CHAPTER 9

CHAPTER 9

Corporate Tax

OVERVIEW

The corporate tax in Brazil is composed of IRPJ (Corporate Tax on Legal Persons) and CSLL (Social Contribution on Net Profit).

The overall tax rate is:
IRPJ 25%
CSLL 9%
Overall tax rate = 34%

Specifically, the IRPJ 25% is split into two parts:

  • a rate of 15% applies to the net profit,
  • a rate of 10% applies to the amount of monthly net profit exceeding 20K R$ (or to the amount of quarterly net profit exceeding 60K R$).

The CSLL is intended to finance Social Security. The rate of CSLL is 9%, except for financial institutions, which bear a rate of 15% (since 2008).

IRPJ and CSLL apply to any entity except:

  • Non-profit Educational Institutions,
  • Social welfare institutions,
  • Political parties,
  • Labor unions.

The basis for calculating the amount of tax can be the “ACTUAL” (REAL), the “ESTIMATED” (PRESUMIDO), the “SIMPLE” (SIMPLES) or the “ARBITRARY” profit.

Current legislation does not provide a definition for these four profits. However, they specify when and how to apply one or the other method. The choice of method depends on the turnover achieved in the previous year; this choice cannot be amended during the year.

A company with a turnover of or above 78M R$ must use the ACTUAL profit method (“regime real”).

Companies with a turnover of less than 78 M R$ will be subjected to the ESTIMATED method (“regime presumido”) or to the SIMPLES method (“regime simples”). See below the thresholds for the three most used methods.

Turnover over 78M R$: « Real » system,

Turnover between 3.6M and 78M R$: « Presumido », or « Real » system,

Turnover below 3.6M R$: « Simples », Presumido », ou « Real » system,

on 4th October 2016, members of Parliament have voted new thresholds for SIMPLES; it will be increased from 3,6M to 4,8M R$ per year on 1st January 2018)

The ACTUAL profit method is mandatory – regardless of the amount of revenue – for financial institutions (building societies, insurance companies, financial intermediaries …), companies specializing in risk management and recovery (mainly companies engaged in factoring services).

For some activities, there is no option between tax system. This list is available – in Portuguese only – on this site : http://www.cnae.ibge.gov.br/.

Since the option is possible with respect to the calculation of profit, and consequently, the method of calculation of corporate tax, simulations are vital to determine which method is the most advantageous.

SIMPLE METHOD (“SIMPLES”)

This method is an option for small and medium-sized enterprises. It is easy to apply and the tax rates are relatively low.

CONDITIONS

Many conditions must be satisfied for the company being authorized to opt for this method, the main one being having a maximum of 3.6M R$ (2016 threshold) in total sales during the year.

In addition, there are restrictions. A company cannot opt for the SIMPLES in the following situations:

  • If there are one or more legal entities among its partners,
  • If the company itself controls another corporation,
  • If a partner is resident abroad,
  • If a partner has shares in another company opting for SIMPLES, regardless of the percentage of its holdings, unless the total turnover of the two companies does not exceed the statutory threshold of 3.6 M R$,
  • If a partner has 10% or more shares in a company opting for ACTUAL or FORCAST scheme, and if the total of turnover of both companies is over 3.6 M R$,
  • If the activity of the company is consulting, intellectual services, technical, scientific, sporting, artistic, regulated or unregulated (Complementary Law No. 139 of 2011).

To find out whether your activity is compliant with this method, go to http://cnae-simples.net/. Beforehand, find the code of your activity in the ‘CNAE’ (National Classification of Economic Activities) website.

TAXATION

The legal person subject to this method declares and pays monthly, with a single document, all taxes due (whatever there are, relevant to Federation, to Federal States, or to Municipalities).

The tax rate is different depending on the activities and on the amount of total sales.

The SIMPLES means that all the following taxes will be paid through a single document:

  • Income Tax – IRPJ,
  • Tax on Industrialized Products – IPI,
  • Social Contribution on Net Income – CSLL,
  • Contribution to Social Security Financing – COFINS,
  • Contribution to PIS / Pasep,
  • Tax on goods and some services (Intermunicipal Transportation and Communication) – ICMS,
  • Tax Services of any kind – ISS.

Method of calculation:

The companies opting for the SIMPLES method must apply different rates depending on whether they are industrial, commercial, or service.

The rate depends on the turnover made over the last 12 months. There are 5 tables: one for industry, one for trade, three for different types of services. We reproduce below the table IV. These tables are updated on January 1st of each year.

