CPMF: the most controversial and the most desirable tax?

Twelve years have passed since its extinction. Governments come and go and the CPMF (English acronym that means Temporary Contribution on Financial Transactions) is still desired and rejected with the same strength.

But why is a tax that is so easily implemented and has a low tax rate (it was 0.38% and a proposal is at 0.22%) so controversial?

At the time of its implementation (its initial purpose was to subsidize health), and also today (the proposal is that it would compensate for a reduction in corporate taxes and payroll taxes), the CPMF is defended on the grounds that it will be a tax to “compensate” for some “hole” in Federal government’s accounts or that it will eliminate existing distortions in the Brazilian economy.

A good example that justifies such defence is the following statement by Economy Minister Paulo Guedes “if the political class thinks that the distortions caused by this tax are worse than the 30 million unemployed, it’s for them to decide” (statement given after a meeting with the Deputy Chamber’s president, Rodrigo Maia from the political party DEM-RJ).

The current economic team defends the reduction of the tax burden on companies. Its implementation would require some sort of compensation, which could include the creation of a new CPMF (although under a different name: Financial Transaction Tax – ITF – Brazilian acronym). This line of thought cost the chair of former Federal Revenue Secretary Marcos Cintra.

Advocates of this type of tax justify that in terms of coverage, it is 100% and it would observe the constitutional principle of isonomy, i.e., treat equally the equals and unequally the unequal. Whoever transacts money through their accounts would be taxed. Those who have a lot of transactions and a lot of money would be taxed more than those who have less money and fewer financial transactions.

The critics, state that, although they value the purpose of decreasing the tax burden on companies (with a reduction in taxes on production and payroll), they consider the waterfall effect of such tax as prejudicial. The tax being cumulative is one of the main criticisms from such experts.

The institution of a new tax in the present scenario is bad as a principle. IOF (The Brazilian acronym for Tax on Financial Transactions) already exists and the tax burden is relatively high. Added to this is a complexity of ancillary obligations that require high investments in technological infrastructure and personnel. Therefore, discussing CPMF without a positive counterpart is useless.

In the context of a broad tax reform, discussing the CPMF or ITF, together with the decrease of taxes on production, trade and services, as well as on payroll, can be an alternative and a good incentive. Nevertheless, its creation is still unpopular.

Although the CPMF is an important tax from an economic point of view, and therefore desirable, its creation is very controversial. A tax reform proposal with an “ITF” is likely to be considered “stillborn”. It will no develop beyond the first meeting.

The plan from the government of introducing several reforms, not only tax, would not count with the creation of a new CPMF. Maybe it could be used as a bargaining chip to approve other reforms so these may be approved. The controversy continues.

By Alamy Candido, partner at Candido Martins Advogados

“I’m here to stay!”

The increasing CRI market

The Real Estate Receivables Certificate (CRI, in the Portuguese acronym) market has shown a strong growth in recent years. The volume of CRIs traded at B3 between January and September this year is 60% higher than the volume traded in the same period of 2018, according to B3 itself. It is also expected that the volume of this security in the market continues to grow next year.

This growth is due to several reasons, which include tax benefits to individuals (income derived from CRI is exempt from income tax to individuals), the low interest rate scenario in Brazil, the comeback of the real estate market and the recent movement by the Brazilian Securities Exchange Commission (CVM) in making the rules of using CRI as a guarantee more flexible.

In July, CVM published a decision allowing the use of CRI for reimbursement of expenses already disbursed from the real estate projects, and not just for payment of future expenses, which was already permitted.

Although the consultation that generated this decision by CVM was made by XP Investimentos, everyone benefits from it. This is another case where the technical area of CVM refuted such possibility and the CVM Board of Commissioners decided to move forward with the offer.

To support its understanding, the CVM Board of Commissioners argued that although it is possible to use CRI funds for the reimbursement of expenses, a time limitation is required. Therefore, it suggests that only expenses incurred in the 24 months prior to the termination of the CRIs public offering should be considered. They based this argument on the term provided for in Law No. 12,431/11.

