CHAPTER 10
COFINS and PIS
OVERVIEW
The PIS (Program of Social Integration) and COFINS (Contribution for the Financing of Social Security) are federal taxes based on the turnover of companies. The PIS is intended to finance the unemployment insurance system, and COFINS to fund Social Security.
Next to Corporate Tax, it is COFINS which is the main budget revenue of the Federation.
- All private sector companies are subject to this tax, except:
- Micro-enterprises,
- Small businesses who opted for the SIMPLES Corporate Tax method,
- Associations, unions, and federations,
- Co-operative companies.
This tax also applies to amounts paid to non-residents as remuneration for services.
Like the VAT encountered throughout western economies, these two taxes are non-cumulative. The company must pay any difference between the amount of COFINS/PIS collected on sales, and the amount paid on purchases.
However, for companies subject to the ESTIMATED method, this tax is “cumulative”!
RATE
The rate of COFINS is 7.6% for companies subject to the ACTUAL profit method. They have the right to deduct a credit of 7.6% of the amount of expenses incurred by the company and required for its activity (such as goods purchased for resale, raw materials used, rental expenses, energy expenditure or depreciation of capital) from the total COFINS collected on sales.
The rate of COFINS is 3% for the ESTIMATED method. This rate is much smaller than the 7.6% that applies for the ACTUAL profit method. But, on the other hand, this tax is cumulative!
Consequently, for a medium-sized company with the possibility to opt for the ESTIMATED or ACTUAL profit method, calculations and simulations must take into consideration the PIS and COFINS cumulative or non-cumulative impact!
Likewise, the rate of PIS is 1.65% for companies subject to the ACTUAL method (with the possibility of deduction); and is 0.65% for companies under the ESTIMATED method (without possibility of deduction).
Companies subject to the ACTUAL method must submit a document outlining the calculation of PIS and COFINS charges.
Finally, for co-operatives, property management companies, associations, political parties, unions, federations, foundations and other non-profit entities, a PIS of 1% applies to the gross monthly payroll.
CALCULATION AND PAYMENT
Taxpayers are required to calculate and pay PIS and COFINS each month. The deadline is the last working day of the fortnight following the month of reference.
This calculation is based on monthly billings, defined as the turnover of sales of goods and services, whatever their nature and accounting classification, excluding the following:
- The IPI tax, if clearly identified on invoices,
- The ICMS tax if clearly identified on invoices,
- Canceled sales and unconditional discounts,
- Dividends received,
- The proceeds from the sale of fixed assets,
- The turnover from exportation.
Since 1st July 2015, financial income is included in the calculation basis.
Case study: calculation and accounting of COFINS on sales
Input in January:
INCOME STATEMENT
Turnover (COFINS in deduction of) 57,600
CURRENT LIABILITIES
Current liabilities / COFINS payable 57,600
Input related to payment the following month:
CURRENT LIABILITIES
Current liabilities / COFINS payable 57,600
CURRENT ASSETS
Bank 57,600
PIS and COFINS are not due on exports when they generate foreign exchange.
Payment is made to the CEF (Economic and Federal Fund).
TAX OPTIMIZATION
It is common practice in Brazil to do tax planning in order to avoid paying taxes, in particular PIS, COFINS and ISS.
For this, the law allows the reimbursement of expenses between companies; this expense reimbursement is not an invoice and therefore is not subject to PIS, COFINS and ISS.
Thus, two companies within the same group can decide to avoid issuing and exchanging invoices; and instead, use the “debit note”, which is tax free.
Similarly, two independent companies can use this mechanism. Imagine company A, selling a service to company B for a total of 100 R$, out of which 90 R$ was outsourced.
A has already paid PIS, COFINS and ISS on those 90 R$ outsourced. However, if A bills 100 to B, B must pay PIS, COFINS and ISS on the total 100 R$. The 90 R$ outsourced have been double taxed for PIS, COFINS and ISS. This is why this tax is described as “cumulative”.
On the contrary, if A sends a “debit note” to B to be reimbursed 90 R$, then A may limit its billing only to the balance of 10 R$. B will pay the PIS, COFINS and ISS on the 10 R$, decreasing by 90% the tax burden.
