Switzerland: Swiss Bank Secrecy: US based clients are in trouble.

2009-03-31

In a previous article we have explained that foreign clients of Swiss Banks need to seek advice as to the best way to protect their interests in the future. This is important even if at the present time there is no risk of information being sent from Switzerland to their home tax administrations in case of tax avoidance. This is because Switzerland still makes the distinction between not declaring assets to the tax authorities, which is not a fraud under Swiss law, and tax fraud, which implies typically the use of false contracts or false balance sheets or similar documents. Even if this distinction will not be upheld in future treaties concluded by Switzerland to avoid double taxation, the distinction will remain so long as the existing treaties have not been renegotiated, and notwithstanding, it will cover only facts occurring after the revised treaty enters into force.

This, however, is not true for US-based clients because some 300 client names were forwarded to the US authorities on February 18, 2009, by order of the Swiss Banking Regulatory Authorities (FINMA), short-circuiting the pending judicial review of the administrative decision to forward the information to the USA ¹. US-based clients of UBS Inc. are also in trouble because the Swiss courts have given a very broad interpretation to the “fraud and the like” concept, which is applicable only in the cases of information sought by US authorities.

Indeed, the Federal Administrative Court held in its decision of March 5, 2009 (A-7342/2008 and A-7426/2008) ² that acquiring an offshore company to hold the assets under the name of said company for the sole purpose of escaping the US taxes was a fraudulent activity, if at the same time the US resident continued in fact to exert control over the assets transferred on an account in the name of the offshore company, and if the US person managed those assets by way of instructions given directly to the Swiss Bank, without going through the directors or officers of the offshore company. This very broad Swiss interpretation of fraud in the US context is due to the fact that under the Qualified Intermediaries agreements entered into by Swiss banks with the US Tax Administration in 2003, UBS Inc. specifically undertook towards the US Authorities to identify the US beneficiaries, thus creating indirectly a higher degree of diligence duty. Fortunately for the US clients of UBS, the USA Internal Revenue Service has withdrawn on March 16, 2009 all pending requests for additional assistance from the Swiss Authorities in their tax investigation launched in August 2008. Switzerland has therefore immediately discontinued all pending investigations regarding names which had not already been forwarded to the USA pursuant to the previous decision ³.

In all other cases (except the special situation described above), a request must be filed by the non-Swiss foreign authorities, stating what fraud is being investigated and what information is needed in connection with a specific person. Whenever judicial or administrative assistance is granted, the Swiss bank is then ordered to put at the disposal of the Swiss authorities copies of all banking documents, including the names of the beneficial owner, settlor, protector, and beneficiaries, if in the bank’s files.

This is followed by a review of what documents are relevant to meet the request for information presented by the foreign state. The Swiss authorities will not check if the request is legitimate, but only if the request meets the formal requirements for assistance and if the banking documents are potentially relevant in the context of the investigation described by the foreign state. The legal owner of the bank account may then object to the forwarding of the information, for instance if it discloses the names of third parties, who may have made payments on the account or who may have received funds from said account, but unrelated to the foreign investigation. Such objections will however only be successful if they are obviously outside the scope of the investigations described by the foreign authorities. An appeal for judicial review of the administrative decision is possible, but only very few appeals are upheld in practice.

The Swiss courts in the case of the US requests for information have also been extremely lax in their interpretation of what was not a fishing expedition. As indicated above, normally the name of the person investigated must be stated in the request and must correspond to a name found in the banking records as a beneficiary or otherwise in the investigated account. The Swiss government has insisted that this practice must be maintained in the future.

In the March 5, 2009 case, the Court held however that a precise description of the account, even without a specific name, could be sufficient to grant the requested assistance. This goes far beyond, for instance, what the Isle of Man agreed to provide to the German authorities under the new Anti-Tax Avoidance Treaty between those two assets. It is therefore likely that in implementing the new legal Swiss policy abolishing the distinction between tax abuse and tax fraud in cases of assistance sought under a tax treaty, the Swiss government will seek to enforce stricter requirements to limit the assistance to cases where the name of the taxpayer is identified by the requesting state. This is indicated in particular by the Federal Department of Finance communication of March 13, 2009 setting out the conditions for granting administrative assistance in fiscal matters ⁴.

