CHAPTER 4
ICMS – Tax on the Movement of Goods and Services, on Transportation and Communication
As it is controlled by the Federal States, the rate of Imposto sobre Circulaçao de Mercadorias e Serviços (“ICMS”, or Tax on Commerce and Services) varies depending on the Federal State where the service provider is located. It also depends on the product.
For example, you will find in APPENDIX 3, the rates of ICMS of the State of São Paulo (in Portuguese) with different figures applying to different products.
ESCOPO
O ICMS é o principal imposto cobrado pelos 26 estados federais e se aplica a:
- a movimentação de mercadorias,
- os serviços de transporte entre vários estados ou municípios,
- os serviços de telecomunicações.
Operationally, similar to the internationally well-known Value Added Tax, the taxpayer is entitled to a tax credit of upto the amount of ICMS that was paid on expenditures incurred by the company previously.
Portanto, esse imposto é "não cumulativo". Assim, ao comprar mercadorias, o ICMS já está incluído no preço pago ao fornecedor. Da mesma forma, quando a mercadoria for revendida, o preço de venda a ser pago pelo cliente incluirá o ICMS. Dessa forma, todas as empresas cujas compras e vendas estão sujeitas a obrigações tributárias de ICMS pagarão o ICMS, que corresponde à diferença entre o ICMS cobrado na venda e o pago nas compras.
The triggering event is the sale of goods / services including:
- Entry and exit of goods from the establishment of the taxpayer, whether commercial, industrial or producer, even if it is to another facility of the same taxpayer,
- Effective transportation services between Federal States or between municipalities, and communications and telecommunications services,
- Provision of food and beverages at restaurants, bars, cafes and similar establishments.
The Industrial Pole of Manaus (“PIM”) has a tax advantage: goods entering the PIM from other Federal States are exempt from ICMS but only if they are to be processed or consumed in the PIM.
TAXPAYER AND LIABILITY
Unlike the ISS, the seller is solely responsible for the payment of ICMS. Thus, the customer, even if no invoice is provided – is not required to pay ICMS.
BASIS FOR CALCULATION, RATE, AND DEADLINES
BASE DE CÁLCULO
A base de cálculo do ICMS é o valor das mercadorias vendidas, líquido de descontos incondicionais, mas inclui custos relacionados, como seguro e transporte.
The basis of calculation of ICMS is sometimes affected by IPI (art. 13 de la loi nº 87/96):
- Para produtos vendidos para fins comerciais ou industriais, o preço de venda mais os custos relacionados, excluindo o IPI, será a base de cálculo do ICMS.
- Para produtos comprados para uso interno ou retidos como ativos no balanço patrimonial, a base de cálculo do ICMS inclui o IPI.
Exemplo:
The Company “Trade” located in São Paulo, buys – for internal consumption – goods for the price of 100,000 R$, inclusive of 17,000 R$ of IPI. The purchase price will also include:
- Insurance 1,000 R$,
- Transport 1,500 R$,
Thus in this case, the ICMS will be calculated on the total price of 102,500 R$.
TAXA
A alíquota - que varia entre os estados federais - é geralmente de 17% ou 18%. Ela também depende do tipo de operação, do destino e do produto.
There are also different rates depending on the origin and destination of the transaction: see the list of rates in the ‘ICMS between states’ table hereafter (for more information on the rates of ICMS throughout Brazil, please look at www.fiscontex.com.br/legislacao/ICMS).
ICMS BETWEEN STATES
Example: the state of São Paulo
TRANSACTIONS MADE BY A COMPANY LOCATED IN THE STATE OF SÃO PAULO
(1) this part of Brazil is relatively poor and is far from the economic center of the country, for this reason, it has a rate of ICMS (7%) lower than in other regions (12%).
Example of a sale from a manufacturer in the State of São Paulo to a client in the State of Ceara:
As indicated in the table here above, a sale from SP to Ceara (part of Northeast region) is taxed at 7%. You can see below that a 7% ICMS tax goes to the SP Tax authorities (SEFAZ/SP) while a 10% ICMS tax goes to the Ceara Tax authorities (SEFAZ/CE). The normal ICMS tax applying in Ceara is 17%, the difference between this 17% and the 7% goes into the Ceara budget.
But what happens if a manufacturer based in Ceara sells to a client in SP?
