Salaries and Benefits – INSS
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Labor law is governed by a code called the CLT (“Consolidaçao das Leis do Trabalho”).
The INSS (National Institute of Social Security) manages the pension system and social security. The INSS uses the services of DATAPREV (which provides database management services) and is controlled by the Ministry of Social Security (“Ministerio da Previdencia Social”). Both these entities are key contacts for HR Departments.Social law is highly developed in Brazil. Although it is quite easy to dismiss an employee in Brazil (certainly easier than in most of countries of continental Europe), regulations grant employees many rights of appeal. Thus, there are nearly 2 million lawsuits filed before the Labor Court each year.
On the other hand, staff turnaround is very high compared to Western standards, this being rather part of Brazilian culture than just the result of macro-economic factors.
For the employment contract to be valid, the following conditions are necessary:
- registration with the INSS,
- establishment of the Fund of Guarantee for the Time in Service (FGTS – Provident Fund),
- entry in the Annual Social Report (RAIS).
The trial period is 90 days.
The employer must maintain and submit annually to the Ministry of Labor, a Social Report (“Relatorio Anual das Informações Sociais” – RAIS).
As for the employee, he must have a personal record book (Carteira de Trabalho, or CTPS), containing the detailed list of past work experience and social security information. This document traces the entire career of the employee (list of employers, positions held, dates of recruitment and breach of contract, remuneration, etc.).
It is a means of proof of the terms of the employment contract, and as such, can replace the permanent employment contract.
The temporary employment contract is allowed but cannot exceed two years. The trial period is limited to 90 days.
The employer should open for each of its employees a reserve fund (Fund of Guarantee for the Time in Service). The CEF (Caixa Economica Federal) manages the FGTS. Every month, a SEFIP (‘Sistema Empresa de Recolhimento do FGTS e Informações à Previdência Social’) statement must be issued online via the CEF application. This monthly report contains data on FGTS and Social Security amounts to be paid.
Each month, an amount equivalent to 8% of the gross salary (+13th month, holidays, and bonus) is paid on this FGTS. This 8% is withheld in the payslips. To make these monthly payments, it is mandatory to use a dedicated application (called GRRF) available on the website of the CEF.
Excepting cases of resignation, when the employee leaves the company, the amount of accumulated FGTS is paid to him/her.
Moreover, there is a severance payment equal to 50% of the accumulated amount of FGTS (40% to the dismissed employee, and 10% to social security).
In case of resignation, the amount of FGTS is not paid to the employee. Nonetheless the employee never loses the benefits of this amount: the accumulated amount is held until the employee faces a future lay off.
Most often, rather than resigning, the employee does negotiate with the employer a dismissal, to obtain the immediate payment of the FGTS. Of course, to have the consent of his employer, the employee will have to bear any additional cost borne by the employer (mainly the 50% severance payment).
3 Case Histories:
An employee is dismissed; the amount of accumulated FGTS is 1,000 R$:
Amount of the severance for dismissal charged to the company:
1,000 * 50% = 500 R$
Amount of FGTS paid to the dismissed employee:
1,000 R$ + 400 R$= 1,400 R$
FGTS amount paid to the INSS:
1,000 * 10% = 100 R$
The company pays 500 R$.
The employee receives 1,400 R$
Upon resignation, there is no additional cost to the employer. The 1,000 R$ will remain held and subsequently paid to the employee.
The company pays nothing.
The employee receives nothing.
Resignation ‘disguised’ as a lay off:
An employee resigns, but negotiates a dismissal with his employer in order to obtain the immediate payment of the amount of FGTS. The amount of accumulated FGTS is 1,000 R$:
As in the previous case, the employer will incur an additional cost of 500 R$. To compensate this, the employee must agree to pay the 500 R$ to his employer. The FGTS amount received by the employee will be: 1,400 – 500 = 900 R$
The company pays 500 – 500 = 0
The employee receives 900.
Given the level of inflation in Brazil, the immediate payment of the FGTS is often preferred by the employee.
It also happens that the employer may try to take advantage of this situation! Thus, the employer, as a condition to accept a lay off rather than a resignation, may require the reimbursement not just of those extra 500 R$ paid for severance costs, but 700 R$ for example (in this case, the employer makes a profit of 200 R$).
The company gets 700 – 500 = 200
The employee receives 1,000 + 400 – 700 = 700
The legal working time is regulated by the Labor Code and collective agreements. It cannot be longer than 8 hours daily, 44 hours per week and 220 hours monthly.
The amount of overtime is limited to 2h per day, and is paid at least 50% more. Overtime is not paid to executives.
Leave can only be taken after a period of 12 months of employment with the company. Every year, the duration of paid holidays is 30 consecutive days. It is important to note that these are 30 calendar days and not 30 working days (i.e. 4 weeks + 2 days).
Generally, the employee must take all the leave in one time. During his leave, the employee receives a bonus equal to at least one third of his salary.
In the case of sick leave, the employer pays for only the first 15 days, beyond which Social Security bears the cost. There is one condition: the employee must have contributed for at least 12 months to the INSS (this condition is not applied in case of accident).
Maternity leave is 120 days.
In 2016, the federal minimum monthly wage is 880 R$ (788 R$ in 2015). It is reviewed annually, and varies among states and professions. For example, the monthly minimum wage in the State of São Paulo is about 70 R$ higher than the federal minimum. In 2017, the federal minimum wage shall be 946R$, i.e. 7,5% higher than 2016´s, in line with inflation.