While relinquishing the unique distinction between tax evasion (which did not lead to international assistance) and tax fraud (which led to assistance), the Swiss Federal government will certainly set tighter conditions on which prerequisites will have be to met to have the request accepted. The requirement to identify the name of the taxpayer will certainly be one of the key requirements to avoid fishing expeditions.

Swiss law is therefore moving more in line with international practice, but this does not mean that more requests for administrative assistance will necessarily be successful, provided the clients take appropriate steps to protect themselves.

Notes:

¹ www.efd.admin.ch ² www.bundesverwaltungsgericht.ch ³ www.efd.admin.ch ⁴ www.efd.admin.ch

United States: New Economic Stimulus Law Provides a Temporary Subsidy for Certain COBRA Premiums

2009-03-23

Introduction

The American Recovery and Reinvestment Act of 2009 (“the ARRA”), which was signed into law by President Obama on February 17, 2009, provides a temporary federal government subsidy for COBRA premiums for certain employees (and their qualified beneficiaries) who lost or lose coverage under an employer’s group health plan due to an involuntary termination of employment between September 1, 2008 and December 31, 2009. This subsidy is equal to 65% of the COBRA premium and is provided for up to 9 months of COBRA coverage. The ARRA also allows (but does not require) employers to give individuals who are eligible for the subsidy the opportunity to switch to other group health coverage. These provisions impose significant new COBRA notice, reporting, and premium payment responsibilities that require immediate action.

COBRA Premium Subsidy

Under the ARRA, eligible individuals are provided a federal subsidy of 65% of their premiums for COBRA coverage (excluding flexible spending accounts) for up to 9 months. This means that these individuals will only have to pay 35% of the cost of their premiums for COBRA coverage during this period. The employer (or the plan in the case of a multiemployer plan) is entitled to reimbursement from the federal government for the remaining 65% of the premium.

Eligible Individuals

The individuals eligible for this COBRA subsidy, referred to as “assistance eligible individuals” (or “AEIs”), are those employees and other qualified beneficiaries (i.e., covered spouses and dependent children) who became or become eligible for COBRA coverage between September 1, 2008 and December 31, 2009 due to an involuntary termination of employment and elect COBRA coverage. The statute does not define what will be considered an “involuntary termination” for this purpose, but individuals terminated for gross misconduct would not be eligible for COBRA coverage or the subsidy.

Employees or other qualified beneficiaries who became eligible to elect COBRA coverage due to an involuntary termination of employment between September 1, 2008 and February 17, 2009 (the date of enactment of the ARRA) but did not have a COBRA election in effect on February 17, 2009 (i.e., because they declined COBRA coverage or could not afford to continue paying the premiums) are given a second chance to elect COBRA coverage. This special enrollment period begins on February 17, 2009 and ends 60 days after the date the individual is notified of this special enrollment right.COBRA coverage elected during this special enrollment period is effective with the first COBRA coverage period beginning on or after February 17, 2009; however, this special election does not extend the individual’s COBRA coverage period beyond the original maximum period (generally 18 months from the involuntary termination).

A special, expedited appeals procedure is provided for individuals who believe they were wrongly denied the COBRA subsidy. Such individuals may appeal directly to the Department of Labor, and the Department of Labor is to make its decision on review within 15 business days.

Certain “high-income individuals” are not eligible for the COBRA subsidy. These are individuals whose modified adjusted gross income (“AGI”) (as defined in the ARRA) exceeds $145,000 ($290,000, if filing jointly) for the year the subsidy is received. Individuals whose modified AGI for the year the subsidy is received is between $125,000 and $145,000 ($250,000 and $290,000, if filing jointly) are eligible only for a portion of the subsidy. If an individual receives a subsidy he or she is not entitled to because of this income limit, the excess subsidy must be re-paid as an additional tax on the individual’s federal income tax return. Alternatively, an individual may elect to permanently waive the subsidy instead of having to report it on his or her tax return.

Duration of the Subsidy

The COBRA subsidy applies to COBRA coverage periods beginning on or after February 17, 2009, the date of enactment of the ARRA. So, for example, if a plan charges COBRA premiums on a monthly basis, the COBRA subsidy applies beginning March 1, 2009. AEIs who had a COBRA election in effect on February 17, 2009 in connection with an involuntary termination on or after September 1, 2008 are eligible to receive the subsidy on a prospective basis, beginning with the first COBRA coverage period beginning on or after February 17, 2009.

