General Information on the Brazilian Tax System
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Mainly because of its decentralized organization, the Brazilian tax system is particularly complex and is the subject of much criticism in business circles. It is ranked the last in Latin America, as classified by the Latin Business Chronicle (www.latinbusinesschronicle.com).
It is interesting to note that Brazil is one of the few countries where there is no tax called VAT. However, there is a plethora of taxes, particularly two value-added taxes (ICMS and IPI).
Furthermore, and although inflation (IPCA) has been reduced to a reasonable rate (7.25% in 2016, after a huge 10.70% in 2015), it should be noted that the real interest rate is very high, among the highest in the world. The interest rate (Selic) is set by the Central Bank at 14.00% (November 2016).
The Brazilian tax system is still suited for a hyperinflation economy; thus, the deadlines for payments of any kind are always short. Similarly, delays are quickly and systematically subject to penalties, which are themselves subject to the statutory interest rate (Selic).
Altogether, international comparisons show that the burden of taxes in Brazil is very significant, and that the time spent on taxation is unheard-of! See below the figures estimated for a medium sized Ltd company:
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With the sharp economic crisis of 2015 (recession of 3.8%) and 2016 (expected number is a decrease of 3.2%) unemployment has surged from 6,8% in 2014 to around 11,8% in late 2016.
The rebound is expected in 2017 with between 1% and 2% growth.
In 2016 the weight of taxes on GDP reached 33,2% (source: globo.com), a moderate figure by Western standards, but a marked increase over the previous 18 years.
Level of taxes relative to GDP:
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Tax Burden : international comparaison (2014)
In 2016, the ratio of Public debt to GDP is 74% (while it was below 57% in 2014), and should reach 84% in 2018. 80% of GDP is based on consumption, and the demography is dynamic (204 million people and growing), all of which make Brazil a land of opportunities.
Some macroeconomics information can be found in APPENDIX 1:
The division of tax authority between the Federation, the 26 Federal States and the Municipalities is as follows:
The Federation has the authority on:
- Income tax (IRPF),
- Corporate tax (IRPJ + CSLL),
- Industrialized products tax (IPI),
- Credit, exchange, stock market, insurances (IOF),
- Foreign trade tax (imports, exports),
- Rural land tax,
- Personal assets,
- Employer contributions (INSS),
- Social contributions (PIS and COFINS),
- Compulsory Provident Fund (FGTS),
- Contribution to Interventions in the Economic Domain (CIDE).
The Federal States have authority on:
- Services, transport, communication and movement of goods tax (ICMS),
- Annual vehicle license (IPVA),
- Inheritance tax (ITCD).
The Municipalities have authority on:
- Tax on services (ISS),
- Urban land sale tax (IPTU),
- Tax on real estate and related rights (ITBI).
The list below (« Contribution of taxes to the Federal Budget ») gives the share in the budget of each tax authority; and a detail by tax/contribution.
Although outdated, this list has the merit of presenting you with critical information: the control of taxes by the different tax authorities. It is important for a company to know whether a tax is controlled by the Federation, the Federal States or the municipalities. Indeed, a company subject to the IPI (which appears under the heading ‘Industrialized Products Tax’ in the “Federal” category) will not need to choose among states on the basis of this tax. Since this tax is federal, it is the same throughout the entire Brazilian territory.
On the other hand, ICMS appears in the “State” category. Thus, the rate of this tax will vary from state to state (26 states plus the Federal District). A foreign company looking for the best location for its implantation should take into account the rates of ICMS in all the different states.
[Be aware that Federal States redistribute 25% of ICMS revenue to the Municipalities, according to a ‘Participation Index’]
Similarly, as the rate of ISS is controlled by Municipalities, the choice of location of the implantation must be decided upon, on the basis of the rates offered by Municipalities.
“CUMULATIVE” AND “NON-CUMULATIVE” TAXES
Among the taxes in force in Brazil, there are “cumulative” and “non-cumulative” taxes.
“Non-cumulative” taxes, foremost, among which we find ICMS and IPI, are eligible for a tax credit (as VAT in most of Western countries). However, “cumulative” taxes do not qualify for tax credit.
PIS and COFINS taxes are not cumulative for those companies applying the “Real” method of calculating Corporate Tax. They are cumulative for others methods: “Simples” and “Presumido”.
