IT Sector Receives Tax Incentives

Law 10,176 has been enacted which regulates the capacity and competitiveness of the IT sector. The law establishes a series of tax incentives to stimulate development of the computer and software-related market. Among the incentives is a tax reduction on manufactured IT and computer goods, which is granted upon investment of a percentage of a company's gross income into research and development.

Thus, companies involved in the development and manufacture of IT and computer goods may enjoy the following benefits, provided that they invest in research and development:

• a 95% reduction of tax on manufactured IT and computer goods until December 31 2001 followed by further annual reductions until 2009;

• the maintenance and use of the credit of the tax on manufactured goods that relates to raw material, intermediary products and packing material; and

• accelerated undervaluing.

Two regulatory decrees have been issued in order for Law 10,176 to be properly implemented.

Decree 3,801 has been issued in order to specify which products are to be considered as IT goods. Among the products listed, videos and mobile telephones are particularly notable. The issuance of this list has proved controversial due to the fact that it is doubtful whether some of the listed products should be classified as IT goods. It is recommended that companies wishing to benefit from the tax reductions seek legal advice.

Decree 3,800 has been issued in order to regulate the IT-related tax deductions. It stipulates the requirements that must be met by IT companies in order for them to become entitled to the tax benefits (applicable over the taxation on industrialized products) on the products listed in Decree 3,801.

The most significant requirement is the presentation of a research and development investment plan before the applicable authorities. After the presentation, projects are subject to approval by the Ministry of Science and Technology.

Decree 3,800 also states that all companies must comply with the Basic Productive Proceeding Rule in order to present their projects. This rule is the amalgamation of specific industrial proceedings that are considered necessary in order to qualify an IT product as an industrialized IT product.

The biggest issue surrounding this matter is that the proceeding is not pre-established. Under Decree 3,800 its establishment will be made on a case-by-case basis and will depend on a request from the interested company to the relevant administration. The Ministry of Science and Technology and the Ministry of Development, Industry and Foreign Commerce will jointly examine requests.

Moreover, research and development investment is limited to a minimum of 5% of the company's gross income. Out of this 5%, a minimum of 2.3% must be invested in accordance with the various precise dispositions of the new law.

For further information on this topic please contact Maristela Basso at Tozzini, Freire, Teixeira e Silva Advogados by telephone (+55 11 232 2100) or by fax (+55 11 232 3100) or by e-mail ([email protected]).