The COBRA subsidy ends with the first month on or after the earliest of (i) the date which is 9 months after the first day of the first month for which the COBRA subsidy applies; (ii) the first date the AEI is eligible for Medicare or coverage under another group health plan (other than plans providing only dental, vision, counseling and/or referral services, flexible spending accounts, and certain worksite programs); and (iii) the day following expiration of the AEI’s COBRA coverage.

The ARRA requires an AEI who becomes eligible for Medicare or coverage under another group health plan to notify the plan providing the COBRA coverage in writing. An AEI who fails to provide this notice is subject to a penalty of 110% of any excess COBRA subsidy he or she receives.

The ARRA includes a limited transition rule for implementing the COBRA subsidy with respect to AEIs who had a COBRA election in effect on February 17, 2009. If such an individual pays the full COBRA premium for the first and/or second periods of COBRA coverage beginning on or after February 17, 2009 (for plans with monthly COBRA coverage periods, this means the premiums for March and April 2009), the plan administrator must either (i) reimburse the AEI for the amount of the overpayment within 60 days, or (ii) offset the amount of the overpayment against future COBRA premiums. The offset method can only be used if it is reasonable to expect the overpayment to be fully applied against future COBRA premiums within 180 days. If during the 180-day period, it is no longer reasonable to believe that the excess will be applied against COBRA premiums within such period (i.e., the individual’s COBRA coverage ceases), the plan administrator must pay the remainder of the overpayment to the AEI within 60 days.

Notice Requirements

The ARRA requires that COBRA notices be revised to include additional information relating to the COBRA subsidy and, if applicable, the option to switch to other group health coverage. This additional information can either be included in existing COBRA notices or included in a separate notice sent together with existing COBRA notices. The Department of Labor is required to develop a model notice by March 19, 2009.

This new information must be provided to all individuals who had or have a COBRA qualifying event during the period between September 1, 2008 and December 31, 2009. For those individuals who had a COBRA qualifying event on or after September 1, 2008 and before February 17, 2009, the notice must be provided by April 18, 2009 (i.e., within 60 days after the date of enactment).

The new information to be provided must generally include (i) the forms necessary for establishing eligibility for the COBRA subsidy; (ii) the name, address and telephone number of the plan administrator and any other person maintaining relevant information in connection with the COBRA subsidy; (iii) a description of the special enrollment period for AEIs whose COBRA qualifying event was before February 17, 2009; (iv) a description of the individual’s obligation to notify the plan in writing if he or she becomes eligible for coverage under another group health plan or Medicare, and the penalty for failure to do so; (v) a description, displayed in a prominent manner, of the individual’s right to the COBRA subsidy and any conditions on entitlement to the subsidy; and (vi) if applicable, a description of the individual’s option to enroll in a different coverage option.

A violation of these new notice requirements will be considered a violation of the general notice requirements under COBRA and will be subject to the same penalties.

Reimbursement of Employer or Plan

The employer (or the plan, in the case of a multiemployer plan) is entitled to reimbursement for the COBRA subsidy (i.e., 65% of the premium that would otherwise have been paid by the employee) from the federal government. The employer (or multiemployer plan) can claim this reimbursement only after the AEI has paid the reduced COBRA premium.

An employer entitled to reimbursement credits the amount of the reimbursement to which it is entitled against its payroll taxes (including wage withholding and the employee and employer portions of FICA). To the extent this credit exceeds the employer’s payroll taxes, the employer will be credited or refunded the difference as if it was an overpayment of payroll taxes. To the extent the employer overstates the amount of the subsidy for which it is entitled to be reimbursed, the excess will be treated as an underpayment of payroll taxes.

An employer claiming the reimbursement will be required to report certain information to the Internal Revenue Service at the time its payroll taxes are paid. Information that will either have to be reported to the Internal Revenue Service or maintained to verify compliance will include (i) an attestation of involuntary termination for each covered employee with respect to whom it is claiming reimbursement; (ii) the amount of payroll taxes offset for the reporting period and an estimate of the amount to be offset for the next reporting period; (iii) the tax identification numbers of all covered employees; and (iv) the amount of the subsidy reimbursed for each covered employee and qualified beneficiary and a designation of whether the subsidy is for individual or family coverage. The Internal Revenue Service may also prescribe additional reporting requirements to verify that the proper amounts were reimbursed.

