Since legislation was first introduced in 1995, the Brazilian tax authorities have been developing their legislation in relation to the taxation of profits earned by Brazilian subsidiaries and associated companies abroad.
Law 9249 of 1995, which aimed to tax the profits of Brazilian subsidiaries abroad, was amended by Law 9532 of 1997 to reflect that profits earned by subsidiary/associated companies would be liable to taxation in Brazil when such profits were considered "available" to the Brazilian company. The concept of availability included the declaration of dividends and the capitalization of profits by the Brazilian parent. In 1999 this criterion of "availability" was expanded to include situations where a subsidiary with accumulated profits makes a loan to its parent company.
In an effort to close perceived loopholes in this legislation, Provisional Measure no 2158-34 of July 27 2001 now provides that the profits of a subsidiary/associated company will be considered "available" to the Brazilian company on the date of the balance sheet in which such profits arise. Profits for the year ending December 31 2001 will be considered "available" on December 31 2002.
While the new rules are clearly aimed at companies with subsidiaries located in so-called tax haven jurisdictions, they will apply to all subsidiary/associated companies wherever domiciled. A credit will remain available against Brazilian taxation for the taxation paid abroad.
Treatment of exchange gains on assets and liabilities in foreign currency
Deliberation no 404 of September 27 2001 issued by the Brazilian Stock Exchange (CVM) provides that exchange variations in relation to assets and liabilities denominated in foreign currencies should be taken to profit and loss account for the period in which the variation occurs.
Where however the exchange variations relate to the financing of properties under construction or long term work-in-progress, exchange variations should be separately identified and classified as part of the asset which gave rise to the same. Open capital companies should evaluate the necessity of making a provision to adjust the value of assets subject to exchange variation to the lower of their market or net realizable value.
Financial statements should contain a note of the amount of assets and liabilities denominated in foreign currency, the risks involved and the policies and financial instruments adopted to reduce such risks.
Privatization of Brazilian state banks
ABN Amro Real, the fifth largest private financial institution in the country, purchased the Bank of the State of Paraíba – Paraiban - on November 9. The sale was settled for R$ 76 million ($30 million) at an auction in which ABN was the only foreign bank. Paraiban's purchase does not represent an immediate attempt to reach a top position in the country's ranking, rather it seems to be an indication of ABN's intention to establish its presence in Brazil. This is ABN's second purchase of a Brazilian state bank, the first having occurred in 1998 when ABN bought the Bank of the State of Pernambuco – Bandepe. Now operating throughout Paraíba, ABN has announced its intention to grant more credit to the local entrepreneur as it seeks to achieve a larger clientele in the state.
After the sale of Paraiban, six other state banks are to be sold by the end of April 2002. The Bank of the State of Goias (BEG) will be auctioned in December at a minimum value of R$ 300.7 million. Following BEG, the banks of the states of Amazonas (BEA), Maranhão (BEM), Piauí, Santa Catarina (Besc) and Ceará (BEC), are to be privatized, in that order.
Eliana Maria Filippozzi