Normally, ICMS in Ceara is 17% as stated above. But ICMS for products made in Ceara and sold to SP get a 12% ICMS. For the same product, at the same price, tax authorities of Ceara and SP get a much different collection of taxes! In the latter example, the Ceara tax authorities collect 12$R, and the SP tax authorities collect 6 R$ (the difference between 18% and 12%)!
Federal States sometimes compete to attract investors. Sometimes tax benefits are granted in order to win the investor. One company with a significant investment should contact the Tax Department of various states in order to negotiate tax incentives/breaks.
DEADLINES FOR PAYMENT
The ICMS must be calculated each month. Deadlines depend on the sector of industry in which the firm operates.
“SUBSTITUÇAO TRIBUTARIA”
TRANSFER OF TAX RESPONSIBILITY
The transfer of the responsibility of paying taxes (“ST” or ‘Substituçao Tributaria’) is developing throughout Brazilian States.
One can see that ICMS is similar to VAT, paid by each economic actor in the process of distribution. Wholesalers and retailers, all of them will pay their share of ICMS. With “SUBSTITUÇAO TRIBUTARIA”, this is different.
Since some of them might decide to avoid paying taxes, since the Tax Authorities want to implement solutions in order to increase and anticipate tax collection, the “SUBSTITUÇAO TRIBUTARIA” (“ST”) was created.
This is applicable only to some products. It will also depend on each State.
With ST, the whole amount of ICMS tax is paid upfront, when the products are leaving the factory (i.e. the responsibility is transferred to the producer). As a consequence, wholesalers won’t get any amount of debit and credit with ICMS. To assess upfront the right amount of ICMS tax payable, the price of sale to the final client must be known.
This graph shows the cash flows in case of ST. The total of ICMS paid is still the same, but collection is earlier :
RECOGNITION FOR ICMS
Just as VAT, the ICMS paid on a purchase acquires tax credit if the amount is clearly indicated on the invoice. This right to credit expires if it is not used within five years.
Exemplo:
Purchase of goods for resale. Price of 400,000 R$, including 72,000 R$ of ICMS (18%). Resale price of 500,000 R$.
Recording the purchase:
ASSETS
– Goods for resale: 328,000
– ICMS credit: 72,000
PASSIVO CIRCULANTE
– Supplier: 400,000
Recording the resale:
ASSETS
– Client payables: 500,000
DEMONSTRAÇÃO DE RESULTADOS
– Sale of goods: 410,000
– ICMS liabilities: 90,000
After this operation, the company has a net liability of 18,000 R$ ICMS (90,000 – 72,000).
Its income statement will show a profit of 82.000 R$ (410,000 – 328,000).
For fixed assets, the regulation provides for recovery through monthly amortization of the ICMS paid on the purchase.
Exemplo:
Purchase of a property to be recorded as fixed assets.
Value of property: 100,000 R$
Value of ICMS: 12,000 R$
The amount of ICMS paid will be recoverable; it will be separated from the value of the fixed assets.
The complementary Law No. 102/200 allows the recovery of this tax over 48 months by compensating with other ICMS to be paid.
Accounting for recoverable: ICMS
ASSETS
– ICMS credit: 12,000
FIXED ASSETS
– Fixed asset: 12,000
(diminishing the value of the fixed assets)
Monthly recovery of ICMS: 1/48*12,000=250
ASSETS
– ICMS credit: 250
PASSIVO CIRCULANTE
– ICMS liabilities: 250
If the asset was to be sold or scrapped before the end of the amortization period of the ICMS credit (that is to say, before 48 months), then the balance of unamortized ICMS credit is recorded as expenses.
“DEFERRED” ICMS
The ICMS, as previously stated, is non-cumulative, and therefore, does not weigh on the income statement. However, payment of ICMS means additional need for working capital. For example, a company needs to acquire machinery for 100,000 R$ for a project payable at the end of contract. The ICMS disbursed on that purchase (and other purchases of intermediate goods), can only be recovered at the end of the job.
In order to help these businesses and ease their cash flow, some Federal States (the first was the state of Rio Grande do Sul) have set up, “deferred ICMS” (called “diferimento“).
The ICMS deferral is possible only between taxpayers subject to ICMS and located in the same Federal State. It can also be done with a company located in another Federal State on condition that an agreement with that State has been signed.
Where deferred ICMS applies, the purchaser should pay the supplier the amount less ICMS. This deferred payment must be indicated on the invoice.