By David Roberto R. Soares da Silva and Felipe Pereira Louzada
In an increasingly globalized world, Brazil proves that workers’ global mobilization is also a reality in emerging countries. But globalization has also added complexity when it comes to tax reporting by expatriates leaving overseas, and Brazil is no different.
According to the 2020 Executive Summary of the Observatory of International Migration (OBMigra), a body within Brazil’s Ministry of Justice and Public Security, the number of immigrant workers in the Brazilian labor market was around 115,000 in 2019. Among these registered immigrants, we highlight those who arrive as expatriates, professionals designated by their companies to assume strategic positions in branches worldwide.
According to the OBMigra’s 2020 Executive Summary, 19% more visas were issued for management positions in 2019 than in 2018 and 22% more visas for technical jobs (engineers, IT professionals, accountants, and others).
Preliminary data for 2020 shows that the Covid-19 pandemic partly affected the number of expatriates in Brazil. Nothing that shows a drop in confidence of foreign companies in the emerging potential of the Brazilian economy, but another clear sign that foreign companies sought to repatriate their employees during the pandemic so that they could be close to their families during this period.
Although Brazil ranks as one of the leading destinations for expatriates among countries with an emerging economy, its numbers are still far from the world’s largest economies. Often, research with expatriates shows that Brazilian urban violence, strict labor legislation, the country’s high bureaucratic degree, and the intricate tax system depicted overseas are reasons that keep these workers away from Brazil.
Regarding the Brazilian tax system’s complexity, surveys carried out with expatriates by the most significant global consultancies (E&Y, KPMG, PwC, Deloitte, and Andersen) show the expatriates’ concern in the last ten years has not changed. Instead, the answers are all in the sense that it is not very clear how and when they are paying taxes, how and why they must declare income and assets held outside Brazil, and some concerns over data privacy and confidentiality.
Besides their concerns, globalization has created opportunities for workers with transnational activities, who sometimes abuse the discrepancies and flaws in different tax systems to reduce or suppress their taxes and mis- or underreport assets to tax authorities. Although abusive tax planning by individuals is not the predominant factor in the discussions on an international treaty to exchange information on tax matters, several countries began to suffer from these practices, especially after the crisis of 2008. Therefore, considering the importance of tax revenues to the welfare state and public policies, the Organisation for Economic Cooperation and Development (OECD), in conjunction with the G20 countries, designed the Base Erosion and Profit Shifting (BEPS) initiative. It is an action plan with fifteen guidelines to be implemented by governments to harmonize and bring transparency to tax practices and avoid tax bases’ artificial displacement.
Anticipating the discussions raised during the International Conventions, in 2014, the United States of America announced the Foreign Account Tax Compliance Act (FATCA), the first international treaty in history for exchanging financial information on a global scale.
Under FATCA, all countries hosting U.S. citizens must provide their tax information, including relevant bank information such as balances, income, and transactions, along with details on companies these citizens hold an interest in.
In Brazil, FATCA entered into force in September 2015. According to a Federal Revenue Department’s (RFB) report of that year, FATCA enabled to identify U.S-source income associated with 25,280 Brazilian residents, 22,736 individuals, and 2,544 legal entities, the sum of which exceeded BRL 1 billion. In the first processing phase of FATCA data, the RFB selected 915 taxpayers of greater relevance for further analyzing their tax regularity. Of the 915 chosen taxpayers, only 277 (30.2%) had declared having assets or income in the United States. The RFB notified the remainder of 638 taxpayers to clarify why they did not report U.S.-source assets and income in their income tax returns.
Although not explicitly provided for in BEPS, at the end of 2015, the OECD released the Common Reporting Standard (CRS), its model report that would facilitate the multilateral exchange of information on tax matters, in line with the BEPS objectives.
Among the 110 signatory jurisdictions to the OECD Convention are some known low-tax jurisdictions, such as Andorra, the Bahamas, the British Virgin Islands, the Cayman Islands, Liechtenstein, and Panama.
The exchange of information under the CRS is automatic and standardized. In Brazil, CRS entered into force in September 2018, enabling Brazil to receive foreign financial information of persons domiciled in Brazil for tax purposes, regardless of nationality or visa.
The information received includes complete identification of the holder, existing balances, amounts credited (interest, dividends, and other credits) to bank accounts maintained abroad and through foreign companies or fiduciary structures.
Brazilian law specifies that the incorrect or misreporting of assets held and income earned abroad to the RFB, and the Central Bank may result in the assessment of income tax and fines, not to mention criminal charges.
Unreported foreign assets and income may be subjected to a tax of up to 27.5%, tax penalties of up to 150% plus interest, civil penalties as a percentage of assets held abroad, and criminal charges for tax evasion, currency evasion, and money laundering. Another adverse consequence may include the legal impediment to acting as an officer or director of the Brazilian company in case of a criminal conviction.
This new scenario of transparency and automatic exchange of information globally adds more complexity to compliance practices. In addition, mandatory reporting requires appropriate care and attention to avoid adverse tax, labor, and criminal consequences to expatriates residing in Brazil.
The RFB has one of the most advanced tax monitoring systems in the world, which enables it to crosscheck information electronically from various sources like banks, social security, credit card companies, health plan operators, notaries, realtors, etc. And now, it has CRS to crosscheck foreign financial information. As a new reporting season approaches (February to April), multinational companies operating in Brazil should take the opportunity to review their tax compliance policies to ensure their expatriates strictly comply with local laws and avoid unnecessary exposure and risks. Inappropriate or inaccurate reporting to the RFB may lead to risks not worth taking.
David Roberto R. Soares da Silva, is an expert in tax, estate and succession planning, founding partner of Battella, Lasmar & Silva Advogados, author of Brazil Tax Guide for Foreigners, and coauthor of Planejamento Patrimonial: Família, Sucessão e Impostos, and Tributação da Economia Digital no Brasil, published by Editora B18.
Felipe Pereira Louzada is an expert in personal income taxation, global mobility, and estate planning, and an associate Battella, Lasmar & Silva Advogados, and coauthor of Renda Variável: Tipos de investimentos, tributação e como declarar, published in Portuguese by Editora B18.
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