Brazil is a country with a high tax burden and a complex tax system.
There are Federal, State and City taxes over a company’s operation, as well as social security and labor charges. There are also specific charges over the functioning of customs system and taxes related to specific operations, such as inbound and outbound wire transfers.
Depending on the kind of operation the company practices, specific taxes will apply. A service providing company, for instance, will be directly taxed for ISS (service tax, generally 5% of gross revenue). A sales company, on the other hand, will be instead taxed by ICMS (a VAT-like state tax, generally 19% minus credits on previous operations).
Taxes paid to clear customs may be recoverable or not. This will depend on company taxation system (for federal taxes), destination of the imported item (manufacturing, consumption, resale).
Brazil has two taxes on profit: IRPJ (Corporate Income Tax) and CSLL (Social Contribution over Net Profit).
IRPJ rate is 15%, charged on net profit, plus an additional 10% for net profit in excess of BRL 20.000 / month. CSLL has a rate of 9% over the same base.
However, Brazilian tax regulations allows for two different ways to calculate your net
profit, as follows:
The basis for calculation of the tax, as would be expected, is the net profit, or that is to say the net operational results after the interest, depreciation, amortizations (Equity Before Tax), therein included all the income, fortuitous or not, operational or not, independent from the denomination that may be given them (Legal Decree 1.598/77, art. 6).
EBT is adjusted for tax purposes, being added on undeductable expenses (such as expenses not related to company’s activities) and suffering deductions on non taxable earnings (such as equity gain on a controlled company). It is over this adjusted base that profits taxes will be charged.
In some cases , the law allows for the option of Assumed Profit. In this mode, the taxable profit is not EBT, but instead a percentage of gross income.
That option, therefore, may be advantageous of if the actual profit is higher than EBT. If the actual profit is lower, however, there is not the possibility to cancel this option, and the company would have to pay profit taxes without profit. The key to enjoy the benefit is to plan ahead. And know your profitability.
The primary possibilities of opting for Assumed Profit are:
- Transport (except of cargo): the profit is arbitrated at 16% of the billing (the Rates of 15% and 10% of the IR, when applicable, shall be calculated over 16% of the gross billing of the company);
- Service Providing in general, intermediation, management, location or cessation of non-fixed assets or rights of any nature: the profit is arbitrated at 32% of the billing;
- Commerce, Industry, Hospital Services: the profit is arbitrated at 8% of the billing (12% for CSLL).
To the taxable base calculated according to the Assumed Profit must be added other income, such as capital gain on the sales of assets and rights and financial income.
Instead of a service and sales tax, as in most countries, Brazil has at least four direct taxes with similarities to a VAT.
PIS and COFINS are two separate taxes on gross revenue. They may or may not function like a VAT depending on profit tax calculation (EBT or Assumed, as per item 5.1 above). The rates applicable will also depend on this option.
Even though they are distinct taxes, their functioning is the same on most aspects, and in several cases both taxes are referred to as PIS/COFINS.
PIS tax rate:1,65% COFINS tax rate: 7,60%
In this case, these contributions are calculated as a VAT. The legal corporation will be able to discount some credits to reduce the amount of the taxation to be paid. These credits may be taken from costs of sale or production, or cost of expenses for providing services, beyond some specific expenses, such as rent, electricity, and financing charges – whenever paid to other corporations (values paid to individuals do not render credits).
PIS tax rate: 0,65% COFINS tax rate: 3,00%
The application from these rates will be for companies opting for Assumed Profit, or for companies of Real Profit that dedicate themselves to specific activities (financial institutions, insurance companies, health insurance plans, security and transport of currency, cooperatives, telecommunications companies, newspapers, broadcasters, hospital services, educational institutions, collective transport of passengers by any means, telemarketers, construction companies, theme parks, hotels, real-estate agencies, among other activities).
Deductions are not allowed on this situation – both taxes will be charged on top of gross revenue, without credits.
ICMS (sales VAT) is a state tax, and each state details the rules applicable in each case. The ICMS is charged on the gross sales values, and the tax rate varies from place to place: each state has its own tax rate for internal operations (the standard rates generally range from 17% to 19%). Interstate operations rates are 12% (when selling to South and Southeastern regions) and 7% (to Northeast, North and Middle- West regions).
ICMS values paid on import operations or as part of acquisition for inventory will render credits against ICMS due on sales. In case of fixed assets, ICMS credits will be appropriated according to depreciation. Consumables do not render credits.
