This article is aimed at assisting Brazilian tax residents, mainly individuals, interested in learning more about the current tax and currency exchange voluntary disclosure and amnesty program (RERCT) established in Law No. 13,254/2016 (the Repatriation Law). We shall highlight that RERCT also applies to legal entities, including nonprofit entities in Brazil which may hold foreign assets without any prior disclosure to the Brazilian authorities,. Taxpayers may want to take this window of opportunity to become compliant.
Earlier this year, we reported on the passage of the Repatriation Law. In this alert, we report on key aspects of the instructions for Brazilian taxpayers interested in pursuing the disclosure and amnesty program under the regulations newly issued by the Brazilian federal tax authorities (IN RFB No. 1,627/2016).
To enroll in RERCT, taxpayers or their attorneys must complete and submit a special tax return (the so-called DERCAT), between April 4, 2016 and October 31, 2016 , by accessing the Federal Revenue Service’s Virtual Service Center (e-CAC), which requires digital certification. Note that once a DERCAT has been submitted, it is possible to amend it during that period. According to IN RFB No. 1,627/2016, it is no longer necessary to send a physical copy of the DERCAT to the Brazilian Central Bank (BCB).
For the enrollment in RERCT to take effect, the taxpayer has until October 31, 2016 to submit the DERCAT along with full payment of income tax owed on previously unreported assets plus penalty charges. For having failed to pay tax on unreported assets , the taxpayer will pay the basic 15 percent tax rate plus an additional 100 percent of the tax that was owed – that is, the total penalty for unreported assets is calculated at a rate of 30 percent. In addition, such taxpayers must also file or amend their individual income tax returns for calendar years 2014 and 2015 or any corporate bookkeeping for the calendar year 2015, as well as submit to the BCB a return reporting on Brazilian capital/assets abroad.
The amount of income tax and penalty due must be calculated using the US-Brazil exchange rate as of December 31, 2014: R$2.6562: US$1.
The DERCAT should identify the taxpayer making the disclosure and the assets that are being voluntarily disclosed. It should set out the assets’ corresponding value in Brazilian Reais and in foreign currency. In addition, the DERCAT must describe the actions performed by the taxpayer in case the relevant assets have been disposed of or transferred after December 31, 2014.
In the DERCAT, taxpayers or their attorneys should also indicate that:
- all assets, tangible and intangible, being reported do have a lawful origin
- all information submitted in the DERCAT is accurate
- there is no conviction in criminal proceedings, even if not definitive, regarding crimes listed in Section 5, Paragraph 1, of the Repatriation Law
- the taxpayer was a tax resident of Brazil on December 31, 2014
- the taxpayer does not hold a high- level or elected government job, position or function, and neither does the respective spouses and relatives (consanguineous or kin), up to the second degree or by adoption in these conditions (on January 13, 2016).
Brazil’s tax law makes it necessary to report any assets held in trusts and foundations of any kind. Regarding this requirement, Section 9 of the IN RFB No. 1,627/2016 provides that the beneficiary is responsible for filing a DERCAT and for the fulfillment of other ancillary obligations. The settlor of the trust or foundation that is not included as a beneficiary, in turn, can file a DERCAT, describing practiced behaviors that fit the crimes stated in Section 5, Paragraph 1 of Law No. 13,254/16, as well as the resources, assets and rights transferred to the trust or to the foundation.
IN RFB No. 1,627/2016 also clarifies that, for no longer existing assets or for assets which no longer belonged to the taxpayer on December 31, 2014, the value set on those assets must be estimated as of December 31, 2014. Include proper documentation describing the asset or the operation related to it.
In cases of the estate of a deceased person, the DERCAT should also indicate the federal tax ID (CPF) of the widow(er) and the name/CPF of the administrator of the estate. Please note that Section 4, paragraph 2 of IN RFB No. 1,627/2016 does not restrict “estates whose division was initiated on December 31, 2014” from enrolling in the amnesty – unlike Section 1, paragraph 4 of the Repatriation Law.
If there is an interposed person (title holder) hiding the actual owner (beneficial owner) of the foreign assets, there are specific provision on how to make such disclosures. In case of (i) shareholdings; (ii) assets and rights owned in a condominium; (iii) joint bank accounts; and (iv) assets and rights of the same family unit, each party involved must, in the DERCAT, indicate his/her corresponding ownership share of such assets, proportionally.
With regard to the forgiveness of tax liabilities directly related to the assets that are being voluntarily disclosed, IN RFB No. 1,627/2016 states that such forgiveness does not apply to tax liabilities already paid or assessed but unpaid until January 14, 2016. However, we note that this restriction has no legal basis in the Repatriation Law and could be challenged in court.
RERCT’s benefits cover the amount voluntarily disclosed and used as a basis for calculating income tax. Besides, it also implies forgiveness of tax liabilities arising from non-compliance with ancillary obligations and a 100 percent reduction of the remaining fines and legal charges directly related to that amount, supported by proper and appropriate documentation.
IN RFB No. 1,627/2016 establishes that the taxpayer must keep in good care and order the documentation related to the program – specifying such documents in the case of trusts and off-shore companies and similar entities – for five years from the final date on which the DERCAT is delivered (i.e., October 31, 2016).
Finally, IN RFB No. 1,627/2016 details situations in which voluntary disclosure will be deemed ineffective and, therefore, the taxpayer will be excluded from RERCT’s amnesty. The regulation allows such taxpayers to file an appeal within 10 days of being notified of the rejection. The Superintendent of RFB with jurisdiction over the taxpayer’s tax domicile will decide the ultimate outcome of the appeal.
The Repatriation Law and IN RFB No. 1,627/2016 contain controversial provisions; in addition, despite the information-sharing prohibition, the benefits of RERCT do not eliminate possible tax assessments by state and municipal authorities. In any event, in our view, the program is a good opportunity for taxpayers to regularize any unreported assets, tangibles and intangibles held abroad.
Finally, it is worth mentioning that there is no obligation to actually repatriate any funds that you may report through the program.