Brazil vat: VAT deemed tax credit offset amnesty introduced

The Brazilian government enacted Provisional Measure No. 470/09 (PM 470) on 14 October 2009, which provides a tax amnesty program for tax liabilities related to the federal VAT (IPI) deemed tax credit taken on exports.

The IPI deemed credit on exports was created in 1969 as an incentive to increase the exports of Brazilian companies by allowing them to recognize a deemed tax credit equal to the amount of IPI levied throughout the production chain of manufactured products that were ultimately exported. The credits generally were used to offset other Brazilian federal tax liabilities. The IPI deemed credits expired in 1990 (this was confirmed in a recent decision by the Brazilian Supreme Court), so that no offset is allowed after that year, with the result that affected companies have to pay the taxes unpaid based on invalid IPI credits, along with interest and penalties.

According to the amnesty provided by PM 470, debts related to the offsetting of the deemed IPI tax credit may be paid in up to 12 monthly installments (the PM does not indicate a specific timeline for the installments, but the tax authorities are expected to issue further guidance), with considerable reductions in interest arrears and penalties, as follows:

- A 100% reduction in penalties (both self-assessed penalties and penalties assessed by the tax authorities);
- A 95% reduction in "isolated penalties";
- A 90% reduction in interest charges (short-term Brazilian interest (SELIC)); and
- A 100% reduction in legal charges.

Additionally, taxpayers will be able to offset principal, interest and penalties related to federal liabilities against their own tax losses (NOLs). The offset amounts can be determined by applying a 25% and 9% rate, respectively, to the income tax (IRPJ) and Social Contribution Net Profit (CSLL) on losses incurred up to the date PM 470 was published (i.e. 14 October), with no 30% limit as provided under current law. NOLs used as part of the amnesty program, however, will not be available for future offset.

The amnesty program created by PM 470 complements the amnesty created by Law No. 11,941 enacted in May 2009 for specific liabilities related to the IPI deemed tax credit, and affected taxpayers should consider using PM 470, which offers more attractive benefits.

The deadline for submitting an application for the new amnesty program is 30 November 2009, the date applicable for the previous amnesty.