New Plan Enrollment Option

Under current law, coverage under COBRA is the same as the coverage the individual had on the date of the COBRA qualifying event and may generally be changed only during an open enrollment period. The ARRA provides that an employer may (but is not required to) permit AEIs to enroll in different coverage. The different coverage must have the same or lower premiums than the coverage the AEI had at the time of the qualifying event; must also be available to the employer’s active employees; cannot be coverage for only dental, vision, counseling and/or referral services; and cannot be a flexible spending account or one of certain specified worksite programs. If an employer allows AEIs to change coverage options, the AEIs must be notified of this right and given no more than 90 days after the notice is provided to elect to change their coverage.

Next Steps

These new rules require immediate changes to COBRA materials and procedures and payroll systems. Although further guidance from the Internal Revenue Service and Department of Labor is expected, including a model notice, employers should immediately contact their COBRA administrators, payroll vendors and insurance carriers to begin to address these new rules.

IRS Circular 230 Disclosure:

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Originally published on 2009 Hughes Hubbard & Reed LLP

Switzerland: Swiss Banking Secrecy: reasons to worry? and if yes, what can be done?

2009-03-17

The 1934 Swiss Banking Secrecy Law has not been changed and will not be changed. This was repeated by the Swiss Finance Minister and published on the official site of the Swiss government on March 14, 2009 ¹. The law provides for imprisonment (up to 5 years) for any bank employee who divulges confidential client information as well as for anyone who attempts to persuade such an employee to violate banking secrecy (art, 47.1a and 1b, and 47.3 LB. The prosecution takes place even if no individual client has filed a criminal complaint ². This is what makes Swiss Banking Secrecy so special. Switzerland has even jailed in the past a French Customs Agent who tried unsuccessfully to access to client data by exerting pressure on a Swiss bank employee.

However, foreign clients should worry about the most recent developments because the Swiss secrecy law also provides that bank secrecy does not apply when there is a statutory duty to inform the Swiss authorities (art. 47.5 LB). This is where there has been a recent change, even if Swiss law and Swiss banks will continue to offer a worldwide unique protection, provided appropriate steps are taken in due course. A duty for the banks to inform the Swiss authorities exists in particular in case of Swiss criminal investigations. In case of suspicion of money laundering, banks not only have to answer questions from the Swiss authorities, but there is even a duty to report spontaneously suspicions as to a possible criminal origin of the funds. The criminal origin targeted by this law concerns funds originating from criminal organizations (mafia style) ³, or from activities designed to conceal the criminal origin of the funds (money laundering) ⁴. The list of crimes was expanded in 2003 to include to a limited extent the financing of terrorism ⁵. A crime is a violation of the law punishable by at least three years imprisonment. Money laundering is a crime under Swiss law even if the criminal activity took place outside of Switzerland, provided it is also considered to be criminal there. This is the principle of double criminality in both Switzerland and the other concerned country. This principle has now been removed for tax matters.

Switzerland has accepted to grant judicial assistance to foreign states for the last 20 years, both under domestic laws ⁶ as well as by way of various treaties. In all these cases banks have to answer questions from the Swiss authorities, who may then transfer the information received to the requesting foreign authorities. Swiss banking secrecy provides no protection in those cases. The Federal Law on International Judicial Assistance in Penal Matters excludes however judicial assistance in tax matters, which are not also considered to be fraudulent under Swiss law (Art. 3.3 EIMP). But Switzerland grants not only judicial assistance but also administrative assistance under the treaties concluded to avoid double taxation. Initially Switzerland granted assistance only if a client of a bank was requesting the benefit of the treaty to reduce his tax exposure. But over the years, Switzerland was forced to grant administrative assistance even in other cases, if a fraudulent activity was involved. This required an activity considered fraudulent both in Switzerland and in the foreign country (principle of double criminality) and since not declaring assets to the tax authorities is not fraudulent per se in Switzerland, it limited considerably the scope of information foreign authorities could obtain in Switzerland ⁷.

