April 04, 2005 | By Keith Martin in Washington, DC

BRAZIL bowed to pressure and withdrew a tax measure on April 4 that would have subjected foreign parent companies to tax on exchange rate gains in the value of shares in Brazilian subsidiaries.

The government said it would repackage the proposal. Any tax in the future is expected to be collected only when shares are sold. 

The government has been attempting since 2002 to collect both income taxes and a social contribution tax  on net profits — called a CSLL tax — from foreign parent companies on the appreciation in share value in their Brazilian subsidiaries caused by fluctuations in exchange rates. The US dollar  appreciated 8.5% against the Brazilian real from January to June last year, but lost 7% in value measured over the entire year. The government based its past collection efforts on a directive that the Brazilian tax department issued in  2002. Most companies have been able to avoid payment because of court decisions that such taxes must be based on a law rather than a tax department directive. 

The government moved at the end of December 2004 to provide a proper legal basis by imposing the taxes through a decree, number 232, that appeared in a special edition of the official gazette on December 30, but
imposition of the taxes was delayed until April 2005 for CSLL tax and until January 2006 for income taxes.