The existence of “cumulative” taxes has important consequences. Indeed, each actor of the production process will add an additional tax layer, resulting in a higher price for the final client.
Real interest rates in Brazil are among the world’s highest. Obtaining cheap financing in Brazil is therefore a challenge and many international companies decided to provide themselves for financing their Brazilian subsidiaries.
BNDES, a public bank, can be a solution for your Brazilian subsidiary. In 2002, it started to offer financing to small and medium sized enterprises (“SME”) through the issue of plastic cards. During the last 10 years, there were 580.000 cards issued! In 2016, there was over 10 billion R$ financed through these cards.
The necessary process to obtain a financing with BNDES starts through the internet website, and is finalized within an agency of BNDES (or Itau, Banco do Brasil, Caixa Economica e Federal, Banrisul, and Bradesco).
- no late payment in Serasa Experian,
- need to provide statutory accounts,
- proof of payment of Corporate tax and social charges,
- no outstanding issue with the Central Bank.
On the other hand, it is not necessary to demonstrate that this is for well-devised project/business plan.
The bureaucratic part is just – no surprise – the acceptance of the credit. Once approved, the company can use any time it wants the amount granted by using the card online in a very easy and fast way.
With the plastic card, one can access the BNDES website where there is a catalog of 207.000 items registered (from 47.000 companies) and available for purchase with financing.
FOREIGN EXCHANGE CONTROL
In Brazil, only authorized financial institutions are permitted to maintain accounts in foreign currency.
Thus, any payment or receipt of currencies by a Brazilian company (whether or not is part of a foreign group) must pass through an authorized financial institution and be registered with the Central Bank of Brazil (BACEN).
When an International company sends money to Brazil, it must be registered into the BACEN system. RDE and ROF are acronyms that all international companies should know: a capital increase must be done through an RDE (Registro de Declaraçao Electronica, meaning Electronic Register of Disclosure).
A loan needs an ROF (Registro de Operaçao Financeira, meaning Register of Financial Transaction); see hereafter the document that must be filled out and sent to the banker. With this ROF, the “Loan agreement” must also be signed by both parties and sent.
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Some international groups when financing their local subsidiary in Brazil have used the bank account of a third party, for example the local CEO, i.e. the funds have not been send from the Head office to the local subsidiary. And no registration was done with the Brazilian Central Bank.
Years later, when the time to repay the loan has arrived, the Brazilian bank will ask some evidence that this transfer is a refund. Since no registration of the initial loan has been done, this won’t be possible. The refund is not possible!
A solution is be to ‘create’ another transaction, like paying Management Fees, or importing services from the Head office; but taxation on these transaction is heavy, whereas there is no taxation on the repayment of a loan.
Conclusion: when sending funds to your Brazilian subsidiary, (especially capital and loan), register with the Brazilian Central Bank (BACEN).
Much is described in the RMCCI (Regulamento do Mercado de Cambio e Capitais Internacionais) available on the Central Bank website.
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Process for sending capital to your subsidiary in Brazil:
First it is necessary to create a profile for your company on the Central Bank (BACEN) website. This process is called CADEMP (Cadastramento Empresa, or Company Registration) and needs an electronic identification (through the use of a Digital Authentication). You will need to download the following application on the BACEN website: PASCS10.
It is necessary to create a profile for the investor who will be sending the money to Brazil. The data to be inserted must be consistent with the data written in the Articles of Association. You will get a CADEMP number (ex: 616423) for the investor. A CADEMP is also necessary for the recipient of the investment.
Then, once you have received confirmation from you bank that the money has arrived at your corresponding bank in Brazil, you must contact the bank in Brazil to close the exchange. You will be given the telephone number of the currencies exchange desk. When you call, your contact will look for your operation into the bank’s system (the CNPJ might be used, but the information used to look through the bank internal system depends on each institution). Then, an exchange rate is offered to you, over the phone, and you can agree or not to close the deal. The rate is based on the market price and will depend on:
- The bank (and its commercial policy),
- The amount transferred,
- Negotiation skills.
If the beneficiary feels that tomorrow’s exchange rate will be more profitable than today’s, it’s possible to refuse the offer and to call anytime within the next 30 days to close the deal. After these 30 days, the operation can be cancelled.