In addition to the deadline, in order for the issuance of the CRI for reimbursement of expenses to stand still, it is also necessary that the expenses result from the acquisition, construction and/or renovation of the real estate properties. Expenses incurred indirectly to these activities, such as brokerage, registration, taxes or attorney’s fees in the preparation/negotiation of deeds are not eligible for reimbursement. In addition, it will be necessary to include in the term of securitization the details of these expenses and the individualized specification of each of the real estate properties linked to such expenses. All invoices, deeds and other documents evidencing such expenses must be presented to the trustee.

With these changes, the spectrum of use of CRIs is increased and a greater security for the market is ensured. The structure for reimbursement eliminates the risk of misusing CRI issuances since the destination will be known from the start.

By Julia Pinheiro, associate at Candido Martins Advogados

It’s all digital now!

Corporate acts published in newspapers are in the past

As of October 14, companies (whether publicly-held or not) will be exempt from publishing in the Official Journals and newspapers This exemption was established by Decree No. 529, from the Ministry of Economy and CVM Resolution No. 829, both published at the end of September, which represents a significant reduction in compliance costs of the companies.

The regulation was expected since August, after the Provisional Measure No. 892 allowed the companies to make their publications on their websites.

The publications will follow the following procedures:

It is important to note that the Ministry of Economy (responsible for determining the publication of the closely-held companies after the Provisional Measure No. 892) did not clarify if the closely-held companies shall necessarily have their own website or if they could post their publications on third-parties’ platforms.

This detail is important, as a significant number of companies currently do not have a website (eg. holding companies) and a possible obligation that every company shall have one, would be an unnecessary cost to the companies, something that the new regulation seems to want to avoid.

By Mateus Leite, associate at Candido Martins Advogados

Many little strokes fell great oaks

The collection of default interest over VAT tax by the State of São Paulo

Are we finally able to prevent the State of São Paulo from collecting exorbitant default interest rates on VAT (ICMS) tax debts?

For almost a decade, the São Paulo State abused its power by charging exorbitant default interest on VAT (ICMS) Tax debts. Since 2009, with the enactment of Law No. 13,918, default interest has been charged at a rate of 0.13% per day (approximately 47% per year), far above the Selic rate (Bank’s overnight rate in Brazil) that was less than 11% in that year.

The taxpayers rebelled themselves. There were numerous administrative and judicial claims to dismiss the collection of such interest.  In February 2013, São Paulo Court of Appeals analyzed the matter and ruled unconstitutional the collection of default interest rates above the Selic rate.

Only four years later, in July 2017, the State of São Paulo enacted Law No. 16,497 recognizing that, as of November of 2017, the default interest rate over VAT tax debts should be the Selic rate.  The law, however, prevented taxpayers from getting refunds for the overpayments made before that date.

The discussion reached the Supreme Court (STF) that, last month, finally ruled (with binding effect to lower courts) that Selic rate is the limit!

Was this the end of discussions? Well, not quite.

Surprisingly, STF decisions can only be followed by authorities of the São Paulo State upon a declaration in a Direct Action of Unconstitutionality (ADIn), a binding precedent, or when its effects are suspended by the Senate.

Thus, it is necessary to wait for a position from the State of São Paulo and the State General Attorney authorizing the end of discussions in order to apply the STF decision and prevent the collection of interest higher than the Selic.

Until then, for those who need to pay their debts subject to the interest provided in the legislation of 2009, they still need to file a lawsuit requesting that STF decision be applicable. At the administrative level, it is not possible to rule out abusive interest. But in the judicial level, taxpayer´s victory is now certain.

Taxpayer should stand up! After all, “many little strokes fell great oaks”. The State of São Paulo, sooner or later, will solve this issue and end this discussion with only one possible ending: interests must observe the limits set by the Selic rate.

By Tatiana Del Giudice Cappa Chiaradia, partner at Candido Martins Advogados

Leaving quietly: the redemption of shares as an exit event

When we talk about equity investments, one of the subjects that has been keeping the investors and managers up at night is the exit strategy.

And with reason. When successful, the exit strategies ensure investors, managers and other stakeholders, the earnings from years of strategy work and resources allocation, directly influencing the success of the investment.

When the investment meets the expectations, it is common for investors to exit through an equity sale to another player in the market or even through an IPO, achieving good returns to their investments.