Summary of tax rates on sales by sector:

  •  Trade: 4% to 11.61%,
  •  Industry: 4.5% to 12.11%,
  •  Service: 4.5% to 27.90%.

Example of a service company:

The DELTA company has a gross turnover of 25,000R$ in July and want to calculate – early August – the amount of tax due. DELTA has made over the last 12 months (rolling) a turnover of 220,000 R$. The table below shows that the applicable rate for this level of turnover is 6.54%.

This rate will be applied to the July turnover:
6.54% * 25,000 = 1,635 R$

The amount of 1,635 R$ covers IRPJ, CSLL, PIS, COFINS and ISS (it is possible to read from the table below the split of these 6.54% between different taxes).

“SIMPLES” Table IV – Service:

Example of an industrial company:

The INDU company had a gross turnover of 100,000 R$ during the month of July and wants to calculate – early August – the amount of tax due. INDU realized over the last 12 months (rolling) gross sales of 1.2M R$. The table below shows the rates applicable for this turnover is 8.86%.

This rate will be applied to the July turnover:
8.86% * 100,000 = 8,860 R$

The amount of 8,860 R$ covers IRPJ, CSLL, PIS, COFINS, ICMS and IPI.

Extract from Table II – Industry:

Split of those 8,8600R$

“SIMPLES” Table IV – Industry:

Due to numerous constraints, this SIMPLES scheme is obviously impossible for an international company. On the other hand, it is interesting for entrepreneurs!

Companies using the SIMPLES method do not have to withhold taxes (see the relevant chapter) and do receive the whole amount charged to client (i.e. clients do not withheld taxes neither). Consequently, there is no need to issue a DARF.

ESTIMATED METHOD (“PRESUMIDO”)

This is a simplified calculation of taxable income. This regime is only possible for companies that do not have to select the ACTUAL profit method.

The choice of the ESTIMATED method rather than the ACTUAL profit method is only possible for industrial, commercial, or service companies, whose gross annual turnover does not exceed 78M R$. The estimated profit should be calculated at the end of each calendar quarter.

To calculate the gross annual turnover, the following should be excluded:

  • non-cumulative taxes,
  • sales cancelled,
  • unconditional discounts.

Method of calculation:

Companies subject to this method must determine a ESTIMATED result by applying a set of percentages to their gross turnover. These rates are:

  •  8% for industrial and commercial enterprises,
  •  32% for services,
  •  1.6% for companies selling fuel and natural gas,
  •  8% for medical services and industrial transport,
  •  16% for other transport services,
  •  16% for financial institutions.

For multi-business companies, it will be necessary to apply the respective percentages to each business.

Once the estimated profit is calculated, the company will add to this result the gains from the disposal of assets, financial income and extraordinary income. Once these additions are made, it is possible to calculate the tax due.

The corporate tax (IRPJ) is calculated by applying the rate of 15% to the basis computed (projected profit, gains on disposal of assets and other income). Besides this 15%, there is an additional 10% that applies on the following basis: quarter result minus 60K R$. I.e. if the quarterly result is below 60K, the additional is not due.

The second leg of the corporate tax (CSLL) is calculated by applying 9% to 32% (for companies selling services) of the turnover. See below for an estimate of the total taxes on turnover for a company offering services:

Service Company and Presumido method:

Corporate Tax (Presumido with additional):

ACTUAL PROFIT METHOD (“REAL”)

This profit is the result of consolidated accounting entries, called “Accounting result” adjusted with required additions and deductions (non-deductible expenses and non-taxable incomes) to arrive at the net result before tax. The adjustments made to derive the net result before tax, must be detailed in a separate document called “Lalur”, and kept available to the Brazilan tax authorities.Major additions to the accounting result:

  • Losses resulting from the change in value of the participation in subsidiaries (using the equity method),
  • Diminution of the reserve of valuation,
  • Non-deductible expenses,
  • Non-deductible provisions (such as those on clients receivable).

Key deductions:

  • Gain resulting from the change in value of the participation in subsidiaries (using the equity method),
  • Received dividends,
  • Reversals of non-deductible provisions.

AMORTIZATION OF GOODWILL IS DEDUCTIBLE FROM CSLL CALCULATION BASIS

The Higher Chamber of the Administrative Tax Appeals Council (“CSRF”) has recently ruled that the amortization of the goodwill derived from the acquisition of investments is a deductible expense from the Social Contribution on Net Profit (“CSLL”). The court held that taxpayers can deduct the amortization of goodwill from the CSLL tax regardless of whether there is a merger.

