Withholding Taxes on Invoices
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There are plenty of cases of withholding taxes! In order to fight against tax evasion and to fasten the collection of taxes – in some cases – IRPJ, CSLL, PIS and COFINS must be retained by the client (and subsequently paid to the Tax Authorities) instead of being paid to the provider.
This applies only for Services and only for companies using the ACTUAL or ESTIMATED methods. Companies using the SIMPLES method pay the whole amount to the provider; and receive the whole amount from clients. To be fully compliant, these companies must send to the clients a document signed by the administrator stating that the company is using the SIMPLES, and as such is not subject to withholding taxes.
Amount and taxes withheld are the following:
- 0,65% for PIS,
- 3% for COFINS,
- 1% for l’IRPJ,
- 1,5% for CSLL.
CORPORATE TAX WITHHELD
IRPJ must be withheld on all invoices. There are only two exceptions:
- The amount of IRPJ ‘withheld’ is below 10R$. In such cases the seller will receive the payment including the IRPJ, and will need to pay the IRPJ to the Tax Authorities himself at the end of the month;
- The seller has selected the SIMPLES method, and therefore pays all taxes in a single document at the end of the month;
INVOICE WITH CORPORATE TAX WITHHELD
Below is an example of an invoice related to services, of 1,899.25 R$, with ISS (5% of the amount of the invoice, i.e. 94.96 R$), and IRPJ withheld (1.5% of the amount, i.e. 28.49 R$).
In this case, the client will pay to the provider an amount (net of IRPJ taxes) of 1,870.76 R$ (see the last line of the invoice).
The client will retain the 28.49 R$ of IRPJ, and will need to use a DARF in order to pay this amount to the Public Treasury (Receita Federal).
The seller will receive 1,870.76 R$ and will still have to pay the 5% ISS. He will use a DARM (Municipal document for paying taxes).
Note that if the client fails to retain IRPJ and pays 1,899.25 R$ instead of 1,870.76 R$, the service provider will need to issue and pay the 28.49 R$ of IRPJ.
DARF FOR PAYMENT OF THE CORPORATE TAX WITHHELD
The document below is a DARF (‘F’ standing for Federal), whose code 1708 indicates that it is used in order to pay the Corporate tax (IRPJ) to the Public Treasury. DARFs are used to pay Federal taxes. In such a case, there is only one Federal tax to pay: IRPJ.
(IRRF can been found on the DARF below. It is another acronym for IRPJ; RF stands for Retido na Fonte, i.e. withheld at source).
One can see the amount of 28.49 R$ withheld by the client on the invoice above.
If the client has received and paid 10 different invoices during the month, he will need to issue 10 DARFs to pay the IRPF withheld on each one of these!
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How to issue a DARF / DARM?
To issue a DARF, you need to download a special application (named ‘Sicalc’) from the Public Treasury website: http://www.receita.fazenda.gov.br. This application is updated every month.
You will need to input the correct code (depending on what tax you are paying), the date of reference (based on this date, the deadline will automatically appear), the amount, the name and CNPJ of the company.
To issue a DARM, you need to access the site of your Municipality (example for Rio de Janeiro: https://notacarioca.rio.gov.br/capa.aspx). Inform whether you have a physical identification device (“Certificado Digital”) or not. If you do, connect it to your computer, and input your password. Select “Guias de Recolhimento”. Input the required information, and issue the document “Emitir Guia”.
DARM FOR PAYMENT OF THE ISS TAX
The service provider must pay the ISS tax on all services sold. Since this is paid to Municipalities, it’s a DARM (‘M’ standing for Municipalities) that must be used.
Below is an example of a DARM used to pay to the Municipality of Rio de Janeiro an amount of 644.96 R$ of ISS.
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Some DARF’s Codes:
In the field “Codigo da receita”, a specific code must be selected. This code will inform the tax authorities what tax the company is paying, and what tax system has been chosen. For DARF used to pay Corporate Tax, codes are the following:
IRPJ Corporate tax:
1) Legal entity:
Monthly estimate: 2362
Quarterly calculation: 0220
Yearly adjustment: 2430
Method ESTIMATED: 2089
Method ARBITRADO: 5625
IRRF Corporate Tax withheld:
Legal entity offering services: code 1708
Rent and Royalties paid to individuals: code 3208
PIS, COFINS, AND CSLL TAX WITHHELD
The article 30 Law nº 10.833/2003 (and SRF nº 459/2004) states that PIS, COFINS and CSLL must be withheld on a limited list of services (see Appendix 5 for the list of services subject to withholding taxes). This applies only for transactions between legal entities. Individuals are not within the scope of this law.
PIS, COFINS and CSLL taxes must be withheld. The rates applied are respectively 0.65% for PIS, 3% for COFINS and 1% for CSLL.
Below is an invoice related to services. The service provider (regime ESTIMATED) has issued an invoice for a total amount of 5,750 R$.
The invoice shows the following amounts of tax withheld:
COFINS (3%): 175.50 R$
IRPJ (1.5%): 86.25 R$
CSLL (1%): 57.50 R$
PIS (0.65%): 37.38 R$
Total : 353.63 R$
(Note that if the service provider had selected the ACTUAL method instead of the ESTIMATED, rates would be different.)
The amount, net of taxes withheld, and that will be received by the service provider will be 5,396.37 R$ (it does appear at the bottom of the document).
The client will need to pay to the Tax Authorities the amounts withheld. For this, he will use 4 DARFs (one for each tax) to pay these 353.63 R$.
The service provider will pay 287.50 R$ of ISS. He will use a DARM.
Accounting treatment of withholding tax:
The company that buys services subject to withholding tax shall recognize the cost of service for the full value and account for the taxes to be paid.
Example with the DELTA company, that buys consulting services worth 20,000 R$ from the TAX company. The invoice was registered on 31/08/20016, with settlement scheduled for 25/09/2016.
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The accounting entries above clearly show that the withholding taxes are paid by the client himself!
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After this input, it’s possible to see that the TAX Cpy has a credit (asset) of Corporate Tax (CSLL and IRRF). At the end of year, even if the Company applies the REAL system and makes no profit, some Corporate Tax will have been paid (actually withheld by clients). This credit will increase throughout the years until the Company makes a taxable profit and use this credit.
WITHHOLDING TAXES ANNUAL STATEMENT (“DIRF”)
The DIRF (Declaração do Imposto sobre a Renda Retido na Fonte – SRF n°381/2003) is a statement that the payer must issue every year to inform the federal authorities. It contains information on:
- payment to individuals resident in Brazil,
- the amount of taxes withheld and paid on invoices received,
- payment to individuals resident abroad,
- payment to corporate ‘Health Plan’,
- the codes used,
- the nature of the transactions,
- the amount of the transactions before taxes.
The statement is done through the website of the Receita Federal: http://www.receita.fazenda.gov.br.
The annual DIRF must be issue before end of February.
Penalty in case of late delivery, and mistake:
- 2% of the taxes paid for every month of delay, with a maximum of 20%; i.e. if the delay is above 10 months, the penalty will be 20% of the amount of taxes paid in the previous year and disclosed in the DIRF;
- 20R$ for every group of 10 items disclosed incorrectly.
Since companies opting for the SIMPLES regime do not have to withhold taxes, they don’t have to issue such statement.
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