REIDI: A Special Regime with Federal Tax Incentives for the Development of Infra-Structure in Brazil
by José Rubens Vivian Scharlack
(adapted from article published by the author at the Belgalux’s Yearbook 2010)
Projects for Infra-Structure
Having been selected as the country that will host both 2014’s FIFA’s World Cup and 2016’s Olympic Games, Brazil has become a land of opportunities for investments in infra-structure, not only for the games but also, and mainly, to sustain the boost of the Brazilian domestic economy and foreign trade.
Anticipating this scenario, the Brazilian Federal Government has launched, in 2007, the Growth Acceleration Program (Programa de Aceleração do Crescimento – PAC), which created significant mechanisms that aim to attract investments to the field of infra-structure. The Special Incentives Regime for the Development of Infra-Structure (Regime Especial de Incentivos para o Desenvolvimento da Infra-Estrutura – REIDI) is one of these mechanisms.
Are entitled to file for admission on the REIDI legal entities that own publicly approved projects on the following areas:
• Basic Sanitation:
Before entering into the tax incentives themselves, it is important to remember which federal taxes are levied upon the income and profits of legal entities in Brazil. Companies that have quotaholders or shareholders outside Brazil can opt either for the pretax or the presumed profit systems.
Under the pretax profit system, the company’s net profit adjusted by additions and exclusions determined by the tax legislation is the calculation basis for the Corporate Income Tax (Imposto de Renda Pessoa Jurídica – IRPJ) and for the Social Contribution on the Net Profit (Contribuição Social sobre o Lucro Líquido – CSLL). The legislation allows companies to offset losses incurred in previous years with up to 30% (thirty percent) of the taxable profit of the current year. Also, for companies that opt for this system, two taxes are levied upon the company’s gross income: the Contribution for the Program of Social Integration (Contribuição ao Programa de Integração Social – PIS), at a rate of 1.65% (one point sixty-five percent), and the Contribution for the Funding of Social Security (Contribuição para o Financiamento da Seguridade Social – COFINS), at a rate of 7.6% (seven point six percent). The taxpayer is allowed to use credits of PIS and COFINS related to costs and expenses with inputs, purchases, services, rentals, energy and others foreseen at the legislation so that the final amount of PIS and COFINS to be paid can be reduced.
On the other hand, under the presumed profit system, a percentage of the company’s gross income is the calculation basis for the IRPJ and the CSLL. There is no loss-offsetting under this system. Also the PIS and COFINS taxes are levied upon the company’s gross income, but at lower rates (total: 3.65%), since there is no credit-offsetting under this system.
Also, when importing products, companies in Brazil have to comply with the following import duties: Import Tax (II), Excise Tax (IPI), Sales Tax (ICMS) and also with the PIS and COFINS, calculated upon the import price, plus costs with insurance, freight and customs duties. When importing services, the taxes levied are II, IPI, PIS, COFINS and the Service Tax (ISS).
The legal entity admitted on the REIDI (the “REIDI beneficiary”) benefits from PIS and COFINS suspension on the following transactions:
• local purchase or import of new machines, appliances, instruments, equipments and construction materials for usage or incorporation in works of infra-structure;
• local purchase or import of services destined to works of infra-structure;
• rental of machines, appliances, instruments and equipments for usage in works of infra-structure.
This means that, regarding, for example, local sales made to the REIDI beneficiary, the gross income of the seller will not be triggered by the PIS and COFINS taxation. These taxes will be suspended and will only be triggered if the buyer (that is, the REIDI beneficiary) fails to use or incorporate said goods or services in the work of infra-structure, in which case the buyer will be the one responsible for paying the PIS and COFINS once suspended, plus fine and interests. On the other hand, once the goods or services are used or incorporated into the work of infra-structure, the PIS and COFINS suspension automatically converts into zero rate and therefore no PIS and COFINS shall ever be charged upon said purchases. For imports, the situation is basically the same.
The legislation also provides for co-admission on the REIDI for companies that, despite not being the owner of the project, have signed, with the owner, agreements for the rendering of construction services related to the work of infra-structure (the “co-admitted”). Therefore, not only the REIDI beneficiary but also the co-admitted can benefit from the PIS and COFINS suspension on local purchases and imports.
A third advantage of the REIDI is that it is possible for the beneficiary (and also for the co-admitted) not to apply the PIS and COFINS suspension on one or more particular purchases. This is particularly useful for situations in which the REIDI beneficiary (or the co-admitted) is taxed under the pretax profit system (which, as informed, allows a PIS and COFINS credit of 9,25% upon the amount of the purchase) and the supplier is taxed under the presumed profit system (under which the total rate of PIS and COFINS is 3,65% upon the sales price). Since purchases made with PIS and COFINS suspensions or zero rate do not grant credit to the buyer, being able not to apply the REIDI benefits on purchases made from companies taxed under the presumed profit system may even create value for the REIDI beneficiary (or to the co-admitted)!
Therefore, the REIDI is an excellent opportunity to annul – or even to create value from – the tax impact of PIS and COFINS on the cost of companies interested in investing in Brazilian infra-structure. It is important, to stress, however, that these tax incentives will only apply for transactions that take place within 5 (five) years as of the admission of the legal entity to the REIDI.
Companies and Projects Admitted
The legislation is very specific as to the conditions that both the legal entity needs to meet, one of them being the owner of an approved infra-structure project and the other one having no demandable debt before the federal tax authorities. The Ministry of Transports, the Ministry of Mines and Energy and the Ministry of Social Integration are the ones responsible for the examination and approval of the projects on the respective areas. They issue their own technical rules regarding the filing of the projects and they also publish the names and corporate identification of the legal entities that obtain the approvals. Once the project is approved by the Ministry, the company can file for admission on the REIDI before the Brazilian Federal Revenue Service (Receita Federal do Brasil – RFB).
So far, the RFB accounts for 275 (two hundred and seventy-five) infra-structure projects admitted to the REIDI, 251 (two hundred and fifty-one) of them in the energy field and 19 in the field of transports.