Evaluación final de la unidad

A few days earlier, Renata had asked her attorneys in Brazil to explain the basic tax rules applicable to the investment she contemplated. She wanted to understand both the taxes payable at the entity level, and those payable in Brazil by individual investors on account of any cash distribution made to them from annual operations or from sale of the property, or as a result of any income recognized at the investor level. She also wanted to evaluate the types of entity most suitable from both a legal and tax perspective to hold and to operate the Lodge. In response, they sent her a memo setting forth the most basic elements. They advised her that tax law in Brazil was very complicated, and suggested that she not formalize any decisions about legal and tax issues until they had a chance to carefully and deliberately review the options together. Renata read the memo and tried to highlight the issues integral to her Cash Flow Analysis. She began with the taxes due at the entity level.

Income and Social Security Tax: Under Brazilian tax law, companies may elect to calculate Income Tax (IRPJ) and Social Security Tax (CSLL) liabilities using an Actual Profit Method or a Presumed Profit Method. The election is made annually. In both Methods, a Tax Rate of 25% in the case of IRPJ, and 9% in the case of CSLL, is multiplied by the company profits to determine the tax liability. The difference between the Actual and Presumed Profit Methods is that the former uses the actual profits of the company, whereas the later presumes that the profits are 32% of the gross revenues. Companies using the Actual Method follow Brazilian accounting rules, which include the right to reduce income by an allowable depreciation expense.

In the case of buildings, this is normally straight-line depreciation computed based on cost at 4%

per year⁸⁴.

Unemployment Insurance Tax and Welfare Tax: Companies that use the Presumed Method pay Unemployment Insurance Tax (PIS) at a rate of .65% of gross revenues, and Social Security and Welfare Tax (CONFINS) at a rate of 3% of gross revenues. Actual Method

companies pay these taxes at 1.65%, and 7.6%, of gross revenues respectively, but are allowed to

reduce the amount paid with tax credits generated by a variety of transactions that arise in the ordinary course of business⁸⁵.

Service Tax: Homebuilders and some other service companies pay Municipal Services Taxes (ISS) at a rate of, usually, 5% of gross revenues⁸⁶.

Property Taxes: Entities that own real estate must pay real estate tax. In the case of urban properties, the real estate tax (IPTU) is paid to the municipality. The tax is a percentage of appraised value of the real estate, and varies by municipality. In some cases, there are extra charges for real estate used in economic activities and/or for trash removal. In the case of rural properties, the tax (ITR) is paid to the federal government. The tax is a percentage of appraised value of the real estate. The tax rate varies with size and productivity of the property⁸⁷.

Property Transfer Taxes: Buyers of real estate pay transfer taxes (ITBI) to the municipality at a rate that varies, but is normally 2% of the sales price. Buyers are also responsible for paying a variety of registry fees which vary from one state to another.

Real Estate Sale: Taxes from the sale of real estate are normally 15% of the difference between the sales price and the depreciated cost basis of the real estate investment. The tax due on sale may vary according to the entity and elections involved. For example, real estate investment funds (FII) are exempt from taxes, and there are circumstances in which a real estate company under the Presumed Method may irrevocably elect a special tax regime in which the total of Income, PIS, Confins and CSLL is 7% of the gross income including sales revenue⁸⁸.

Figure 4-7: Summary of Taxes at Entity Level⁸⁹

At the investor level, taxes were somewhat more straightforward. Dividends paid from annual profits were not subject to tax in Brazil. There was however a tax on financial transfers leaving the country known as the Temporary Contribution on Financial Transfers (CPMF) tax, calculated as .38% of the funds withdrawn from the bank⁹⁰.

Capital Gain is taxed at the investor level to the extent that the funds remitted exceed those invested. The difference is taxed at 15%. The amount invested is considered the amount shown on the foreign investment registration filed with the Central Bank at the time of the investment, which registration is required by law. There is some debate as to whether the comparison of the amount invested and the amount remitted would be made in Brazilian or foreign currency⁹¹.

At this point, Renata felt she had the tax information pertinent to her DCF Analysis. She did not want to further consider options for legal entity and their implied taxes until she knew whether the investors liked the project economics. If so, she would explore these matters in

15% (or a 25%

greater detail, and also propose a deal structure, i.e., the relationship between her compensation and sharing of benefits and those of the investors. Right now, she felt that to do so would be premature.