Value-added tax (VAT)
The Brazilian indirect taxes system is complex and has been subject to multiple changes during the past years. The text below contains general information applicable to each of the taxes herein mentioned. It is important to note that the respective legislation includes various exceptions to the general stated rules. In the case of the state VAT (ICMS), although a federal law should be followed, each state issues its own legislation, which brings certain differences when compared to the federal law.
The Brazilian indirect tax system comprises three key indirect taxes:
- VAT on Sales and certain Services (ICMS)
- Excise Tax (IPI), and
- Service Tax (ISS),
which are state, federal, and municipal taxes, respectively.
VAT on Sales and Services (ICMS)
ICMS is a state tax on the circulation of merchandise, electric power, rendering of interstate and intermunicipal transportation services, and communications, even when the transaction and the rendering of services start in another country. It is not a cumulative tax, that is, the tax is only assessed on the increase in the price of the product in each part of the circulation process.
The calculation process involves a system where the taxpayer should check the amount of debits and credits related to the state VAT. In case the taxpayer upholds more debits than credits, the taxpayer will be required to pay tax on the difference between them.
In summary, the credits are calculated when the raw materials enter the taxpayer’s premises and the debits are computed when the final products exit the establishment. Moreover, as a general rule, taxpayers are not allowed to account for credits on materials purchased that will be used on goods that will not be taxable when they exit the company.
Finally, VAT is collected in the state of São Paulo at an 18% rate. Certain products can attract a higher rate (usually 25%) or a lower rate (in most cases, 12%). The internal ICMS rates may vary according to each state of Brazil. Usually, the ICMS rates range from 17% to 20% for the most cases, but higher and lower rates may be applied as well.
Special rates apply to interstate sales, as shown in the chart below. A 4% rate applies on all interstate sales of imported goods.
|From (shipper)||To (addressee)||Rate (%)|
|South and Southeast||South and Southeast||12|
|North, Northeast, and Midwest||Any Brazilian state||12|
|South and Southeast *||North, Northeast, and Midwest *||7|
* Including the state of Espírito Santo.
ICMS is due on a monthly basis, and exports are not subject to ICMS.
In order to avoid illegal tax evasion, enhance the tax control processes, and facilitate tax collection, the legislation may appoint a single taxpayer of a product’s chain as the sole liable party, who will collect the ICMS due by all parties until the final consumer. The so-called ICMS-ST regime is imposed for certain goods as listed by each state tax legislation.
ICMS due on interstate sales of goods to non-ICMS taxpayers
As a general rule, ICMS is collected by the state where the supplier of the goods is located. ICMS is collected by most states at internal rates ranging from 17% to 20% (some products attract a lower/higher rate). As noted above, special rates apply to interstate sales, which will be equivalent to 4%, 7%, or 12%, depending on the location of the supplier and client, as well as whether the goods are imported, have a certain content of imported inputs, or are domestically sourced.
The legislation determines that on interstate transactions with final consumers, the 4%, 7%, or 12% rates shall be applied (instead of the internal rate), and the difference between the internal and interstate rates shall be paid by the acquirer (transactions between ICMS taxpayers) or supplier (transactions involving non-ICMS taxpayers) of the goods to the consumer’s state.
Excise Tax (IPI)
This Federal excise tax is paid by manufacturers on behalf of their customers at the time of sale, either to another manufacturer who will continue the manufacturing process or to the retailer who sells to the end user.
The tax paid is stated separately on the sales invoice, as is the nature of the goods involved. Certain exemptions are given to goods considered to be of basic necessity to the country's economy. The rates are defined by the product’s tariff code (normally around 5% to 15%, but in certain cases ranging to over 300%) and are in accordance with the essentiality of each product, which generally means that essential products will attract lower tax rates.
As mentioned above, when manufactured products are sold between producers, the IPI is imposed. However, the subsequent manufacturer is allowed a credit against its IPI liability, on the amount of IPI paid to its suppliers (non-cumulative tax, similar to what happens with ICMS).
IPI is due on a monthly basis and is imposed on imports of goods, while exports are not subject to IPI.
Municipal Service Tax (ISS)
The ISS is a municipal tax levied on the provision of services listed by Supplementary Law 116/2003. ISS is imposed on a cumulative basis (it is not creditable), and the rates may vary between 2% and 5%, depending on the type of service (rates to be stipulated on a municipal basis).The municipality to which the ISS must be collected to also changes depending on the nature of the service performed.
Service import is also subject to ISS, to be collected by the Brazilian entity that is contracting the services from a supplier located abroad.
ISS is not levied on export of services. However, if the result of a certain service is verified in Brazil, ISS is imposed, even if the payment for such service is made by a non-resident. The definition of 'result', however, has not yet been pacified in Brazil.
The import duty (II) is a federal tax levied on permanent import of goods into Brazil and is also referred to as import tax or customs duty. The rates vary according to the product’s tariff code based on Mercosur Harmonised System (NCM/SH), usually ranging from 10% to 20% (there are some exceptions, but the maximum consolidated rate is 35%). As a general rule, the taxable basis consists of the cost, insurance, and freight (CIF) value of the product (i.e. cost, international insurance, and international freight), calculated pursuant to the World Trade Organization’s (WTO’s) Customs Valuation Agreement.