In an invoice, ICMS is built in the value of the goods.
IPI is a federal tax charged on the sales of manufactured products. This tax functions like a VAT during the manufacturing process – it is paid on importation of manufactured products, and on every step of the production chain, whenever the product suffers modifications. The first sale without modification of the product absorbs the cost of this tax on previous operations.
The rates are tariff based, ranging from 0% to 300% (this one specific for cigarettes, but most maximum rates are between 20% - 30%).
In an invoice, IPI is added to the value of the goods, affecting the total value of an invoice.
ISS is a tax charged on services provided. It is generally charged on the overall value of the service provided, at a rate usually from 2% to 5%, with few or no possibilities to compensate credit from previous operations (according to the law of each city).
This tax is charged directly on the CIF value, and its rate is tariff based. Tariffs range from 0% to 35%, depending on type of product. Tariffs may be altered at any time by the Federal Executive Power, without needs to issue a law.
This is a non recoverable tax.
IPI is taxed over CIF + II value. As mentioned before, the rates are also tariff based.
This is only recoverable if the imported good is assembled in a manufacturing operation. In that case, the value paid will be compensated against IPI on the sale of manufactured product.
This tax is charged over CIF + II + IPI + ICMS + COFINS + PIS (self) value. The rate is 1,65% This will be recoverable only if the company pays profit taxes on EBT mode (5.2.1.1, above).
This tax is charged over CIF + II + IPI + ICMS + COFINS (self) + PIS value. The rate is 7,6%
This will be recoverable only if the company pays profit taxes on EBT mode (5.2.1.1, above).
ICMS is the only non federal tax on import of goods.
The rates classically vary from 16% to 19%, depending on the Federation State. Specific rates apply, such as basic food products (7% in most states) and in case of tax benefits.
This tax is charged over CIF + II + IPI + ICMS (self) + COFINS + PIS value.
This tax is recoverable against ICMS on sales operations. Import of fixed assets will render credits according to depreciation values. Import of consumables do not render credits.
Whenever hiring services from a company abroad, a Brazilian company has to pay import taxes, either retained on the wire transfer or locally on top of the total amount paid.
A general retention of 15% on the wired value applies for most international payments made by a Brazilian company. This comprises payments for royalties, interest, rent, leasing, international freights and services in general.
In case of tax havens, the retention percentage raises to 25%.
If the Brazilian company is paying royalties or services of technical assistance, support, any technical services, it has to pay CIDE of 10% rate over the wired amount (before Income Tax retention).
Will be paid over the wired amount + ISS, in the rates of 1,65% to PIS and 7,6% to COFINS.
Imported services will be paid on the amount of 5% of the value of the imported services.
Most taxes are exempt on export operations. PIS and COFINS are exempt on any service provided to a foreign legal entity and paid with entry of financial resources in Brazil. Export of goods are always exempt of IPI and ICMS.
In case of export of services, ISS exemption will apply if the service has no results in Brazil. Profits taxes, of course, do not differentiate between internal or external revenues.
A Brazilian company has to pay the following social charges over the Gross payroll value:
- INSS – The main social security contribution – 20% of payroll value
- FGTS – An employee compulsory fund – 8% on top of gross salary
- Social Assistance – A contribution to fund several government services destined to qualify, train, educate and assist employees – 5,8% of payroll value
- SAT – Destined to cover labor accidents – ranges from 1% to 3% of payroll (for the office branch, 1%; for the industry branch, 3%).
By the end of the year, a company needs to pay an extra salary (Christmas wage) per year, for each employee (if employment has less than year, the payment is proportional). For every year worked, the employee is entitled to 30 days of vacation. When going out on vacation, the employee is granted an extra salary added of 1/3 salary.
Considering all direct charges over the salary plus monthly accruals for Christmas wage and vacation, the tax burden over payroll could be demonstrated in the following way:
| Salary | 1000,00 |
|---|---|
| INSS 20% | 200,00 |
| Social Assistance 5,8% | 58,00 |
| SAT 3% | 30,00 |
| FGTS 8% | 80,00 |
| Christimas wage accrual | 111,11 |
| Payroll charges - Xmas wage acc | 30,67 |
| Payroll charges - Vacation acc. | 40,89 |
| Total | 1.634,00 |
To the result of this calculations, it should be considered any other benefits, such as food and transport tickets, health plan, life insurance and other provided by the local management of the company.