Wages of unskilled workers are relatively low compared to Western standards; on the other hand, salaries of executives are higher. It is not uncommon to see a manager earning 10 times more than his/her direct reports. These wage differences partly account for the high level of the GINI index (international index measuring the wealth gap between the first and last decile).
In addition to salary, the company must pay a number of benefits; the most significant are:
- premium on paid holidays: salaries paid during paid holidays are 33% above the normal salary received by the staff,
- the 13th month, paid in two equal parts, in February and in November,
- transport allowance, not subject to payroll taxes, nor taxed on income,
- profit-sharing, not subject to payroll taxes, but taxed as income,
- lunch vouchers.
Moreover, given the poor quality of public health services, many companies choose to offer a health plan (“Plano de Saúde”) to their employees.
TAXES AND CHARGES ON LABOUR
The charges on labor are many. In total, an employee can cost up to 100% more than his net wage. An indicative list is presented below:
Compulsory Contributions (in %):
[table id=30 /]
Time not worked – 1
[table id=31 /]
Time not worked – 2
[table id=32 /]
* See glossary
The employer is required to comply with the guide to social welfare, which lists the various payroll taxes.
SIMPLIFIED EXAMPLE INCLUDING INCOME TAX
Assuming that the employee demands a net income of 25.000 R$, after Income Tax, the cost for the company will be 52.920 R$; more than twice the amount received by the employee. See hereafter the key numbers of his payslip:
[table id=33 /]
Simulations can be done on the following website: calculador.com.br.
Social charges are mainly made of INSS (Instituto Nacional de Seguridade Social) charges. The company part of INSS is 20% of the gross salary, without limit. The employee INSS is 8 to 11% of the gross amount, with a maximum amount of R$ 570.90 (11% * R$ 5,189.82).
Table of contributions to the Social Security (INSS) 2016:
[table id=34 /]
RETIREMENT AND DISABILITY
The retirement age is 65 years for men and 60 for women.
Finally, it should be noted that there are strong financial incentives (through heavy penalties) to encourage companies to hire people with disabilities. This incentive is so effective that, for the same level of education, staff with disabilities often receive a salary in excess of that of able-bodied staff.
TAX OPTIMISATION ON SOCIAL CHARGES AND INCOME TAX
There are some schemes well known in Brazil in order to limit taxes and social charges. The first one ‘Turn Consultant’ applies to Brazilian workers (or foreigners with an adequate visa), while the second one ‘Receive a salary offshore’, is used by some expats working in Brazil.
TURN CONSULTANT IN BRAZIL
One classical way of avoiding paying social charges and income tax is for an executive to set up his own company. Most of time, the company will be a Limited company (Ltda), with the “Presumido” or “Simples” method of taxation.
Partners of this company will then be able to be Consultants. Instead of receiving a salary from an employer, they will issue invoices to their clients (Nota Fiscal). The amount charged through the invoices can be decided by both the client and the consultant in order to reach a financial win-win situation. For example, if the amount of taxes saved monthly is 5,000 R$, they can decide to share the benefits between them, equally or not.
Despite being common practice in Brazil, this solution might not be accepted by the tax administration. In case of control, the auditors might ask the following questions:
- Does the consultant have, and use his own business cards?
- Is he using the consulting company email address while working for his client?
- Does the company provide to the consultant benefits normally offered to its staff?
- Is there a hierarchical relationship?
If the tax administration, after investigation, decides that the relationship between the client and the consultant is actually a social relationship, then it might ask:
- the company to pay all unpaid social charges,
- the individual to pay income tax on his income (because there is income tax on salary, but not on dividends).
The consultant’s Limited company will have to pay Corporate Tax. Then, the consultant will pay himself with the dividend of his Limited company. There is no income tax on dividends.
Example of a comparison:
If an employee making 25,000 R$ net of income tax, turns consultant and still demands 25,000 R$, the cost for the company would be 29,879 R$ (instead of 52,920 R$). This is a 44% discount for the company. See below the key numbers of the consulting company (the ‘turnover’ is the total amount charged to the client):
[table id=35 /]
Consultant thru Cpy:
[table id=36 /]
TURN CONSULTANT AND BE PAID FROM ABROAD
If the executive decides to open his own company, and is paid from abroad, the cost would be even lower since PIS and COFINS would not apply. This second solution might not be accepted by both Tax Authorities (Brazilian and foreign’s).
Consultant thru Cpy (abroad):
[table id=37 /]
RECEIVE A SALARY OFFSHORE
Some expatriates choose – when the head-office offers this solution – to have part of the salary paid off-shore.
In such a case, the Managing Director (or any other Director of the Management Committee) receives a below market salary in Brazil, paying social charges on this underpriced salary, but on top of that he receives the other part of his salary in another country, be it the country where the head office is located, or any other country.
By doing this, the Managing Director limits the social charges and Income Tax paid in Brazil, and might avoid paying any tax on the salary paid offshore.
Note that Brazilian residents should declare all their income, not just that earned on Brazilian soil. Nonetheless, some might decide not to declare the salary received offshore.
Of course, this scheme is not compliant with law and is not recommended. Doing this is risky; in case of an audit, the Managing Director will need to explain why his salary is below market level, and possibly below his own employee’s.
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