This is what is about to change, since the Swiss Federal government has publicly stated that the distinction between tax evasion or avoidance and tax fraud will be abandoned in the new tax treaties negotiated by Switzerland . In the future, information may be exchanged on a case-per-case basis in response to specific and justified requests for administrative assistance in tax evasion matters ⁹. The government has also stated that the changes will only enter into force once the treaties have been renegotiated, and without retroactive effect, i.e. information will be exchanged if and when the amended treaty enters into force, but not for matters regarding the period before the new treaty has entered into force. A Swiss referendum may even be launched against such amended treaties to give the opportunity to all Swiss voters to decide whether or not to accept these new terms. Therefore, the new policy will not enter into force overnight. Foreign clients should accordingly not panic, even if the renegotiated treaties are likely to be accepted, because nothing will be changed for the Swiss residents. Banking secrecy will continue to protect Swiss taxpayers against inquiries from the Swiss tax authorities. This is possible because all Swiss source dividend or interest income is subject to a 35% withholding tax, without loopholes, contrary to what is the case in most other countries. Taxes are therefore collected very efficiently for Swiss domestic purposes.

Therefore, residents around the world with Swiss bank accounts do not need to worry for their assets at the present time. However, they should seek advice as to ways to improve their protection in light of the new Swiss policy. Nothing about their confidential asset holdings will be disclosed by Switzerland in the near future to their home tax authorities, but they need to take in due course appropriate measures to adjust to the new situation.

Some US residents are however threatened in the near future because in their case the Swiss Federal Authorities decided that certain banking information had to be provided to the US authorities without the protection provided by Swiss law to avoid a major damage to the Swiss economy as a whole ¹⁰. The reason for that unprecedented move is the US threat to withdraw the US banking license of UBS Inc., which would have put the Swiss parent bank in deep financial trouble, since the US subsidiary bank represents a large asset of the Swiss bank, asset which would have lost its value overnight without a US banking license. This decision concerns some 350 clients who are US taxpayers and whose names were apparently already disclosed to the US authorities in the course of the investigations pending there. This decision was sharply criticized in Switzerland, including by the Swiss Federal Court in charge of deciding whether information may be forwarded abroad, because the Swiss banking supervisory authority, called FINMA, ordered the transfer of this information despite the fact that the Swiss Federal Administrative Court has received appeals filed in opposition to the forwarding of such information to the USA. The Swiss government continues to oppose requests from the US authorities to divulge some 30’000 additional client names without proper Swiss administrative and judicial control to determine if those cases relate to “tax fraud and the like” or only to tax avoidance, which would not make a transfer of information possible under the present Swiss-USA treaty.

A separate article will deal with what is considered as similar to “fraud” by Swiss Courts in the context of information requested by the US authorities. It will also deal with the content of information forwarded abroad, and ways to protect efficiently privacy and confidentiality under the new Swiss regime ¹¹ ¹² ¹³.

www.stswiss.com
Eric W. Fiechter – Partner Secretan Troyanov –Geneva – Switzerland

¹ www.efd.admin.ch
² www.admin.chl
³ www.admin.ch
⁴ www.admin.ch
⁵ www.admin.ch
⁶ www.admin.ch
⁷ www.ejpd.admin.ch
⁸ www.efd.admin.ch
⁹ www.efd.admin.ch
¹⁰ www.efd.admin.ch
¹¹ International double taxation – Swiss government press releases
¹² Banking secrecy – Swiss government press releases
¹³ Geneva newspaper comment

Brazil: Brazil Enacts Tax Breaks, Creates Special Customs Regime With Paraguay

2009-03-11

Brazil’s official gazette of January 9 published Law 11,898/2009, which creates a new customs regime for imports of merchandise from Paraguay by small-business companies and introduces benefits for cleaning, conservation, and maintenance companies as well as manufacturers located within some free trade zones in the Amazon region.

Law 11,898/2009 creates the so-called Unified Tax Regime (Regime de Tributação Unificada, or RTU), whereby small Brazilian business companies are eligible to import a specified volume of merchandise by land from Paraguay under a less burdensome customs regime.

A standard tax of 42.25 percent will apply to all imports under the RTU, which includes import duties (18 percent), the federal excise tax (IPI) (15 percent), and the Program for Social Integration (P.I.S.) and Contribution for the Financing of Social Security (COFINS) levied on imports (1.65 percent and 7.6 percent, respectively). The RTU does not encompass the state VAT (ICMS), which will be regulated by state laws.

