Income tax

3 Months Ended

12 Months Ended

Mar. 31, 2020

Dec. 31, 2019

Text Block [Abstract]

Income tax

12. Income tax

a) Deferred income tax

Deferred tax assets (DTA) and deferred tax liabilities (DTL) are comprised of the main following components:


	Balance Sheet						Net change in the three months period ended
	March 31, 2020			December 31, 2019			March 31, 2020			March 31, 2019
Tax losses carryforwards		39,298			17,146			22,152			(29,611	)
Goodwill on business combinations (i)		14,714			22,303			(7,589	)		(9,068	)
Provisions for IFAs’ commissions		64,669			68,041			(3,372	)		—
Revaluations of financial assets at fair value		(26,370	)		25,259			(51,629	)		(2,486	)
Expected credit losses		13,695			5,666			8,029			(75	)
Financial instruments taxed on redemption		—			—			—			9,852
Profit sharing plan		71,309			141,136			(69,828	)		51,494
Net gain on hedge instruments		22,706			(36,384	)		59,091			(1,080	)
Share based plan		14,187			2,950			11,237			—
Other provisions		47,304			33,284			14,019			776

Total		261,512			279,401			(17,890	)		19,802

Deferred tax assets		261,512			284,533
Deferred tax liabilities		—			(5,132	)

(i)	For tax purposes, goodwill is amortized over 5 years on a straight-line basis when the entity acquired is sold or merged into another entity.

The changes in the net deferred tax were recognized as follows:


	Three months period ended March 31,
	2020			2019
As of January 1		279,401			140,400
Foreign exchange variations		21,055			(114	)
Charges to statement of income		(47,072	)		18,643
Tax relating to components of other comprehensive income		8,128			1,273

As of March 31		261,512			160,202

Unrecognized deferred taxes

Deferred tax assets are recognized for tax losses to the extent that the realization of the related tax benefit against future taxable profits is probable. The Group did not recognize deferred tax assets of R$ 12,237 (December 31, 2019—R$ 18,402) mainly in respect of losses from subsidiaries overseas and that can be carried forward and used against future taxable income. A deferred tax asset was not recorded as taxable income is not expected.

b) Income tax expense reconciliation

The tax on the Group’s pre-tax profit differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities. The following is a reconciliation of income tax expense to profit (loss) for the year, calculated by applying the combined Brazilian statutory rates at 34% for the period ended March 31:


	Three months period ended March 31,
	2020			2019
Income before taxes		516,531			303,227
Combined tax rate in Brazil (i)		34	%		34	%

Tax expense at the combined rate		175,620			103,097
Income (loss) from entities not subject to taxation		(9,246	)		(48	)
Effects from entities taxed at different rates		14,287			6,505
Effects from entities taxed at different method (ii)		(64,678	)		(4,968	)
Intercompany transactions with different taxation		(9,156	)		(7,767	)
Tax incentives		605			—
Non deductible expenses (non-taxable income), net		6,586			717
Others		4,959			(4,747	)

Total		118,977			92,789

Effective tax rate		23.03	%		30.60	%

Current		71,905			111,432
Deferred		47,072			(18,643	)

Total expense		118,977			92,789

(i)	Considering that XP Inc. is domiciled in Cayman and there is no income tax in that jurisdiction, the combined tax rate of 34% demonstrated above is the current rate applied to XP Investimentos S.A. which is the holding company of all operating entities of XP Inc. in Brazil.

(ii)

Certain eligible subsidiaries adopted the PPM tax regime and the effect of the presumed profit of subsidiaries represents the difference between the taxation based on this method and the amount that would be due based on the statutory rate applied to the taxable profit of the subsidiaries. Additionally, some entities and investment funds adopt different taxation regimes according to the applicable rules in their jurisdictions.

Other comprehensive income

The tax (charge)/credit relating to components of other comprehensive income is as follows:


	Before tax			(Charge) / Credit			After tax
Foreign exchange variation of investees located abroad		1,325			—			1,325
Gains (losses) on net investment hedge		(1,277	)		434			(843	)
Changes in the fair value of financial assets at fair value		(2,021	)		838			(1,183	)

As of March 31, 2019		(1,973	)		1,272			(701	)

Foreign exchange variation of investees located abroad		56,560			—			56,560
Gains (losses) on net investment hedge		(85,600	)		29,104			(56,496	)
Changes in the fair value of financial assets at fair value		52,467			(20,977	)		31,490

As of March 31, 2020		23,427			8,127			31,554

22. Income tax

(a) Deferred income tax

Deferred tax assets (DTA) and deferred tax liabilities (DTL) are comprised of the main following components:


	Balance Sheet						Net change in the year
	2019			2018			2019			2018			2017
Tax losses carryforwards		17,146			55,358			(38,212	)		37,774			17,584
Goodwill on business combinations (i)		22,303			59,993			(37,690	)		(56,789	)		(51,327	)
Provisions for IFAs’ commissions		68,041			31,031			37,010			4,744			26,156
Revaluations of financial assets at fair value		25,259			1,397			23,862			(2,427	)		4,030
Expected credit losses		5,666			3,079			2,587			(2,345	)		4,329
Financial instruments taxed on redemption		—			(13,041	)		13,041			(6,230	)		(6,811	)
Profit sharing plan		141,136			—			141,136			—			—
Net gain on hedge instruments		(36,384	)		(1,441	)		(34,943	)		(51,423	)		49,382
Share-base compensation		2,950			—			2,950
Other provisions		33,284			4,024			29,260			(2,572	)		5,251

Total		279,401			140,400			139,001			(79,268	)		48,594

Deferred tax assets		284,533			152,425
Deferred tax liabilities		(5,132	)		(12,025	)

(i)	For tax purposes, goodwill is amortized over 5 years on a straight-line basis when the entity acquired is sold or merged into another entity.

The changes in the net deferred tax were recognized as follows:


	2019			2018			2017
At January 1		140,400			219,668			171,074
Foreign exchange variations		(3,461	)		(9,259	)		(1,155	)
Business combination (Note 5 (ii))		—			—			3,751
Charges to statement of income		139,411			(76,455	)		45,325
Tax relating to components of other comprehensive income		3,051			6,446			673
At December 31		279,401			140,400			219,668

Unrecognized deferred taxes

Deferred tax assets are recognized for tax losses to the extent that the realization of the related tax benefit against future taxable profits is probable. The Group did not recognize deferred tax assets of R$ 18,402 (2018—R$ 12,025) mainly in respect of losses from subsidiaries overseas and that can be carried forward and used against future taxable income.

(b) Income tax expense reconciliation


	2019			2018			2017
Income before taxes		1,544,109			640,728			575,507
Combined tax rate in Brazil (a)		34,00	%		34,00	%		34,00	%

Tax expense at the combined rate		524,997			217,848			195,672
Income from entities not subject to taxation		(9,551	)		(3,647	)		(5,101	)
Effects from entities taxed at different rates		25,948			16,444			9,078
Effects from entities taxed at different method (b)		(24,089	)		(18,183	)		(25,971	)
Intercompany transactions with different taxation		(50,138	)		(38,255	)		(30,264	)
Tax incentives		(9,772	)		(1,408	)		(265	)
Non-deductible expenses (non-taxable income)		10,888			(689	)		175
Others		(13,658	)		3,288			8,642

Total		454,625			175,398			151,966

Effective tax rate		29,44	%		27,20	%		26,38	%
Current		594,037			98,943			197,291
Deferred		(139,412	)		76,455			(45,325	)

Total expense		454,625			175,398			151,966

(a)	Considering that XP Inc. is domiciled in Cayman and there is no income tax in that jurisdiction, the combined tax rate of 34% demonstrated above is the current rate applied to XP Investimentos S.A. which is the holding company of all operanting entities of XP Inc. in Brazil.

(b)	Certain eligible subsidiaries adopted the PPM tax regime and the effect of the presumed profit of subsidiaries represents the difference between the taxation based on this method and the amount that would be due based on the statutory rate applied to the taxable profit of the subsidiaries.

Other comprehensive income

The tax (charge)/credit relating to components of other comprehensive income is as follows:


	Before tax			(Charge) / Credit			After tax
Foreign exchange variation of investees located abroad		2,034			—			2,034
Gains (losses) on net investment hedge		(3,124	)		738			(2,386	)
Changes in the fair value of financial assets at fair value		275			(65	)		210

As of December 31, 2017		(815	)		673			(142	)

Foreign exchange variation of investees located abroad		18,645			—			18,645
Gains (losses) on net investment hedge		(26,508	)		9,013			(17,495	)
Changes in the fair value of financial assets at fair value		6,727			(2,567	)		4,160

As of December 31, 2018		(1,136	)		6,446			5,310

Foreign exchange variation of investees located abroad		6,823			—			6,823
Gains (losses) on net investment hedge		(10,543	)		3,410			(7,133	)
Changes in the fair value of financial assets at fair value		1,058			(360	)		698

As of December 31, 2019		(2,662	)		3,050			388