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Benjamin Reid
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+1 305 979 4510
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Chantal Cantin
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Miami,
10
January
2017

The Brazilian Amnesty – what comes next?

Maitland’s LatAm team looks at the relative success or failure of Brazil’s Voluntary Disclosure Program and sets forth some practical options for Brazilians to regularize their offshore assets post-amnesty.

On 11 March 2016, the Brazilian revenue authorities (Receita Federal Brasileira - RFB) issued the guidelines regulating Federal Law No 13 254 in relation to the Special Regime of Taxation and Foreign Currency Regularization (Regime Especial de Regularização Cambial e Tributária), known locally as RERCT.

The RERCT was the much awaited response many had expected ever since Brazil, following Chile and Mexico, had opened discussions around membership with the Organization of Economic Co-operation and Development (OECD). It was the inevitable response to growing global tax transparency encapsulated in the United States’ Foreign Account Tax Compliance Act (FATCA) and the OECD’s Common Reporting Standard (CRS).

What we learned

As with similar Voluntarhat we learnedy Disclosure Programs that have been implemented across Latin America, Brazil’s RERCT allowed individuals with resources (goods or assets of a licit origin) shipped or maintained abroad either nondeclared or declared with some omission or error, to be declared to the Brazilian tax authorities through the payment of 15% income tax based on the declared amount, together with a 15% fine based on the total value of the resources held abroad as of 31 December2014. The date proposed for Brazilians to adhere to the amnesty was set as 31 October 2016.

Plagued by a history of unmaterialized governmental promises, nightmares of the events pertaining to the country’s previous impeached president – Fernando Collor de Melo who in the 1990s froze Brazilians assets while permitting a daily allowance of around $50 – and an economy stuck in no-man’s-land, it is easy to understand why the majority of Brazilians with undeclared capital hesitated and elected to watch the events unravel leading up to and following the impeachment of former President Dilma Rouseff on 31 August 2016. And, while the appointment of Rouseff’s vice president Michael Temer was generally welcomed, rumors that the government looked to make fundamental changes to the RECRT legislation did little to appease potential amnesty applicants and only increased anxiety. On one side, individuals were presented with the option of adhering to legislation they were not 100% sure they trusted and potential changes could end up in them facing criminal charges. However, on the flip side, doing nothing was quickly becoming impossible. As FATCA and CRS sank their teeth deep into the throat of North American and European financial institutions, the old approach of turning a blind eye to tax compliance was quickly replaced with requests for self-certification forms and letters from independent lawyers and tax advisors confirming that capital was declared. In summary, individuals with non-declared capital were stuck between a rock and a hard place.

On 1 November 2016 the journal Valor Economico cited that the total amount the RFB had received in fines and taxes was approximately R$50.9 billion (USD$15.6 billion), equating to a total of R$169.9 billion (USD$52.39 billion) from assets flowing back into the ‘regulated’ financial system. While many questioned why the final numbers were so far off the $200-400 billion that had been widely expected, it is somewhat paradoxical that Brazil’s transitory government - which inherited the reins of a country whose debt-to-GDP ratio was at the highest in over 10 years and whose main objective was to attract as much additional capital as possible - simply added more uncertainty and again delivered too little, too late.

On speaking to local partners, the feedback we at Maitland received was consistent – ‘Brazilians wanted to adhere, that decision had been made. The problem many faced was that the government left it too late to install confidence in the regime and therefore, in the end a large number of applicants simply didn’t have enough time.’

The outcome was definitely a lesson learnt by all. Fortunately, it appears the government has learnt from the mistakes made and looks set to open a second window for those who could not make the first one. The issue however if and when this does happen is, will the terms be as attractive and will the RFB be able to get their hands on the remaining pot of gold that sits at the end of the rainbow?

“In other words, those who have applied under RERCT do not necessarily need to repatriate the resources that are the object of the regularization, and may use international structures – varied and flexible – to find the right destination and one that best suits their interests for this portion of their assets.”

Repatriation versus regularization

One of the most common misconceptions of those viewing the Brazilian RERCT from abroad is around what happens to the assets that fall under the RERCT. They should note that repatriation is only one option, not compulsory, and it is acceptable to regularize offshore structures that offer asset protection; succession planning; tax planning; as well as improved profitability, risk segregation and investments diversification by reallocating resources in different types of investments, including a diverse range of offshore investment funds.

In other words, those who have applied under RERCT do not necessarily need to repatriate the resources that are the object of the regularization, and may use international structures – varied and flexible – to find the right destination and one that best suits their interests for this portion of their assets.

What to do?

The optimal jurisdiction and structure for holding assets offshore will always be determined based on the specific case. Unfortunately, nowadays ‘one size fits all’ rarely applies especially as the world gets increasingly more complicated. For those individuals who have adhered to the RERCT, the next step is to have a comprehensive analysis of their needs and objectives which will most probably be followed by some form of restructuring.

For those clients who chose the ‘wait and see’ approach, the PIC / HoldCo is a good and cost-efficient solution provided proper governance is applied. For those clients who are truly concerned about succession, the centuries old Anglo-Saxon trust allows for a tried and tested solution. And for those who wish to avoid any chance of assimilation, the investment fund does present a strong case.

Finally, it is very important to note that tax planning must always follow ethical and moral parameters. We would like to emphasize that Maitland is available to help you better understand, build, and administrate international structures. Our specialized teams are located in 12 different countries; we pride ourselves on being jurisdiction agnostic and we look to provide our clients with the solution that works for them in the jurisdiction of their choice.

 

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The information and opinions herein are for information purposes only. They are not intended to constitute legal or other professional advice, and should not be relied upon as such or treated as a substitute for specific advice relevant to particular circumstances. Maitland accepts no responsibility for any errors, omissions or misleading statements in this publication, or for any loss which might arise from reliance on the material. No mention of any organisation, company or individual, whether on these pages or not, shall imply any approval or warranty as to the standing and capability of any such organisations, companies or individuals on the part of Maitland.