After this, you will need to send some documentation by post mail. This will depend on the bank’s internal process. It might be the screen image of the RDE (system SISBACEN), a signed statement asserting the destination of the funds, or any other document, but it will always include the numbered Exchange Contract. This contract will be sent by mail to you (the beneficiary), for you to print, sign and return two copies to your bank. Failing to do so within 48hours might result in the operation being cancelled, the funds returned to the issuer, and all related costs being charged. This contract contains details of the transaction, among other things the nature of the operation: capital increase, loan, payment, etc.
This process can be done by your bank, but you will take part in closing the deal over the phone.
INTERNATIONAL TAX TREATIES
Brazil has signed tax treaties with a limited number of countries to avoid double taxation. Most of these treaties apply to individuals and legal entities and cover taxes on income or profits but not taxes on the turnover. Today, Brazil holds double taxation conventions with the following countries:
List of bilateral agreements:
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They state that taxpayers residing in the former country have the right to credit the tax paid in the latter.
CHARGES AND “MANAGEMENT FEES”
Royalties paid to non-residents due to the use of technology, trademarks, patents or know-how are subject to a withholding tax of 15%. Likewise, the withholding tax paid in respect to technical assistance services, administrative services and support services is also 15%.
The remuneration for services other than those mentioned above is subject to a withholding tax of 25%.
As mentioned, the head-office bears the charge of 15%, receives 85$, and obtains a tax credit of 15$.
In practice, many head-offices revise the price of their performance upward in order to receive the expected amount, net of tax, as in the example below:
This solution allows the head-office to improve its result; however, it also globally increases the amount of taxes and the cost to the subsidiary.
Besides, if there is no evidence that there is a real service behind these invoices, amounts paid might not be deemed deductible by the tax authorities (for Corporate Tax).
To limit this risk, it is suggested the following:
- Every time a staff from the Head Office come to visit and review progress in Brazil, keep evidence of all expenses incurred (airline ticket and hotel),
- A written report for each visit would help to support your claim; it should be sent to Brazil for archive.
- All relevant emails exchanged should be saved.
PROFITS & DIVIDENDS
There is no taxation on the transfer of dividends abroad. However, in a limited number of cases, a 15% tax may apply.
Since taxation on dividends is very favorable, it is recommended – to the extent possible – to limit or avoid the payment by the Brazilian subsidiary of a ‘Management Fee’ since this renunciation will be more than compensated by extra dividends (depending on share of capital controlled by the provider of the related services).
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Interest generated in Brazil is taxable abroad. The Brazilian Treasury (Receita Federal) subjects the interest paid to a foreign company to a 15% withholding tax.
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Brazil adopted a law on transfer pricing in 1996. The normative statement of 13th November 2002 states the implementing rules. Contrary to the rules used by member states of the OECD (of which Brazil is not a member), the Brazilian law sets ceiling prices for imports and floor prices for exports. The peculiarities of the Brazilian legislation are difficult to reconcile with International legislation. Experience shows that a significant number of foreign companies ignore this situation and are ill prepared to overcome the resulting difficulties.
The Brazilian legislation on transfer pricing applies to all transactions between related companies. A participation of at least 10% directly or by a common shareholder, qualifies as “related companies”. Likewise, the sole status of agent, distributor or exclusive licensee of a foreign company without a capital link, also qualifies.
Thus, the Brazilian notion of related companies is much more extensive than that of international standards.
Moreover, there is a special provision on payments to taxpayers residing in a tax offshore country. A transaction made by a resident of Brazil with a taxpayer resident in a country that has not established the corporate tax, or levying the tax at a rate below 20%, is subject to transfer pricing rules even though both parties to the transaction are independent. The list of these countries is published by the Ministry of Finance, the last update dating from 2010 (consult the Instrução Normativa RFB nº 1.037 – The Delaware US State has been included into this list).
The methods are similar to those of the OECD but impose fixed margins. If the price of an imported product exceeds the price ceiling set by law, the corresponding expenditure is not deductible. Similarly, there is a floor price for exports.
For imports, the price ceiling is defined using three methods:
- the market price method,
- the resale price method,
- and the cost plus method.
The market price method must take into account the arithmetic average of selling prices of similar products or services, as reflected in comparable transactions with independent third parties in the Brazilian market, or in a foreign market, under the same financial conditions. The Brazilian official directives define the criteria and indicate the adjustments to be made based on the financial conditions of the transaction, such as payment terms, guarantees given, quality control, advertising expenses, insurance and transport.
