São Paulo – Tax relief measures put in place by government can help improve cash flow for Brazilian businesses hit by the Covid-19 pandemic. Several federal taxes and some social security payments have been deferred, and the Tax on Financial Operations has been in many cases lifted.
Below is an interview with Crespo Gregio Advogados law firm partners Fernando Crespo P. Viña and Fabio Gregio Barbosa. According to them, a tax rule applicable to major exchange rate fluctuations can benefit exporting companies. However, adapting to the new rules in a complex legal framework requires skilled advisory, the attorneys say.
ANBA – The administration has announced a string of tax relief measures to help businesses through the Covid-19 crisis. Which do you consider to be the most impactful and relevant measures for Brazilian businesses?
Crespo Gregio Advogados – The administration is adopting measures designed to equalize the damages incurred by taxpayers, while considering the need to collect taxes. Key measures so far concern the deferral of multiple federal taxes, especially those levied upon revenue and payroll, which weigh the most on legal entities during the crisis. Debt instalment payments have also been postponed, and the IOF is not being levied on several operations, including loans.
Does any of the tax relief measures announced during the pandemic concern exports?
The impact of these measures is widespread, and therefore it does relate to exports, albeit indirectly. For example, exporters’ payroll contributions have been postponed, which is a relief. However, there is one measure that can help exporters, even though it isn’t recent. There is a rule regarding exchange rate fluctuations (Normative Instruction 1.079/2010) that provides that in the event of major upward or downward fluctuations in exchange rate – of over 10% –, taxpayers can choose to report their revenues under the cash system, rather than on the usual accrual basis (paid on the month of operation). Therefore, exporters can resort to this in case the pandemic led to exchange rate fluctuations.
And are some of the tax relief measures put in place during the pandemic directly or indirectly beneficial to micro and small businesses?
Yes. These businesses’ tax payments have been deferred and special lines of credit have been made available, as per each company’s net equity or revenue in previous years.
Does Crespo Gregio Advogados advise companies to rely on these tax deferrals? Will that not eventually lead to cash flow problems? Is it best for a company to resort to that only in case it has no cash available right now?
Taxpayers must consider the actual need to utilize these benefits, which are intended to protect companies’ activities and consequently the national economy. Since the pandemic has created many problems to taxpayers, including delinquency and weak cash flow, we advise them to delay their tax payments responsibly, while noting that they must be paid at a later date in observance with the rules currently in effect. Not many taxpayers have seen a steady stream of revenue or an increase thereof during the crisis, and not many are problem-free.
Since cash flow issues are for the most part inevitable, we must also note that several bills have been presented to create an instalment payments program, whereby taxes could be paid with benefits and increased flexibility. However, none of those bills have passed yet.
In what way are these tax deferrals and exemptions helping enterprises? Do you believe this is helping companies’ finances?
The pandemic had an impact on most taxpayers, who had no time to brace themselves for the deleterious effects stemming from Covid-19. Some other taxpayers had invested large sums on expansion, research and development of new endeavors, which led to great expectations of returns in the months or years ahead.
Thus, we see these measures in a positive light, because they bring relief to taxpayers who lack the necessary cash to honor all their obligations, including financial, contractual, labor- and tax-related ones. It is true that these measures could be on a bigger scale and that taxes could have been lowered rather than just postponed, but anyway we believe this is a positive outcome.
Do you believe that businesses are actually using these measures? And if not, what is missing?
As far as we have seen, most companies are making use of the measures put in place by the government. However, tax laws are very complex, and any changes thereto involve that complexity. There are also several taxes that share the same name, yet are very different amongst themselves when it comes to the strictures of legislation, with distinct legal provisions and rules.
A case in point is “social security payments.” Many such payments, including employers’ shares, tax breaks, payments by agricultural companies, the amount that is deposited into employees’ accounts, individual taxpayers, environmental labor hazards (RAT) and the S System (payments unto institutions such as Senai and Sesi). However, not all of these payments have been deferred, despite umbrella announcements being made via multiple communication outlets.
One must look intently at the tax postponement rules to check which have been really postponed. When it comes to social security, S System payments haven’t been extended. Only employer contributions, although both are commonly referred to as social security contributions.
Taxpayers lacking access to an experienced legal team or specialized advisory may not be able to correctly apply the benefits, and they will be amenable to fines and interest on delayed payments of taxes that haven’t really been deferred.
Which labor-related measures adopted by the government do you consider to be the most impactful for businesses?
In the tax realm, there are several taxes that are levied on payroll. Payments of some of those have been postponted, including 20% payments by employees, the RAT, the tax breaks and contributions by agricultural companies. Tax brackets have also been reduced for the Sesi, Senai, Sest, Senat, Sesc, Senac and others. Payroll taxes are the object of major debate, and this will surely be the case once tax reform project discussions resume.
What are the major bottlenecks or issues faced by businesses amid the pandemic from a legal, tax and finance perspective? And how can businesses address them?
A high tax burden has been in place way earlier than the Covid-19 pandemic. However, since companies are seeking to cut costs wherever they can, tax costs have become more relevant. In the past, tax-related costs used to often be overlooked. An executive in a given business who used to try to cut manufacturing costs has realized that some of those costs are taxes, and that they can cut those costs in a safe way.
We have seen demand go up for services that seek to help companies achieve tax compliance, because many taxes are no longer required or can be reduced, either through the courts, or through administrative action with recognition from the Federal Revenue.
Adapting companies’ routines to best tax practices certainly cut costs and adds competitiveness. Unfortunately, this adaptation stumbles upon the complexity of law, and therefore not all taxpayers embrace it. This requires a skilled legal team and advisory from seasoned professionals who keep track of market movements, the legislation, the Federal Revenue, and the administrative and legal courts.
Did Crespo Gregio get many requests from new and old clients stemming from tax and other pandemic-related issues? What do most of these requests relate to?
Yes, we have seen demand soar during this time. Most are looking for tax compliance. Our clients are looking more and more to comply with the legislation, and particularly with what legal and administrative authorities say.
This is so because there are tax rules that require certain charges, which are often at odds with what the Federal Revenue says, in terms of such obligations not being required any further. In other words, the law is unchanged, and yet these charges will no longer be levied. This information is not implemented in an automatic way.
Or else in the case of credits, like PIS/Cofins credits, where normative instructions which put forth the expenditures and items liable to credit are very restrictive, however the Federal Revenue has come forward to admit the possibility of accrual of credits which are vetoed under normative instructions.
Sadly, implementation of these tax improvements is not automatic, and it depends on legal action by corporate lawyers. This is exactly what we are being sought for.
Do you have any recommendations or advice to companies, anything they should watch out for or consider when it comes to dealing with tax and legal issues amid the pandemic?
We advise them to always seek specialized, reliable council. Although there are many legal avenues to reducing tax burden, there are always professionals who make mistakes that will not yield the expected advantages.
Can you tell me in a few words what kind of services does Crespo Gregio offer, and what is the firm’s history?
Basically, the firm looks out for the interests of legal entities in all tax law-related issues, including consulting and disputes. In short, we are a highly specialized firm whose sole focus is on tax laws. Our professionals and consultants have over 10 years’ experience in consulting and lawsuits. We work to translate the Brazilian legal environment to the benefit of our clients.
Our professionals boast a unique view of the market, with an emphasis on Corporate Law, and their goal is to provide intelligent, up-to-date legal alternatives with speed, rapport, ethics and transparency that will help grow our clients’ businesses.
We are also keeping track of the highly computerized scenario. To that end we rely on “robot” systems to help with office routines, thereby cutting costs and fees.
Translated by Gabriel Pomerancblum