Under the decision, the legal rule that this expense is non-deductible from corporate income tax is not applicable to the CSLL tax calculation basis. According to the court, the calculation bases of these two taxes are not identical, which means that the corporate income tax rules do not automatically apply to the CSLL tax. Thus, since there is no specific legal ground for treating the amortization of goodwill as non-deductible for the purposes of the CSLL tax, taxpayers are allowed to deduct it.

The actual outcome may, depending on the choice of the company, be calculated quarterly or at the end of the tax year.

Quarterly calculation:

After having calculated the quarterly accounting result, the company will add gains on the disposal of assets, financial income and extraordinary income. Once these additions are made, it is possible to calculate the tax due.

The tax is calculated by applying the rate of 15% to the basis of calculation: accounting result, adjusted with additions and deductions, plus gains and losses on the disposal of assets, and other income. On top of this 15%, there is an additional 10%. This 10% is applied to the amount of quarterly taxable result exceeding 60K R$.

The following must be deducted from the basis of calculation:

  •  Tax benefits granted by the authorities,
  •  Corporate Tax (IRPJ and CSLL) paid or retained at the source on billings and already included in the calculation of net profit.

Payment is made in one time, before the end of the month following the end of the fiscal quarter. It may be paid – optionally – in three monthly installments, in which case an interest will be applied (interest rate “Selic”).

Yearly calculation:

Companies can choose to calculate their taxable income on an annual, rather than on a quarterly basis. However, the payment of tax is made each month (the deadline is the last business day of the following month). In this case, companies, in order to determine the amount to pay, must not base the calculation of tax due on the amount calculated the previous year (as in many Western countries), but must calculate an estimated result, based on the turnover of the current year.

This choice of the Brazilian tax administration to use the current turnover, instead of the previous year’s net profit, is another consequence of years of hyperinflation!

The calculation of the estimated corporate tax is made from the gross turnover (plus, where applicable, gains/losses on disposal of assets, and other income received) of each activity, to which we apply the following rates:

  •  8% for industrial and commercial enterprises,
  •  32% for services,
  •  1.6% for companies selling fuel and natural gas,
  •  8% for medical services and industrial transport,
  •  16% for other transport services,
  •  16% for financial institutions.

These rates apply to the turnover (from which must be withdrawn cancelled sales, unconditional discounts, and IPI tax collected on sales).

To the outcome of this first calculation, it is necessary to add the gains on the disposal of assets, financial income and exceptional income.

The difference between the amount of monthly tax paid, and the final amount calculated after the closure of the tax year, will be a “correction” to be settled the following year. The amount of this “correction” must be communicated through a dedicated software application available on the website of the Treasury.

Why select the quarterly rather than the yearly calculation; or vice versa? See here below two advises:

Seasonal or stable activity?

Caution! For the quarterly method, the quarterly results cannot be offset.

Thus, for example, if the first 2 quarters showed a profit, they will be subject to a tax payment. If the 3rd quarter is a loss, this loss will not be offset by the profits of the first two quarters (you won’t get back the corporate tax paid over those two quarters). However, this loss may be offset against the profits of the 4th quarter (in the limit of 30% of the profits of the 4th quarter – see section below on the report of losses).

Consequently, with the quarterly calculation, a company that during the same tax year goes through positive (profit), and negative (loss) quarters, will pay more tax than the one that has opted for an annual calculation.

1st rule: a company with a seasonal level of profitability might select the annual method of calculation of profits.

High or low profitability?

Imagine an industrial company with a net rate of return of 16% on its sales. According to the ‘annual’ profit method, and assuming that the total sales reach 100K R$, this company shall have a calculated result of 8% of total sales. The corporate tax will be calculated on this 8K R$ profit and paid through monthly installments during the year.

If the company had opted for the ‘quarterly’ calculation, its tax base would be twice larger, since it would have been 16% of total sales: 16K R$!

Obviously, there will be an adjustment at the beginning of the following year. But the cash would have been better managed throughout this period, and given the cost of money in Brazil, a significant amount of interest would have been saved.

2nd rule: a company with a very high profitability (higher than those expected from the tax rules) will be better off selecting the ‘annual’ profit method.

CARRY FORWARD OF LOSSES

In the case of accumulated net losses in the balance sheet, it is possible to reduce the current year’s corporate tax by offsetting current profit with past losses.

