On 22 May 2019, the Brazilian Federal Revenue Service (BRS) published the Answer to Advance Tax Ruling Request No. 151, presenting its understanding of the tax treatment of rewards paid to employees and statutory directors, following the Brazilian Labour Reform.
The BRS reinforced its understanding that the employer must objectively prove what the expectations of the performance were, and how the employee’s performance exceeded said expectations, in order to exclude the social contribution taxation relating to the reward.
As of 11 November 2017, discretionary rewards paid by an employer are not taxed in the form of social security contributions, when the payment is made in form of goods, services or cash to an employee, or group of employees, due to said employee’s performance exceeding what would be normally expected in the exercise of his/her activities.
From 14 November 2017 to 22 April 2018, in order to be excluded from the social security tax calculation basis, the high performance reward may not exceed two payments per year at most.
Rewards excluded from the social security contribution tax calculation basis must meet the following criteria:
they are paid exclusively to insured employees, individually or collectively, and are lower than the amount paid to the individual taxpayers;
they are not restricted to cash and can be paid in goods or services;
they do not result from legal obligation or express agreement; and
they should be paid as a consequence of a work performance exceeds expectations (the employer must prove what the expectations of the performance were, and how the employee’s performance exceeded said expectations).
This pertains to the following legal provisions: the Constitution of the Federative Republic of Brazil 1988, article 62, section 11; Law No. 13,467, 2017, articles 1 and 4; Provisional Presidential Decree No. 808, 2017, article 1; Law No. 8,212/1991, articles 22 and 28; Decree Law No. 5,452/1943, article 457, sections 2 and 4; and BRS Instruction No. 971/2009, articles 52 and 58.
The main area of concern is the restrictions presented by the BRS on the payment of rewards to non-employed/statutory managers; however, the matter has not received the attention that it requires. As will be further detailed, we disagree with the interpretation adopted by the BRS.
The Consolidation of Labour Laws (CLT) defines, in article 457, that every payment made by employers to employees, as a result of the work performed, will be characterised as remuneration.
In other terms, remuneration is not only the fixed monthly salary, but also commissions and bonuses, which by definition includes the amounts contractually agreed and those usually paid (such as annual bonuses).
Corroborating this understanding, article 458 of the CLT extends the concept of remuneration to include payments of utilities granted, either under contract or due to custom usually made.
Therefore, it can be noted that until enactment of the Labour Reform, payments usually made in favour of employees and statutory managers as a form of remuneration for the work performed, whether in cash or as utility, had a remunerative nature. Thus, they would be subject to labour and social security taxes.
However, with the Labour Reform, it has been established that “rewards” paid by employers to employees are not part of the tax calculation basis of social security contributions and labour charges, even if they are usually made. Paragraph 2 of Article 457 of the CLT has been amended as follows:
The amounts, even when usual, paid as allowance, meal allowance, forbidden their payment in cash, travel allowances, rewards and premiums, are not part of the employee’s remuneration, are not incorporated into the employment agreement and are not part of the tax calculation basis for any labour and social security incidences. (Emphasis added.)
In addition, the aforementioned law amended article 457, section 4, of the CLT to define the concept of reward:
Payments granted at the discretion of the employer as goods, services or cash to the employee or to a group of employees due to a superior performance to what is ordinarily expected of their activities are considered as rewards.
Before analysing the reach of the amendment introduced by Law No. 13,467/2017, it should be noted that it has also been amended by Provisional Measure No. 808, dated 14 November 2017, which was not converted into law. This temporary change brought a new wording for the concept of rewards:
Rewards are considered discretionarilly granted by the employer, when paid in the form of goods, services or cash to an employee or a group of employees, or third parties related to the business activity, when the performance, in the exercise of their activities, is higher than what is ordinarily expected.
In addition to these mentioned amendments, Law No. 13,467/17 added item Z to paragraph 9 of article 28 of Law No. 8,212/91 to exclude from the tax calculation basis of social security contributions “rewards and premiums” paid to individual taxpayers, such as directors and statutory officers, as well as employees.
Despite the legal provision of article 457, section 4, of the CLT, which defined the concept of “rewards”, there is intensive debate about the criteria to define whether if there has been a “discretionary act” by the employer and what would constitute a “performance higher than was ordinarily expected”. The answer to these questions has a direct impact on whether or not the exemption from social security contribution and labour incidences applies. The above-mentioned Answer to Advance Tax Ruling Request presents a restrictive interpretation given by the BRS.
In spite of the relevance of the discussion, our focus is whether or not the tax exemption shall apply to rewards paid to statutory managers and officers.
Although Law No. 13,467/17 defined “rewards” in the CLT in reference to employees, we understand that this definition extends to individual taxpayers, especially when considering the express exclusion of the tax calculation basis provided by artice 28, section 9, item Z, of Law No. 8.212/91, as amended by Law No. 13.147/17.
In this sense, the BRS’s understanding presented in Answer to Advance Tax Ruling Request No. 151, dated 14 May 2019, is mistaken when it seeks to restrict the exemption only to employees.
Amendments to the Labour Reform are welcome. When defining rewards, legal criteria are established. Provisional Measure No. 808, which was not converted into law, merely clarified that payment could be made to an employee, group of employees or third parties related to the business activity. At this point, there’s no innovation in the tax treatment. So, the expiry of its validity does not represent the impossibility of paying rewards to third parties, precisely because the Labour Reform not only changed the CLT, but also Law No. 8,212/91 as described above.
In light of this context, we understand that the definition of rewards extends to individual taxpayers, such as statutory officers and managers. Thus, the position of the BRS must be reviewed, otherwise tax assessments will be brought to the judicial courts, increasing legal uncertainty and litigation.