The essential Tax Law in Brazil

These are the highlights if you want to know the essential Tax Law in Brazil.  This entry was drafted by L.O. BAPTISTA ADVOGADOS ASSOCIADOS  for “E-IURE COMPENDIUM” 2018. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case “L.O. BAPTISTA ADVOGADOS ASSOCIADOS” is an excellent option if you are looking for legal advice in Brazil.

The taxing power is shared by the Federal Government, the States, the Federal District and the Municipalities. For this purpose, a series of rules was created, which together constitute the Brazilian Tax System, namely: the Federal Constitution, National Tax Code and federal, state and municipal legislation.

Significant Developments

The National Tax System has been undergoing improvements in order to cover practically all the activities of corporate entities.

TAXES ON CORPORATE INCOME

These taxes are imposed on a federal level and can be summarized as follows:

IRPJ (CORPORATE INCOME TAX)

Assessed on the acquisition of the economic or legal availability of income (the product of capital and labor or the combination of both) and of proceeds of any nature. The rate is 15% with a surtax of 10% levied on income in excess of R$ 240 thousand (approximately US$ 76 thousand in August 2017) per year.

CSLL (SOCIAL CONTRIBUTION ON NET PROFITS)

Levied at a tax rate of 9% on taxable profits. The contribution rate corresponds to 20% in the case of legal entities considered financial, private insurance and capitalization institutions.

PIS (CONTRIBUTION TO THE SOCIAL INTEGRATION PROGRAM)

Assessed on the monthly gross receipts of corporate entities. It may be computed in a cumulative regime, at the rate of 0.65%, or non‑cumulative regime, at the rate of 1.65%. In the latter case, the sum collected in certain prior operations is discounted on each successive operation and there are some deductions of the gross receipts determined by law.

COFINS (CONTRIBUTION FOR THE FUNDING OF SOCIAL WELFARE PROGRAMS)

This is also levied on monthly gross receipts and may also be computed in a cumulative regime, at a tax rate of 3% or non‑cumulative regime, at a tax rate of 7.6%; subject to legal limits and requirements. PIS and COFINS are determined and collected on the same tax basis.

Corporate Residence

This is determined with regard to the location of the company’s assets and where the facts giving rise to the tax obligation occur (company’s registered office and/or main place of business).

Other Main Taxes

FEDERAL TAXES

IPI (equivalent to the Excise Tax): its taxpayers are, for example, importers and industrial companies. Its tax rate, which is applicable on the amount of each operation, varies in accordance with the product. There are a number of tax benefits to stimulate the industrial sector, as well as the construction sector.

II (Import Duty): is levied on import operations. This tax has variable rates according to the product being imported.

IOF (Tax on Credit, Insurance and Foreign Exchange Operations, or on Operations relating to Negotiable Instruments and Securities): in foreign exchange operations, the tax basis for the calculation of IOF is the sum in local currency received, delivered or made available. The maximum rate is 25%, currently reduced to thirty-eight hundredths of a percent (0.38%) to most of transactions.

STATE TAXES

ICMS (equivalent to VAT): is levied mainly on the circulation of goods, including those imported from abroad; interstate and inter‑municipal transport services and communication services. Its rates vary from 4% to 25% of the operation amount, in accordance with the type of goods sold or the service rendered and according to the internal legislation of the State where the company taxpayer is located. In most cases, the rate is 18%. It is non‑cumulative.

ITCMD (Transfer Tax) is assessed on the transfer of any property by will, inheritance or gift made between individuals or corporate entities. The rate on the market value of the property donated or received as an inheritance varies according to the State. In the State of São Paulo the rate is 4%. The maximum percentage allowed for every States is 8%.

MUNICIPAL TAXES

ITBI (Inter-Vivos Property Tax): is levied on the transfer, for any reason, by an onerous act, of real property, by physical nature or accession and in relation to security interests on real property. Its rate, which is applicable to the market value of the property, varies in accordance with the Municipality. In the Municipality of São Paulo, the rate is 3%.

IPTU (Urban Property Tax): the taxable event is the dominium utile or the possession of real estate located in the city zone of the Municipality (in São Paulo, the rates vary in accordance with the market value and use of the property, from 1% to 1,5%).

ISS (Service Tax): is levied on the provision of the services contained in the list attached to Complementary Law 116/03, regardless of whether the services constitute the core activity of the provider. The rate varies from 2% and 5% and is defined by the Municipality where the establishment is located or where the service is carried out, according to each individual case.

CAPITAL TAX AND STAMP DUTY

These are not provided for in the legislation.

Branch Income

Subject to the same rules set forth above. Branches in Brazil are not allowed to take deductions related to expenses paid or credited to the headquarters as royalties, technical, administrative or similar support.

Income Determination

Actual income ‑ determined in the annual balance sheet at December 31 or in quarterly trial balances. Presumed income ‑ percentage of the quarterly gross receipts of the corporate entity, without any deduction, for the purposes of the calculation of IRPJ and CSLL (corporations whose total gross receipts in the preceding calendar year were not higher than R$ 78 million, equivalent to US$ 24 million in August 2017, may elect for this regime).