The question remains: what if the invested companies do not met expectations and/or there are difficulties in executing exit strategies like the above? For some investors, it is a risk worth taking and the premium received for some investments compensate the lack of liquidity of others. For others, especially those in search for returns closer to a fixed income and less interested in big exit premiums, the lack of liquidity may be a big problem. To these investors, in a market with no liquidity, the redemption of shares may be a good alternative.

The redemption of shares is nothing more than the payment, by the invested company itself, of the value of its shares held by one or more shareholders to permanently cancel them, using for payment part of the company’s results or its capital reserve.

However, for the redemption of shares to be a quick and efficient exit strategy, it needs to be thoroughly studied by the investor. We can highlight some precautions that must be taken from the beginning of the investment, such as the setup of a specific class of shares, the formation of capital reserve in the contributions made throughout the investment period, the rules to calculate the redemption price – which can take many forms such as discounted cash flow and book value – and the procedures for implementing the redemption.

It is important to note that since the redemption of shares depends on the invested company’s cash and accounting results, it may be that the situation of the company does not allow the redemption to be made at the time the investor intends to leave the company. In addition, as a rule, redemption is a company’s option and not an obligation. When the company is contractually bound by the redemption, it becomes an obligation and, most likely, a liability on its financial statements.

Therefore, the redemption is an exit possibility, but contains uncertainties. Thus, it is important to verify the structure of each transaction to assess the viability of this alternative and tax aspects for the company and the investor.

By Raphael Pereira Arantes Pires, associate at Candido Martins Advogados

Bye bye, so long, farewell … Official Gazette

If you have never read the Brazilian Official Gazette you are missing out on nothing! Microscopic letters are a test for our sight. The days of the Gazette are coming to an end provided that the Provisional Measure No. 892/2019MP 892), published last August 6, is converted into law.

The birth of the Official Gazette is so old that it dates back to the time of the transfer of the Portuguese court to Brazil in the early nineteenth century. That’s right! Since then it is up to the Official Gazette to disclose the official normative and administrative acts of the government. The Corporation Law of 1976 requires companies to publish their corporate acts, communications to shareholders and financial statements in the State Official Gazette and also in a high circulation newspaper. And these publications are very expensive.

With the digital age, this requirement has lost its raison d’être. Today, the publication in the Official Gazette and in another newspaper does not guarantee the publicity and access to the shareholders as was the intention of the legislator.

20 years after Google was launched, MP 892 brought to an end publications in newspapers, allowing public companies to disclose the required information on their own websites, the CVM website, and the market entity`s website where the securities are admitted to trading, such as B3Brazilian Stock Exchange), with the CVM being responsible for regulating the application of such legislation.

The text of the provisional measure did not specify how publications of documents related to privately held corporations will be handled, but merely mentions that such matters will be further regulated by the Finance Ministry.

The absence of express regulation on the subject for both public and private companies creates legal uncertainty, since companies do not yet clearly know how to proceed with their publications.

The MP 892 is effective until October 19, 2019, and may be extended for the same period, and must be approved by the National Congress to be converted into law. However, these rules will only be effective after the regulations are issued by the responsible agencies. Until then, the old rules apply.

This is good news on the way to reduce bureaucracy of companies, bringing great savings to companies and generating more agility and efficiency in the disclosure of relevant information to the market.

By Marcella Pontes de Oliveira Bertolini, associate at Candido Martins Advogados

Neither too much, nor too little: IOF in export transactions

This phrase reflects the new position of the Brazilian IRS on the incidence of Tax on Financial OperationsIOF) on export revenue inflows.

Last December, the IRS published a note preventing exporting companies from having a good night sleep. The IRS began to demand the IOF on foreign exchange transactions on the inflow of funds in Brazil immediately after the conclusion of the export process. In other words, the date for securing the zero tax rate on money entering the country would be the date of the completion of the export process.

With this, the beginning of the year was hectic for exporters, since banks began to inform the companies that they would withhold the applicable tax.

It was then that the Attorney General’s Office of the National TreasuryPGFN) issued an opinion that made the deadline more flexible, motivating the IRS to consider its position and back down, publishing on July 15 another note modifying  the previous one.

According to the new position of the IRS, the taxpayers must observe the form and the term established by both the National Monetary CouncilCMN) and the Central Bank, so that the period to ensure the zero rate of resources in the country becomes 750 days.