Law 11,898/2009 also covers RTU rules on election to the regime, customs control, payment of tax, accessory obligations (for example, tax filings), and penalties for violation of RTU rules.

The law changes rules concerning the noncumulative P.I.S. and COFINS regimes for cleaning, conservation, and maintenance companies. Under the law, because those companies are labor-intensive, they may now take P.I.S. and COFINS credits on some expenses incurred on behalf of employees, namely, food and meal vouchers, transportation allowances, and uniforms.

The credits will reduce the burden of those taxes on eligible companies. However, analysts are already debating the credits’ extension to other labor-intensive sectors, such as call centers and telemarketing, security, value transportation, and civil construction. They argue that if the law considers those items P.I.S./COFINS creditable for one or a few sectors, the same tax treatment should apply to other sectors under the constitutional principle of equality.

Finally, Law 11,898/2009 grants full IPI exemption for products manufactured within some Brazilian free trade zones located within the Amazon region, namely, those located in the cities of Tabatinga (state of Amazonas), Guajará-Mirim (state of Rondônia), Macapá and Santana (state of Amapá), and Brasiléia and Cruzeiro do Sul (state of Acre). The IPI exemption will be granted if specific requirements are met. For example, the relevant manufacturing project must have been approved by the Manaus Free Trade Zone Superintendence, and most of the final product’s raw materials from animal, vegetal, and mineral origins must be produced locally (within the region). The exemption does not apply under some conditions to arms, ammunition, tobacco, alcoholic beverages, passenger vehicles, and cosmetic and personal hygiene products.

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

Originally published in the January 15 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)

United States: Projects Await Stimulus Funds; Recovery.gov Tracking Flow

2009-03-02

Stimulus money for education, transportation, health care, and energy projects will begin flowing to the states over the next few weeks, according to federal officials overseeing the plan. The amounts and timing of the flow of the money depend on the mechanisms for disbursement established under the American Recovery and Reinvestment Act signed by President Obama on February 17, 2009.

In some instances local jurisdictions will have direct control over the funds. Under education, for example, the Act calls for $53.6 billion in fiscal stabilization money. The money is intended to back-fill the states’ education budgets. Here, the local districts will have the greatest say over the funds used for construction and maintenance.

“Under the Act, state governments will have direct control over 18 percent of the stabilization funds. The state percentage is intended for safety projects under education,” said Robert Strange, an education analyst for the National Conference of State Legislatures (NCSL). “That’s a pretty broad area and could include some maintenance of schools, but it can’t be used for new construction. Most of the money under fiscal stabilization is intended for the local level.”

There, 81 percent of the stabilization money is targeted at grade levels K-12.

“The local districts are permitted to use the money for repairs and modernization projects,” Strange said. “They have a lot more discretion over using the money for the actual physical structures.”

On the infrastructure end, many of the states’ Transportation Departments have already finalized lists of projects for funding.

“The bulk of these will be projects that can be started quickly, like re-surfacing and bridge repairs,” said a transportation expert with NCSL. “The whole idea is to create jobs quickly.”

This means that contractors involved in water, sewer and transportation work could be very busy in the next few months. Many projects already through the engineering and design phases are simply awaiting the money. That could begin to come through as early as mid-April, experts say.

The federal government’s website that tracks stimulus progress, Recovery.gov, has outlined a timeline for action over the next few months.

February 19, federal agencies reported their formula block grant awards. Departments of Education, Health and Human Services, and Energy will decide who will receive award grants and contracts. In some instances, funds will go through a state government. In others, the money will go directly to an institution, school or contractor.

March 3, federal agencies are to begin reporting use of funds. Until the federal government distributes funds to state and local governments, institutions and contractors, it can’t be determined how much funding a specific state, community or institution will receive.

May 3, federal agencies to make performance plans publicly available, and also begin reporting on their allocations for entitlement programs.

May 15, detailed agency financial reports are to be made available.

May 20, federal agencies are to begin reporting their competitive grants and contracts.

July 15, recipients of federal funding are to begin reporting on their use of funds. Recovery.gov will provide a way to search the money flow by state and by congressional district.

