Lionel Nobre Director – Brazilian Business Advisory Portal Dallas Bar Association – International Law Section October 15

1. The Tax Implications of Doing Business in Brazil Lionel Nobre Director – Brazilian Business Advisory Portal Dallas Bar Association – International Law Section October 15, 2002

2. Topics to be covered Tax Concerns for US companies investing in Brazil - • Domestic corporate taxation • Withholding taxes • Transfer pricing control • Taxation of transactions with low tax jurisdictions • Anti-Avoidance rules • Tax planning mechanisms

3. General tax principles European-Continental - Portuguese system - Current system under the 1988 Federal Constitution: • the Union; States, Federal District and Municipalities can levy taxes; fees and contributions • no hierarchy between the taxing powers • tax rules are found in the Federal Constitution, Complementary Laws (ie. National Tax Code) and in Laws, Decrees and other lower norms

4. Treaties to Avoid Double Taxation – Argentina, Austria, Belgium, Canada, Chile, China, Denmark, Ecuador, Germany, Korea, Spain, Philippines, Finland, France, Holland, Hungary, India, Italy, Japan, Luxembourg, Norway, Portugal, Check Republic, Slovak Republic and Sweden • Brazil does not have a Tax Treaty with the US nor with the UK • Basically follows the OECD model with the exception of China (UN Model)

5. Tax Concerns for US Companies in Brazil Corporate Taxes • Corporations - legal entities under current Brazilian law • US tax treatment of: • “Limitada” (Ltda.) - type companies – can check-the-box • Partnerships (“sociedade civis por responsabilidade limitada”) – can check-the-box • “Sociedade Anônima” (SA)- type companies – cannot check-the box

6. Tax Concerns for US Companies in Brazil • Diverse tax burden on the company as a separate legal entity from its partners, shareholders, quotaholders - “corporate tax burden” • No consolidation rules for same group allowed in Brazil

7. Tax Concerns for US Companies in Brazil Corporate Tax Rates & Methods • Income Tax on Net Profits (IRPJ) • 15% on profits • 10% additional on values exceeding approx. US$ 66,000 per annum • Social Contribution Tax on Net Profits (CSL) • 9% on profits • Total Corporate Tax Burden = approx. 34% • Real Profit Method vs. Presumed Profit Method

8. Tax Concerns for US Companies in Brazil • Revenue Based Taxes • - Contribution to the Integration Program (PIS) • - COFINS (Contribution to Finance Social Security) • - Service Tax (ISS) • Transaction Based Taxes • - Import Tax (II) • - Manufacturing Tax (IPI) • - Good’s Circulation Tax (ICMS) • - Check Tax (CPMF) • - Financial Transaction Tax (IOF)

9. Tax Concerns for US Companies in Brazil • Withholding Taxes (Imposto de Renda na Fonte – IRF) • Taxation occurs at source • Territoriality Principle - Mechanism for Taxing Non Tax Residents (foreign taxpayers) - without a Tax Registry/Roll Number (“CPF/MF or CNPJ/MF”) • Imposed on profits, income and capital gains paid, credited, remitted, issued to foreigners or non- Brazilian taxpayers

10. Tax Concerns for US Companies in Brazil Remittance Non-Tax Haven Tax Haven Royalties 15% + 10% Surtax 25% Dividends/Profit 0% 0% Interest 15% 25% Services Fees 25% 25% Other 15% 25%

11. Tax Concerns for US Companies in Brazil • Lack of definition of permanent establishment - adoption of definition found in Tax Treaties (23 Treaties) • “Doing business in Brazil” - foreign company cannot be bound by individual or company in Brazil (mandate or agent)

12. Tax Concerns for US Companies in Brazil Transfer Pricing Control • Introduced for the 1997 calendar year by Law nr. 9.430/96 - similar rules were soon “exported” to Venezuela and Argentina • Income Tax rule on deductibility of cost/expenses as well as recognition of revenue in overseas transactions with so-called “related” and “low tax jurisdictions” • Rules applied to Imports, Exports of goods, services and assets as well as to financial transactions (ie. loans)

13. Tax Concerns for US Companies in Brazil Transfer Pricing Control • Rules not applicable to international Royalty or Technology payments • Does not follow OECD rules nor adopt the any known “arm’s length principle” • Very broad definition of related party – “vinculated party” including entities in listed tax haven jurisdictions

14. Tax Concern for US Companies in Brazil Transfer Pricing Control • Adopts fixed profit margins whenever Uncontrolled Prices cannot be used • Can be argued unconstitutional for Brazilian tax purposes • In cases where a Tax Treaty exists can elect to use the foreign country’s rules instead (i.e. Germany)