Neither too much, nor too little: the deadline is no longer indefinite, nor immediately after the finalization of exports. The tax authorities have chosen a middle ground.

Although the new position is positive for taxpayers, it can generate even more bureaucracy for Brazilian companies that will probably have to prove to banks that the inflow of funds is linked to the export procedure respecting the deadline set by the monetary agencies.

By Marcela Leal Sammarone, associate at Candido Martins Advogados

Tax authorities criticize and praise on PIS/COFINS taxation

The Brazilian Revenue ServiceIRS) have not yet decided on how to apply the concept of inputs for purposes of calculating PIS/COFINS credits under the non-cumulative regime.

Even after the ruling of the Superior Court of JusticeSTJ) on April this year, which theoretically ended the discussion about the concept of input for PIS/COFINS, the Brazilian Tax Authorities are adamant in changing their understanding on the matter.

The STJ has defined that all items considered essential, indispensable or relevant for the company’s economic activity are entitled to PIS/COFINS credit.

Using this concept, the IRS issued on June 27, 2019 Consultation Solution COSIT No. 228 acknowledging the right of the transport company to use the credits of the contributions on the expenses with automotive safety of freight vehiclestracking/monitoring).

Contrary to this decision, on the same day the IRS issued the Consultation Solution DISIT No. 7039, prohibiting the use of credits on the hiring of surveillance services by legal entities in general.

In other words, the IRS feel it has the authority to determine which taxpayers can survive without surveillance and security services and which taxpayers really need such services.

The fact is that this environment maintains a serious legal uncertainty as to whether or not PIS/COFINS credits can be used. As a result, companies must take a closer look at this point, so as not to expose themselves to unnecessary risks or even leave money on the table.

By Paola Ayres Sarraf, lawyer at Candido Martins Advogados

To vote or not to vote, that is the question!

Last July 11th, the joint Congressional Committee that analyses the Provisional Measure for Economic FreedomMP 881/2019) approved several amendments that were not included in the original text with the issuance of a draft bill of law.

Among the changes is the right of the shareholder to exercise its voting rights at the meeting even though conflicting interests with the company are involved. The Brazilian Corporations Law prohibits the shareholder vote in resolutions of general meetings in which it has conflicting interests with the company. This new proposal establishes that the potential conflict of interest between the shareholder and the company should not deprive the shareholder of the right to vote, allowing the decision to be annulled provided it is demonstrated that certain conditions or adequate compensation for the company were not observed. In this case, provided the loss has been proved, the shareholder who exercised its conflicting voting rights will be liable for the damages caused and will be obliged to transfer to the company any improper advantages it has obtained.

The deliberative bodycollegiate) of the Brazilian Securities and Exchange CommissionCVM), going against the decisions of the technical area of the CVM and the Brazilian Corporations Law, had expressed its views that the shareholder does not need to express its impediment at the time of voting, only being liable to reimburse the losses caused for abusive conduct if any damage to the company is proven. The draft bill of law consolidates the understandings of the deliberative body of the CVM.

In a country like Brazil, where corporate control is concentrated in the hands of a few families and business groups, it can be said that this position of the legislature has a more political than technical bias.

The position goes in the opposite direction of the European Union rules on conflict of interest. In 2017, for example, Directive 2017/828 prohibited the conflicting shareholder from voting on relevant transactions between the company and related parties of the shareholder.

The bill of law still needs to be analysed and voted by the House of Representatives and the Senate to be converted into law. Until then, the current text of the Brazilian Corporations Law applies.

By Giovanna Paes Cruz, lawyer at Candido Martins Advogados

The Alienist – Machado de Assis

A classic of Brazilian literature, this fiction written by Machado de Assis is, one hundred and thirty years after its original publication, one of the most devastating reflections about how insane science can be.
The protagonist Simão Bacamarte is a doctor who get interested in psychiatry, starting a study about insanity in the city of Itaguaí, in the State of Rio de Janeiro, where he launches  a hospice – considered the most modern method in the treatment of psychiatric diseases at that time -, gathering the local population for his experiments.  It’s a surprising and modern story, with brings an intense debate about the limits between madness and reason, insanity and lucidity.