Import duty is not recoverable by the importer (i.e. it is considered a cost).
A municipal property tax (IPTU) is levied annually based on the fair market value of property in urban areas at rates that generally vary according to the municipality and location of the property. In the municipality of São Paulo, the basic IPTU rate is 1% for residential properties or 1.5% for commercial properties (both rates may be increased or decreased according to the market value of the property).
A municipal property transfer tax (ITBI) is levied on the transfer of immovable property, with rates also varying based on the municipality where the property is located. The ITBI rate in the municipality of São Paulo is currently 3%, applied over the market value of the property or the transaction price (whichever is higher).
A state property transfer tax (ITCMD) is normally payable at rates varying from state to state on inheritances and donations of goods and rights. In the state of São Paulo, ITCMD is charged at the rate of 4%.
Tax on financial operations (IOF)
IOF is a tax levied on certain financial operations, such as loans, foreign exchange operations, insurance, and securities, as well as operations with gold (as a financial asset) and foreign exchange instruments. The applicable rate will vary depending on the operation. The IOF rate may be reduced to 0% in some cases, such as: (i) exchange operations relating to the inflow of revenues in Brazil deriving from the export of goods and services; (ii) exchange operations relating to the inflow and outflow of resources in and from Brazil, stemming from foreign loans, with average term exceeding 180 days; and (iii) remittances of interest on net equity and dividends relating to foreign investment.
Social Contribution on Billing (COFINS)
COFINS, a monthly federal social assistance contribution calculated as a percentage of revenue, is levied at the rate of 7.6%. Under the non-cumulative method, a COFINS credit system is meant to ensure that the tax is applied only once on the final value of each transaction. However, some taxpayers (such as financial institutions, telecommunication companies, cooperatives, and companies that opt to calculate IRPJ and CSLL using a ‘presumed profits’ method) are subject to the cumulative method of COFINS system, which applies a rate of 3% with no credit system.
The general rates of COFINS may be reduced in certain circumstances (e.g. financial revenues may be subject to a rate of 0% or 4% depending on the nature of the transaction). Also, certain transactions are exempt from COFINS (e.g. exportation of services or assets are typically exempt where it results in funds entering Brazil).
Contribution to the Social Integration Program (PIS)
PIS, which is also a federal social contribution calculated as a percentage of revenue, is levied at the rate of 1.65%. Under the non-cumulative method, a PIS credit system is meant to ensure that the tax is applied only once on the final value of each transaction. However, some taxpayers (such as financial institutions, telecommunication companies, cooperatives, and companies that opt to calculate IRPJ and CSLL using a ‘presumed profits’ method) are still subject to the cumulative method of PIS system, which applies a rate of 0.65% with no credit system.
The general rates of PIS may be reduced in certain circumstances (e.g. financial revenues may be subject to a rate of 0% or 0.65% depending on the nature of the transaction). Also, certain transactions are exempt from PIS (e.g. exportation of services or assets are typically exempt where it results in funds entering Brazil).
PIS and COFINS on imports
Importation of goods and services are also subject to PIS and COFINS (in addition to other taxes imposed on import transactions). PIS and COFINS are generally imposed on the Brazilian entity or individual (the importer of goods or services) and should apply to the import of services at the rates of 1.65% and 7.6%, respectively.
PIS/COFINS rates on importation of goods, however, are 2.1% (PIS) and 9.65% (COFINS), respectively. Accordingly, the combined general rate for the import of goods is 11.75%. There are also increased rates for PIS and COFINS on importations of certain specific products, including pharmaceutical products; perfumes, cosmetics, and toiletries; machinery; and vehicles (under these cases, specific rates were provided). For the import of certain goods listed in the legislation, an additional 1% for COFINS is also applicable.
The contributions paid upon import transactions may, in some instances, be creditable.
Legal entities incorporated in Brazil are subject to employer social costs, including: Social Security Contribution (INSS), Employees’ Severance Indemnity Fund (FGTS), work accident insurance (RAT), and variable contribution destined to 'third parties' engaged in social development activities (e.g. SENAI, SESC, SESI). As a general rule, INSS is due by the companies at a 20% rate over the employees’ payroll. However, certain entities may be eligible to calculate INSS at a range of 1% to 4.5%, applied on the company’s gross revenue rather than being calculated upon the company’s payroll (CPRB). In relation to FGTS, such contribution is levied on employee’s salary at the rate of 8%.
The employer is responsible to withhold income tax and social security contribution on behalf of the employee on a monthly basis.
Contribution for Intervention in the Economic Domain (CIDE)
CIDE is a federal contribution levied at the rate of 10% on remittances made by corporate taxpayers for royalties and for administrative and technical services provided by non-residents. CIDE is payable by the local entity, and, therefore, not creditable to the non-resident. CIDE does not represent a liability to the foreign recipient. CIDE is not applied on the payments relating to the license to use, market, or sub-license software, provided that it does not involve transfer of technology, which is considered to be the transfer of the corresponding source code.