Past losses can be applied to reduce future Corporate Tax, and must be disclosed and explained in the LALUR.

The use of previous losses in order to decrease the current year’s tax burden is limited to 30% of the current year’s net profit.

For example, a company making a 100 R$ profit during the year 2016, and with a 200 R$ accumulated loss in the balance sheet, will be authorized to decrease its basis of calculation by a maximum of 30 R$. Corporate tax will be calculated on 70 R$. There will be 170 R$ left of accumulated loss, which could be used during the following years.

Example:

There is no time limit to use these accumulated losses.

As mentioned above, for the method of quarterly calculation of taxable income, each quarter is considered a separate period. This means that – within the same fiscal year – the Corporate Tax paid with respect to one quarter cannot be offset against following quarters. So with the quarterly method, you might end up with a higher tax burden (but you get a tax credit)!

The retroactive compensation for losses is not permitted.

Example of calculation of Corporate Tax:

Calculation of earnings “ACTUAL” net IRPJ and CSLL
Activity: Industry, trade and service

CHOOSING BETWEEN “REAL” AND “PRESUMIDO” METHOD

As long as the Turnover is below 78M R$, one can choose between the ACTUAL or the ESTIMATED method the one that gives the lowest amount of Corporate Tax.

The choice must be done every year and before the 25th of February. PIS and COFINS taxes related to January turnover are due on 25th of February; when paying these taxes, a Specific code is selected (8109 and 2172 for a Cpy selecting Presumido) and related to the Turnover of January.

Let’s see through examples the basic criteria in order to select the best method:

Example 1:

Here below is a plain vanilla comparison for a service company. For services, it is a 32% rate that must be applied to the Turnover (1,000,000 R$) in order to estimate the ESTIMATED result.

Applying the 34% Tax on those 320,000 R$ makes 108,800 R$ of Tax (it was decided in this example not to take into consideration the 20,000 monthly threshold used for the additional Corporate Tax).

In this example, it’s obvious that the ESTIMATED method is not the right choice, since the company will pay a Corporate Tax of 108,800R$ in spite of an actual 0 R$ return!

SIMPLIFIED EXAMPLE OF COMPARISON BETWEEN REAL AND PRESUMIDO
SERVICE CPY  – YEAR 2016

Example 2:

Here below is a 7 years Business Plan for a startup Service Company, with Corporation Tax calculated as per ESTIMATED and ACTUAL method.

In this example, we take into account the “Loss carried forward”, another advantage of the ACTUAL method.In red, we highlighted the highest amount of tax. From 2013 till 2017, applying the ESTIMATED method gives a higher amount of Corporate Tax. Subsequently, in 2018 (and probably for the following years) the ACTUAL method gives a higher amount of Corporation Tax.

REGIME PRESUMIDO (SERVICE CPY – 32%) 7 YEARS BUSINESS PLAN

REAL METHOD (SERVICE CPY) 7 YEARS BUSINESS PLAN

Below, one can see the amount of Corporate tax paid over these 6 years by always selecting the best method: 692,240 R$.

The amount of Corporate Tax saved is 360,400 R$; i.e. 52% of the amount paid (assuming that the amount paid has been the lowest amount of tax between 2013 and 2018)!

CORPORATION TAX SAVED BY SELECTING THE BEST OPTION

Of course, the decision to select ACTUAL or ESTIMATED must be taken before actual numbers are known. Accurate financial planning is a key issue in order to save Tax.

Besides, credit of PIS and COFINS must be taken into consideration to make the best choice.

ARBITRARY METHOD (“ARBITRARIO”)

This regime is chosen by the tax authorities as a last recourse when there is a complete lack of confidence in the financial statements due to a glaring lack of evidence necessary to verify the calculation of the actual or estimated profit.

The method of calculation is at the discretion of the tax administration, and may relate to the amount of total assets, capital subscribed, total purchases / sales, payroll…

The application of this method by tax authorities almost invariably leads to a higher tax burden on the company.

DISPUTE

In case of dispute, for legal reclamation, there are 3 different stages, all of them are federal:

  • Receita Federal : chance to get a positive result is deemed 20%; then,
  • ‘Conselhos de Contributientes’, this body is 50% made up of companies and 50% of government officials, therefore more likely to get positive results,
  • The 3rd stage is the High Court (Câmara Superior de Recursos Fiscais – CSRF).