For the resale price method, a margin of 20% must be calculated on the price (60% when the goods are semi-finished and for incorporation in a manufacturing process).
For the cost plus method, the margin is also 20%, but the definition of costs to be taken into account is extremely precise, and it should comply with the nomenclature thereunder. This means preparing upstream the specific tables showing cost items as provided in the circular of the administration. In addition, the Brazilian tax authorities may demand to verify the actual costs incurred by the seller of goods or services (by definition located abroad), which can go upto the production of proper accounting documents.
However, there is no recommendation regarding the use of the best method. The taxpayer can use one of these three methods, or use several of them, in which case he may retain the one which gives the highest price.
With respect to exports by Brazilian companies, they are subject to transfer pricing rules when the average price of exported goods or services on the fiscal year is less than 90% of the normal price set by the company on the domestic market. When the 90% rule is not met, the company must justify its export price using one of the following:
- sales price as compared to market prices,
- ‘resale minus’, with application of a fixed margin of 15% for wholesale and 30% for retail sale,
- the ‘cost plus’ with application of a margin of 15%.
Finally, there is an exception to the application of these fixed margins when:
- either the turnover in the year with related companies is 5% or less of the total turnover of the Brazilian company,
- or the absolute value of exports with related companies, during the year, does not exceed 5% of the net income of the Brazilian company (based on the average of the year or, where applicable, the previous two years).
Again, companies can retain one of the recommended methods without having to justify whether it is appropriate or not to the type of transaction concerned.
These rules on Transfer Pricing apply not just for merchandise, but also for services (although few international companies are aware of that).
Besides, these rules apply for companies using the Real tax regime or the Presumido tax regime (despite paying all taxes on turnover).
In some cases, transfers of funds abroad are subject to a Contribution for Intervention in the Economic Domain (“CIDE”) of 10%, and must be paid to the Brazilian National Fund for Scientific and Technological Development. This applies to royalties paid to non-residents under patent licensing, trademark, know-how, transfer of technology, contracts for technical assistance, administrative assistance and similar services.
The CIDE is due by the company making the payment of funds, and is not deductible from the amount to be paid to the beneficiary abroad. As a result, the CIDE is not recoverable by the head-office abroad, even if a bilateral Convention has been signed between Brazil and that country.
This charge is payable monthly, by the last day of the second week following the month of payment.
Moreover, the tax deduction for royalties is subject to a limitation of general application: 5% of the turnover from the sale of the product giving rise to the royalty. Included in this envelope is not only the 5% royalty on the use of brands, but also those royalties related to patents and technology transfer.
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SOFTWARE AS A SERVICE (CLOUD COMPUTING):
BRAZILIAN RECEITA FEDERAL DECIDED THAT REMITTANCES ABROAD ARE SUBJECT TO FEDERAL TAXATION
According to Private Letter Ruling 267/2007, issued by the Brazilian Federal Revenue Office, amounts remitted abroad due to Internet remote use of off-the-shelf software through cloud computing (Software as a Service contracts) are considered payment for the provision of technical services. Taxpayers must therefore apply the Withholding Income Tax IRRF (15%), CIDE-technology (10%) and PIS/COFINS on Imports (9.25%) to these remittances. This rule may apply to all taxpayers.
Even though the Brazilian IRS does not have jurisdiction to decide on the municipal Service Tax (ISS), this ruling also states that these services are subject to the ISS, which is in keeping with an earlier decision from the City of São Paulo Tax Authorities.
However, we believe there are reasonable arguments to challenge the position taken in this private letter ruling.
The basis of calculation of income tax is wide and includes not only salaries, but also most benefits offered by companies (such as tuition fees, housing benefits, and expat benefits).
On the other hand, the monthly payments of FGTS – 8% based on the gross salary, and taken out of the payslip – are not taxable.
The main deductions from the tax basis are the following: social security and Brazilian pension fund contributions, Brazilian health plan contributions duly approved by the authorities, and medical expenses.
The tax rate for a non-resident taxpayer (mainly foreigners having arrived in Brazil without a work contract, and staying in Brazil for less than 6 months) is 25%.
Monthly thresholds of Income Tax:
Progressive Table for the monthly calculation of Income Tax of Individuals for 2016
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Tax income is managed by the Federation and is paid in two steps:
- a monthly payment taken from the source of income and shown on the payslip,
- then, a yearly adjustment (through a declaration on the website of the Federal Treasury, or in an agency of ‘Banco do Brasil’ or ‘Caixa Economica e Federal’).