15. Tax Concern for US Companies in Brazil Taxation of Transactions with Low Tax Jurisdictions • Introduced by Law nr. 9.430/96 - jurisdiction with no taxation or with a maximum tax burden of 20%; (analysis of local legislation as well as type of legal entity) Low Tax Jurisdiction List : American Samoa; Andorra; Anguilla; Antígua; Dutch Antilles; Aruba; Bahamas; Bahrein; Barbados; Belize; Bermuda; Barbuda; British Virgin Islands; Campione D`Italia; Channel Islands (Alderney, Guernsey, Jersey and Sark); Cayman Island; Cypress; Cook Islands; Costa Rica; Djibouti; Dominica; United Arab Emirates; Gibraltar; Granada; Hong Kong; Lebuan; Lebannon; Liberia; Liechtenstein; Luxembourg (Holding company under Law 31 of july 1929) Macau; Madeira Island; Maldivas; Malta; Isle of Man; Marshall Islands; Mauritius; Monaco; Montserrat Islands; Nauru; Niue; Oman; Panama; Nevis and St. Christopher; West Samoa; San Marino; St. Vincent and Grenadine; St. Lucia; Seychelles; Singapore ;Tonga; Turks and Caicos; US Virgin Islands; Vanuatu

16. Tax Concern for US Companies in Brazil • Consequences • higher withholding tax rate - 25% on all payments made from Brazil to low tax jurisdictions - exceptions: financial investments - transactions subject to transfer pricing control mechanisms

17. Tax Concerns for US Companies in Brazil • “General Tax Avoidance Rule” introduced by Complementary Law nr. 104/01 and recently regulated by MP 66/02: • attempt to introduce a “Form over Substance Rule” • power granted to Tax Authorities to challenge transactions with the exclusive objective of reducing taxes • Constitutional right for taxpayers to save on taxes; • via judicial challenges/injunctions • via corporate reorganizations/legal acts • Strict legal definition of taxable event and taxable amount – allows usage of many tax planning techniques

18. Tax Concerns for US Companies in Brazil Some Tax Planning Ideas Indirect Taxes – VAT taxes (ICMS and IPI) – review of import, purchase and sale flow Municipal Service Taxes – locate activity in a favorable municipality (can bring down rate from 5% to 0.5%) Corporate Reorganizations to offset losses carry forward with profitable activities (can reduce taxable profit to nearly zero)

19. Tax Concerns for US Companies in Brazil Remuneration of Capital through Interest payments – TJLP rate index (approx. 11% per annum) • Treated as a dividend or • Profit distribution • Deductible Interest • Limited to net equity • Withholding tax of 15%

20. Tax Concerns for US Companies in Brazil M&A Transactions • Usually advisable to use a holding company in Brazil as acquirer for tax purposes • Payment of premium for investment – capital gain for seller • Need to amortize premium for Brazilian tax purposes – deductibility for buyer • Adoption of a tax structure which allows seller to not generate a taxable capital gain and at the same time allows the buyer to amortize premium paid on acquisition

21. Tax Concerns for US Companies in Brazil M&A Transactions BrasCo. (Seller) BrasCo. (Seller) Buyer Buyer (3) (1) ASSETS (drop down) (2) NewCo. NewCo. (Target) Target Asset Target Asset

22. Tax Concerns for US Companies in Brazil Brazilian income tax legislation for the next coming years? - Thin capitalization provisions – today there are no rules determining equity/loan make-up - Secondary adjustments for transfer pricing control purposes today not allowed

23. Tax Concerns for US Companies in Brazil Stricter control on Foreign Owned assets in Brazil • No PE in Brazil, but rather just the necessary disclosure of foreign assets ownership to Tax Authorities (real estate, shares, vehicles, boats, airplanes, etc.) • Capital gain taxation if buyer is a Brazilian resident: 15% on the taxable gain • Mandatory enrollment of foreign investor’s with assets in Brazil with the federal taxpayer number (CPF/MF or CNPJ/MF) and appointment of a Brazilian resident as an attorney-in-fact

24. Grant Thornton’s approach • Utilize a multi-lingual, multi-cultural and multi-disciplinary team approach with more than 30 years of experience in Latin American and European investment, accounting and tax matters; • Maintain strong support and close working relationships with our Grant Thornton offices in Latin America and Europe (in more than 200 locations comprising more than 6,000 professionals) Services Offered • Cross-border and International Tax Consulting • Foreign Investment Structures (Inbound/Outbound) • Cross Border and Domestic Tax Compliance • Expatriate Taxation • Corporate Management • International Audit and Financial Statement Reviews

25. Focus on main European and Latin American markets • 1998 - Mexican Business Advisory Portal established in Dallas • Contact person: Manuel Rajunov, Managing Partner, International Tax Services (214-561-2358 or mrajunov@gt.com) • 2001 - Brazilian Business Advisory Portal (Miami) • 2002 – European Business Advisory Portal • established in Dallas • Contact person: Manu Lutz, Director of European Business Services (214-561-2334 or manuel.lutz@gt.com)

26. Tax Concerns for US Companies in Brazil Grant Thornton LLP – Miami Brazilian Business Advisory Portal 777 Brickell Avenue Suite 1100 Miami, FL, 33131, FL, USA Lionel Nobre – Director E-mail: lnobre@gt.com Tel: 305-341-8045 Fax: 305-341-8099 Note that the information provided herein should not be relied upon as professional tax advice. Therefore, we encourage you to consult us directly with any issues or questions.

27. THANK YOU !!