United States: Tax Implications of Incurring Website Development Costs

2009-02-26

The business use of websites is widespread and increasing rapidly as many organizations move away from a traditional brick-and-mortar business model and turn to an online presence for ongoing business activities. This trend combined with the fact that IRS has not issued formal guidance as to the deductibility of website development costs has resulted in confusion. The long-established rules applicable to the deductibility of business costs in general, and existing IRS guidance applicable to software development costs in particular, provide limited guidance as to the proper tax treatment of these costs. As businesses compile their tax information and make decisions regarding the deductibility of these costs incurred or paid in 2008, or enter into contracts for website development activities, care should be exercised so that desired deductibility is achieved.

The determination of the proper time period for deducting website design costs (i.e., costs of the website’s overall structure, functionality and appearance) depends on whether the costs are “software costs” within the meaning of the “software guidelines.” Generally, the portions of the website’s design that are produced from sophisticated programming language typically used in website design will qualify as “software.” Website design costs that qualify as “software” costs are deductible under the following “safe-harbor” rules.

Generally, if the individual or company launching the website acquires the design from a contractor who is at economic risk should the software not perform, the design costs are amortized by that individual or company over the three-year period beginning with the month in which the website is placed in service. It is important to note in this context that off-the-shelf computer software placed in service in a tax year beginning in 2003 and before calendar year 2010 qualifies as “section 179 property” eligible for an elective current expense deduction in 2008 of up to $250,000.

If, on the other hand, the design is “developed” (designed in-house by the individual or company launching the website or designed by an independent contractor who is not at risk should the software not perform), the individual or company launching the website can choose among the following alternative tax treatments:

Amortizing the costs over a three-year period beginning with the month that the software was placed in service;
Deducting the costs in the tax year in which the costs are paid (if taxpayer is a cash-basis taxpayer) or in the tax year in which the costs are accrued (if taxpayer is an accrual-basis taxpayer), but only if all of costs of developing the software are deducted this way;
Amortizing the costs over a five-year period beginning with the completion of the development, but only if all costs of developing software are amortized this way; or
Amortizing the costs over a period longer than five years, but only if the costs are Code Sec. 174 research or experimental expenditures.

Website design costs not considered “software” costs are deductible in accordance with their useful life. Thus, these costs must be amortized over the number of years that it is expected that the non-software portions of the design will be used in the business. If it is expected that these non-software portions of the design will have a useful life of no more than a year, the costs can be currently deducted.

Website content associated with advertising is generally deductible in the year incurred or paid and is consistent with the treatment of advertising costs in general. Website content other than advertising will be currently deductible or amortized over a multi-year period, depending on the useful life of the content.

The deductibility of some website costs related to the startup of a business is limited. When website costs that would otherwise be currently deductible are paid or accrued before a business activity begins, the costs are deductible only upon the termination or disposition of the business, unless the individual or company launching the website elects to amortize these costs over a period of 60 months or more beginning with the actual start of the business. Generally, business activity is deemed to have commenced upon the business’ engaging in activity for which it was organized, such as recording sales or revenue.

The above rules provide ways in which an individual or company launching a website can take advantage of the most profitable tax treatment when planning and incurring website development costs. For instance, an individual or company seeking to contract for a website design can structure the contract so that the website development costs qualify as software costs and also include in the written agreement with the developer/contractor terms that will put the risk that the software fails to perform on the individual or company, which is likely to result in more favorable tax treatment. Appropriate tax treatment of website development costs can be supported by detailed, descriptive allocations of costs, both in contracts and in internal records.

Conclusion

While the costs of purchased hardware and software should be capitalized, many of the costs involved in the development of a website may be appropriately classified as software development costs and are thus currently deductible as an expense under the various provisions of the Internal Revenue Code. Companies incurring significant website development costs should consult with their tax advisors to perform a detailed analysis of the tasks undertaken and the related costs to ensure maximum deductibility.

Brazil: African Union-Brazil Technical Cooperation Agreement Enters Into Force

2009-02-17

Originally published in the February 17 edition of World Tax Daily
(Copyrights Tax Analysts)

Brazil’s official gazette of February 6 published Presidential Decree 6,762/2009, which brings into force the African Union-Brazil technical cooperation agreement signed in Brasilia on February 28, 2007. The agreement had been pending approval and validation by Brazil’s Congress.