Deductions

From the income tax determined for the month under the actual income, the tax paid or withheld at source on income included in the tax basis, and the deduction incentives related to the Workers’ Food Program, Children and Adolescent Funds and Cultural, Artistic and Audiovisual Activities may be deducted. Additionally, there are some costs and expenses that are deductible for the determination of actual profit:

• Depreciation, amortization and depletion: The amounts related to the decline in the value of asset items resulting from wear and tear, as a result of nature and normal obsolescence (depreciation), recovery of the capital invested, or of the resources invested in the formation expenses of the result for more than one taxable period (amortization) and decline in the value of mineral and forestry resources, resulting from their exploitation (depletion), may be computed as a cost or charge in each taxable period.
• Net operating expense: The expenses that are not computed in costs, necessary for the company’s business activity, paid on the transactions undertaken are operating expenses and deductible.
• Payments to foreign affiliates (transfer pricing): The respective costs, expenses and charges relating to goods, services and rights are deductible for the determination of actual profit up to the price determined by one of the methods provided in law.
• Taxes: Deductible from actual profit according to the accrual basis of accounting.
• Other significant items: The provisions and allowances provided in law (technical, vacation pay, thirteenth salary and provision for income tax) are deductible.

Group Taxation

There is no legal provision for group taxation; each company is taxed in separate.

Tax Incentives (including special tax regimes)

Industrial Technological and Agricultural Development Programs (PDTI and PDTA), to foster the technological qualification of industries and agriculture. There are tax regimes linked to the importation and exportation of goods and tax benefits for industrialization and commercialization in certain Brazilian regions.

Withholding taxes (IRRF)

Below is a table with some of the main percentages:

*(a): For the purposes of the application of the Brazilian tax legislation, tax havens are construed as countries or dependencies with the taxation of income at a rate or less than 20%:

Andorra, Anguilla, Antigua and Barbuda, Aruba, Ascension Islands, Commonwealth of the Bahamas; Bahrein, Barbados, Belize, Bermudas Islands, Brunei, Campione D’Italia; Channel Islands (Alderney, Guernsey, Jersey and Sark), Cayman Islands, Curacao, Cyprus, Singapore, Cook Islands, Republic of Costa Rica, Djibouti, Dominica, Erin, United Arab Emirates, Gibraltar, Granada, Hong Kong, Kiribati, Labuan, Lebanon, Liberia, Liechtenstein, Macau, Madeira Islands, Maldives, Isle of Man, Marshall Islands, Mauritius Island, Monaco, Montserrat Islands, Nauru, Niue Island, Norfolk Island, Panama, Pitcairn Island, French Polynesia, Queshm Island, American Samoa, Independent State of Samoa, San Marino, Saint Martin, Islands of St Helena, St. Lucia, Federation of St. Kitts and Nevis, Saint Pierre and Miquelon Island, St. Vincent and the Grenadines, Seychelles, Solomon Island, Swaziland, Sultanate of Oman, Tonga, Tristan of Cunha, Turk and Caicos Islands, Vanuatu, Virgin Islands of the United States, British Virgin Islands.

Tax Administration

Is carried out by the Brazilian IRS and by the State and Municipal Treasuries, according to the respective taxing power.

• Returns: Obligation depends on each tax and State/Municipality involved.

• Payment of tax: IRPJ and CSLL ‑ Quarterly or annual, with the adjustments provided in law; IPI/ICMS/ISS/PIS/COFINS ‑ monthly; and II ‑ at the time of customs clearance.

INDIVIDUAL TAXES

Individuals residing in Brazil are subject to tax on the worldwide income.

Territoriality and Residence

The tax domicile of an individual is generally construed as his or her habitual residence, provided that there is the requisite intention to maintain such a residence.  There are specific criteria and conditions though.

Gross Income

Product of capital, labor or the combination of both, alimonies and personal allowances in cash, proceeds of any nature (increases in patrimony that do not correspond to the declared income, are also included).

EMPLOYEE GROSS INCOME

Taxed in the month that the resources are received by the paying source, even by means of a deposit in a financial institution in favor of the beneficiary. This is calculated with the use of the following progressive monthly table:

* US$ on August 2017.

CAPITAL GAINS AND INVESTMENT INCOME

Income tax is due on the capital gains on the sale of property or rights, determined by the positive difference between the sales value and the acquisition cost, at the a progressive rate corresponding to 15% to 22,5%.

CAPITAL LOSSES

There is no provision for the taxation or deduction in Brazilian legislation.

Monthly Deductions

Social security contributions, expenses in the cash book, US$ 60.26 per dependent and US$ 605.13 of allowances and pensions of persons over the age 65, per month.

DEDUCTIONS IN RETURNS

Incentives for cultural and artistic activities (gifts and sponsorships), gifts and funds controlled by the Councils of Rights of Children and Adolescents, medical and education expenses, contributions to Pension Plans.

SIMPLIFIED DISCOUNT

The taxpayer may elect for the simplified discount, which consists of the deduction of 20% of income, limited to US$ 5,324.92, in the Annual Adjustment Statement, with the proof of the expense and indication of its type being not necessary.

PERSONAL ALLOWANCES

These may be deducted if necessary in order to comply with a judicial decision or judicially ratified agreement, including the payment of provisional alimony.

Tax Credits

Credits for foreign taxes paid are allowed.

Other Taxes

SOCIAL SECURITY (INSS)

The employees’ contribution, discounted from their salary, is calculated by the application of the corresponding rate (could be until 11% of the amount paid by the company, limited to USD 193,38), on their monthly contribution salary. For other taxpayers affiliated to the General Social Security Regime, the contribution is 20% of the contribution salary in the company level, subject to the deductions set forth in law.

WEALTH TAXES

Though provided for in the Constitution, this tax has not been introduced yet