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25 February 2015
For decades, imports of aircraft and aircraft parts have been exempt from most taxes that apply to imports. Brazil has a plethora of import and import-related taxes (eg, an industrialised goods tax and a circulation of goods and services tax). Two taxes are specifically intended to fund government social programmes – the social integration programme (PIS) tax and the contribution to the financing of social security (COFINS) tax. The application of COFINS tax to the import of aircraft has recently changed.
The likely reason why aircraft imports have enjoyed beneficial treatment in the past is because the legislature has recognised the strategic importance of aviation to economic development. Brazil is geographically vast and many parts of the country rely heavily, and sometimes exclusively, on aviation services for their economic development and survival. Cognisant of the significant investments required to develop aviation services, the government has exempted the sector from most taxes that would otherwise apply to imports.
For example, the applicable rate of the tax over imports is zero for aircraft. In addition, the applicable rate of the industrialised goods tax is zero for most commercial aircraft imports. Until 2013, business aircraft could also be imported free of industrialised goods tax, although this tax currently applies to most business aircraft imports. The tax on the circulation of goods and services is state based; thus, the tax rate varies. However, in 2014 the Superior Court of Justice ruled that the tax on the circulation of goods and services is not due on leased goods, unless a lessee exercises its purchase option. Since most Brazilian aircraft finance transactions are based on leases, this tax rarely applies to imports and now will apply only where a lessee exercises its purchase option.
The application of COFINS tax on imports is based on a 2004 law which established a general tax rate of 7.65%. Under the original law, the tax rate applicable to rent for aircraft and aircraft parts and for maintenance, repair and assembly was zero. In 2004 the law was amended to broaden its scope to include all imports of aircraft and parts, regardless of whether they were imported under lease agreements or otherwise. In 2008 the law was further amended to include aircraft parts (to the extent that they were not already covered) imported for maintenance of aircraft and consumables (eg, fluids and paint). In short, the aviation sector has not paid COFINS tax since the 2004 law was introduced.
An April 2013 executive order (subsequently transformed into law) increased the COFINS tax rate applicable to imports by 1%. Initially, the new law triggered no changes in the treatment of aircraft imports. Airlines and other operators assumed that the change would not apply to aircraft or aircraft parts. Customs and tax inspectors seemed to agree, as no noticeable change was seen in the clearance of aircraft imports that had not paid the COFINS tax or any other import tax.
It is possible that the tax inspectors responsible for approving imports believed that the tax did not apply to aircraft. Another possibility (although less likely) is that it simply took time for the 2013 legislation to filter down to the inspectors responsible for assessing taxes on imports. Nonetheless, during the second half of 2014, some inspectors began applying COFINS tax to aircraft imports, stating that the applicable tax rate was 1% of the value of the import. However, customs and tax inspectors around the country have inconsistently applied the tax to new imports. This demonstrates a lack of common understanding concerning the application of the 2013 law.
The unexpected application of COFINS tax on aircraft imports caused considerable surprise to several airlines that imported aircraft during the second half of 2014. In addition, some airlines had sub-leased aircraft from their fleet to European carriers during Europe's high summer season. Although these sub-leases usually had terms of only a few months, when the aircraft returned to Brazil, the airlines suddenly faced assessments of 1% of the value of the returning aircraft, which had been outside the country only for a short time.
The Brazilian Airline Association filed a declaratory action in late 2014 seeking a judgment preventing the imposition of COFINS tax on the import of aircraft and aircraft parts. To date, no decision has been rendered. Consequently, to avoid this new tax burden, airlines have sought individual rulings against assessments of this tax. In most cases airlines have successfully avoided definitive payment; however, in some cases airlines have been required to post bonds equivalent to the applicable tax rate, which has placed a burden on cash flow.
There are several compelling reasons why COFINS tax should not apply to imports of aircraft. The main reason is that the 2013 law amended the general rules regarding the tax. Thus, the new tax rate should apply only to transactions to which the 7.65% tax rate already applied (thereby increasing the tax rate to 8.65%). The 1% increase should not apply to sectors that were already exempt, to encourage development or for other policy reasons. It is illogical to impose COFINS tax on the import of aircraft and aircraft parts when these transactions are still exempt from the other taxes. In addition, imposing COFINS tax on the import of aircraft and aircraft parts may violate Brazil's obligations under the General Agreement on Tariffs and Trade, as in certain circumstances it discriminates against imported goods.
Most industry participants expect the courts to clarify that COFINS tax does not apply to the import of aircraft or leased aircraft (and engines and parts). Precisely how and when the courts will reach this position is unclear. If the courts uphold the applicability of COFINS tax on aircraft imports, it will reduce the growth of Brazil's airlines and other operators and could make sub-leasing of aircraft during Brazil's low season uneconomical.
For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3064 8599), fax (+1 561 431 5808) or email (email@example.com). The Basch & Rameh website can be accessed at www.baschrameh.com.br.
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