The agreement seeks to improve and encourage projects for social and economic development, agriculture, health, education, natural resources, the environment, and energy between Brazil and one or more member countries of the African Union. The agreement does not list these projects, however.

Article VIII of the agreement provides for income tax relief for individuals involved in projects under the agreement in the other country, although compensation and allowances paid by the host country may be taxed according to local tax laws and tax treaties. Article X of the agreement provides for import and export duty relief for goods involved in projects under the agreement in the other country. The agreement also sets the conditions for full application of the exemptions granted.

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

Brazil: Brazil Issues New Customs Regulation

2009-02-17

Originally published in the February 12 edition of World Tax Daily
(Copyrights Tax Analysts)

Brazilian President Luiz Inacio Lula da Silva has signed a decree that updates and consolidates all the customs regulations issued in the past six years.
Presidential Decree 6,759/2009, published in the official gazette on February 6, replaces the previous customs regulations created by Decree 4,543 of December 22, 2002.
The new regulations address issues such as the electronic filing of import licenses; imports for third parties; and the creation of the Program for Social Integration (P.I.S.) and Contribution for the Financing of Social Security (COFINS) regimes for imports.
The main goals of Decree 6,759/2009, which contains 820 articles, are to insert all customs rules and regulations in a single piece of legislation and to make the rules clearer and more accessible to practitioners and importers.

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo

Brazil: Brazilian Companies Putting Off Tax Payments to Sidestep Loan Interest

2009-02-17

Originally published in the February 11 edition of World Tax Daily (Copyrights Tax Analysts)

The gap between the interest rate that financial institutions pay on deposits and the higher rate they charge for loans is having a curious effect on corporate taxpayers. Many Brazilian companies are putting off tax payments, allowing interest to accrue, rather than taking out high-interest loans from banks to pay their tax obligations.
Unpaid (and unassessed) federal taxes are subject to penalties of 0.33 percent per day, up to 20 percent, plus interest calculated according to the government-monitored SELIC interest rate, which is currently 12.75 percent per year.
Although the SELIC rate fell 1 percentage point in January, the reduction has not been reflected in banks’ interest rate spreads. According to studies by the Central Bank, Brazilian banks in January 2008 charged interest rates that were 18.23 percentage points above the SELIC rate for cash flow loans. In December 2008 the gap soared to 26.5 percentage points on average.
As a result, some corporate taxpayers with cash flow problems have opted to finance their business by delaying their periodic tax payments. The delays sometimes are accompanied by a lawsuit challenging or disputing a given tax before a federal court of law.
Depending on the tax and the specific circumstances, taxpayers may seek an injunction to suspend tax payments. The most common legal actions involve social security contributions on certain payments made to employees; the 9 percent CSL (social contribution on net income) on export income; the deduction of excess state VAT (ICMS) credits for income tax purposes; and P.I.S. and COFINS tax credits on some expenses.
With an injunction, a taxpayer is able to suspend those tax payments while the injunction is in effect. If the injunction is revoked, the taxpayer has 30 days to pay the tax due with interest at the SELIC rate but does not have to pay a penalty. After 30 days, the tax is due with a delay penalty of 20 percent, but the taxpayer also runs the risk of being assessed, in which case the penalty goes up to 75 percent of the unpaid tax.
If litigation or an injunction isn’t an option, the more aggressive taxpayers simply decide not to pay their federal taxes for a while, hoping they will not be assessed before they settle their tax liability. Even in those cases, the financial costs (apart from the risk of being assessed) may make the risk worthwhile. In annual terms, an unpaid tax can cost a company up to 32.75 percent (the 12.75 percent SELIC interest rate and a 20 percent delay penalty), while the interest on a cash flow loan can reach 39.25 percent (the 12.75 percent SELIC rate and the additional 26.5 percentage points in the banks’ rate spread).
The nonpayment of a tax may be too risky, however, because the Federal Revenue Department has the resources to cross-check taxpayers’ information. The filing of monthly or quarterly tax returns by taxpayers or their clients gives tax authorities enough information to assess the taxpayer for unpaid taxes. In that event, any possible advantage of delaying a tax payment could result in a concrete disadvantage, because a 75 percent penalty will apply.

David Roberto R. Soares da Silva, tax partner, Azevedo Sette Advogados, São Paulo