The level of technology in the tax administration is very high. This has been decided to fight tax evasion, and also because of years of raging hyperinflation that has plagued the country. The use of technology allows for better control, and faster settlement. For example, over 95% of income tax returns are made through the internet.
The period for sending the declaration is from March 1st to April 30th.
Since June 2012, (Instruction RFB n° 1277/2012), individuals and legal entities must disclose to the tax authorities all transactions related to services, royalties, or any other operation with non-residents. Operations with merchandises are out of their scope.
Residents have 30 days to disclose the operations. This communication must be done through the Public Treasury website (Centro Virtual de Atendimento ao Contribuinte (e-CAC) da Secretaria da Receita Federal do Brasil).
Failing to disclose, or disclosing false information may result in a 5000R$ fine, or 5% of the amount of the operation.
The tax authorities have created a simulator for individuals (http://www.receita.fazenda.gov.br/aplicacoes/atrjo/simulador/simulador.asp?tipoSimulador=A). It takes into consideration deductions for:
- Social security,
- Education costs,
- Medical costs,
- Alimentation pension paid.
Most of them are deducted from the basis of calculation.
OTHER TAXES ON PERSONAL INCOME
Taxation of capital gains earned by individuals increased. In 2016, capital gains are subject to a 15% Withholding Income Tax (WHT) rate. On September 22, 2015, however, the Brazilian Government issued Provisional Measure 692/15, increasing the taxation of the capital gains earned by individuals. On March 16, 2016, this Provisional Measure was converted into the Law 13,259.
With this new Law, the WHT will be levied progressively, as shown in the table below:
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Since Provisional Measure 692 was converted into law only in 2016, the new system of taxation of capital gains by WHT should take effect only from January 1, 2017.
For investors in equities traded on the Stock Market, a 15% tax is applied on gains when the amount of sales is over 20K $R during the month. If the amount of sale is not over 20K $R, there is no tax.
On the other hand, gains on intra-day operations are taxed at 20%.
For investors in the money market and bonds, gains are taxed depending on the holding period of the investments:
- held less than 6 months: 22.5%
- held between 6 and 12 months: 20.0%
- held between 12 and 24 months: 17.5%
- held more than 24 months: 15.0%
Non-residents bear a 25% tax, whatever the financial product and the duration of the holding.
The calculation of the cost of purchase and sale takes into account the cost of transaction and related costs. The payment of the tax is monthly, the deadline being the last day of the month.
PROFIT SHARING SCHEME
Employees who receive some revenue through a profit-sharing scheme (“Participação nos Lucros ou Resultados” – PLR) of the company must pay tax on those benefits:
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INHERITANCE AND WEALTH
The Federation has created a tax on inheritance and gifts (“Imposto Transmissão Causa Mortis e Doação” – ITCMD) that amounts to 8%. Nonetheless, the Federal States have the authority to diminish this rate. For example, the state of São Paulo has set this tax at 4%.
There is no tax on wealth.
Foreigners living in Brazil and holding assets abroad must disclose them on a yearly basis. Those who don’t shall pay a fine.
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Program to regularize assets not declared by Brazilian taxpayers (or foreigners with residence in Brazil)
Following the example of other countries (Italy, Mexico, Germany, etc.), the Brazilian Government has created a program to regularize undeclared foreign assets held abroad by Brazilian taxpayers (“RERCT”).
The RERCT was created on January 14 by Law 13,254 and this program applies to all funds, assets or rights of lawful origin, such as bank deposits, capitalization transactions, loans and exchange transactions, equities, intangible assets, real estate, aircraft and others.
The amount to be regularized will be subject to the income tax at a 15% rate, and a fine of 100% on the tax, for a total tax rate of 30% on the amount to be repatriated. Those who take advantage of the RERCT will have their criminal liability for the crimes it provides for extinguished.
A taxpayer who wants to participate in the program must submit a unified statement of regularization to the tax authorities and to the Brazilian Central Bank and must pay the tax mentioned above. The deadline to participate in the RERCT program is October 31.
Although the local IRS has recently issued a Normative Ruling (IN 1,627) regulating the program, there are some points in this legislation that remain unclear and may raise doubts.
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