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Brazil - Taxation

Introduction

The Brazilian taxation system is complex, with over than 60 different taxes and several Tax regimes. The main directives for taxation are provided by the Federal Constitution, which establishes the general principles of taxation, the limitations on the power to tax, tax competence across levels of government as well as tax revenue sharing provisions. Thus, the National Tax System is instituted by the Constitution itself, which establishes that the Union, the States, the Federal District and the Municipalities may collect taxes. The administrative-political autonomy, which is an essential characteristic of the Brazilian federative system, confers to each level of government the possibility of instituting taxes, fees (due to its police power or to the use of public services) and improvement charges (due to public works). With respect to social contributions, most of them may only be established by the Federal Government.

According to the Brazilian Constitution, the tax competence of taxing powers is as follows:

Main Taxes collected by the Union

On foreign trade – on imports (II) and exports (IE) of goods and services
On income and earnings (IR)
On industrialized products (IPI), a value added tax levied on manufactured goods
On financial operations (IOF)
On rural land property (ITR)

Main social contributions collected by the Union

Contribution for the Financing of Social Security (COFINS)
Social Integration Program/Civil Servants Savings Program Contribution (PIS/PASEP)
Contribution on Net Profit (CSLL)
Provisional Contribution on Financial Movement (CPMF), a bank debits tax
Social Security Contribution, a contribution on payroll and self-employment earnings

Main taxes collected by States and the federal district of Brasilia

On inheritance and gifts (ITCD)
On circulation of goods and transportation and communication services (ICMS), a value added tax levied on goods in general and some services
On motor vehicles (IPVA)

Main taxes collected by municipalities and the federal district of Brasilia

On urban land and property (IPTU)
On real estate conveyance (ITBI)
On services (ISS), except those subject to ICMS

1. Direct Taxation

Tax Regimes

In Brazil, companies may elect to pay Income taxes based on estimated earnings (“lucro presumido”) or based on actual taxable income. Taxes rules on estimated earnings (“lucro presumido”) are simplified but tax rates are higher. As estimated earnings are calculated on the basis of the turnover (estimated earnings), the election of this tax regime may be appropriate for businesses with very high margin rates. Taxpayers must elect for either one of these options in January of each calendar year. Taxpayers are not allowed to change from one option to the other within the year.

The assistance of tax advisors is strongly recommended

Corporate Income Tax (IR and CSLL)

In Brazil, corporate income taxes on actual taxable income represents around 34% and are composed of the three following elements, as follows:
• Corporate income tax (IRPJ) amounts to 15%
• A surtax of 10% is due on profits in excess of R$240,000 per year
• In addition to that, a Social Contribution Tax on corporate profits (CSLL) must be paid at a rate of 9%.

Small entities with gross revenues below specified amounts (below R$1,200,000) may follow simplified payment procedures (called SIMPLES) and reduced tax rates.

Losses carryforward

An important point to be stressed in relation to the Corporate Income Tax is the rule applicable to the losses carryforward. There is a 30% cap for the absorption of current year's income by prior years' NOLs.

An example: if one taxpayer bears $ 2,000 of NOLs, and is generating $ 1,500 of Net Income in the current year, he will only be able to use $ 450 of NOL. Thus, the taxpayer will end up paying tax on $ 1,050.

On the other hand, NOLs have no expiration date, being available over an indefinite period of time.

Company's losses generated from January 1, 1996 must be divided into operating and non-operating losses for offset purposes. Additionally, the non-operating losses can absorb 100% of the year's non-operating net income, as long as they do not exceed 30% of current year total taxable income (operational + non operational).

Foreign Tax Treaties and Tax Credit

Brazilian corporate income tax adopted the principle of territoriality for defining taxable income up until 1995. However, as of January 1st, 1996 this principle is no longer applicable and corporate income tax is assessed on worldwide income. Therefore, income, which is produced outside of Brazilian territory, is now subject to Brazilian corporate income tax (not for purposes of social contribution on profits). A credit for the income tax paid abroad is allowed, limited to the total Brazilian tax liability assessed on the foreign income.

Transfer pricing

With regards to exportation to related parties, transfer prices rules have been established in 1996 in order to control that the taxable income resulting from exportation of goods, services and rights to related parties (or to residents in a low tax jurisdiction) is above the minimum transfer price allowed by the law. Similarly, with regards to importation from related parties, transfer prices rules have been established in 1996 in order to control that the amount of deductible costs and expenses resulting from goods, services or rights acquired abroad from related parties (or to a resident in a low tax jurisdiction) do not exceed the highest transfer price allowed by the law. Transfer pricing rules are complex and rigorous in Brazil and may result in significant tax penalties. The assistance of tax advisors is strongly recommended.

Withholding Income Tax

Any payment or remittance made by a company located in Brazil, to an individual or legal entity residing or domiciled abroad, is subject to withholding income tax. The most important operations and corresponding rates are the following:
- Royalties: 15%
- Services in General: 25%
- Technical Assistance Services: 25%
- Dividends: 0%
- Interest on capital: 15%
- Interest on loans: 15%
- Leasing of capital goods: 0%
- Capital Repatriation: 0%

Personal Income Tax ("Imposto de Renda das Pessoas Físicas", IRPF)

Individual residing in Brazil must fill their income tax return every year in April for the income earned during the prior calendar year. Individuals resident in Brazil are subject to taxation on their worldwide income. Brazilian tax rules generally change annually.

The individual's income taxes are retained and paid by companies on behalf of their employees on fixed rates. After filling the income tax return, individuals may have to pay an additional amount to fiscal authorities or receive the excess of income tax already paid.

For computing the taxable basis, Brazilian income tax legislation allows the individual certain deductions which are subject to certain limits such as:
- Deduction for taxpayer's dependents
- Alimony payments, according to an agreement or court decision
- Federal, State or Municipal social security contributions
- Private social security contributions
- Education expenses for the taxpayer and dependents
- Medical expenses

Monthly income earned by resident individuals is subject to income tax based on a tax table as follows:

Salary in R$	Income Tax Rate	Amount to discount
Below R$ 1,257.12	Exempt	0
From R$ 1,257.13 to R$ 2,512.08	15%	188.57
Above R$ 2,512.08	27,5%	502.58

Source: Receita federal

2. Indirect Taxation

Federal Value-Added Tax on Industrialized Goods - IPI

IPI that was introduced in Brazil in 1967, is a single-stage equivalent to VAT at production level, levied by the federal government on supplies of manufactured goods in Brazil or the importation of goods into Brazil. Therefore, ataxpayer, for IPI purposes, is either the importer or the entity that industrializes (manufactures) goods. For IPI purposes, the industrialization process comprises assembly, transformation, packaging and reconditioning, among other activities. IPI rates depend according to the nature of goods, from zero-rate for basic supplies and rising for non-essential goods.

State Value-Added Tax - ICMS

ICMS is a tax equivalent to VAT and is chargeable on:

Supplies of goods in Brazil
Supplies of interstate and inter-municipal transportation services
Supplies of telecommunications services
The importation of goods into Brazil

Municipal Tax on services rendered (ISS)

Supplies of services, other than those subject to ICMS, are subject to a cumulative tax called "Imposto Sobre Serviços" (ISS). This is a municipal tax on certain services listed by the federal government as per Complementary Law # 56/87. The taxable basis of ISS is the price of the service rendered. In general, the service tax is levied by the municipality in which the company is established. The exception to this rule is the construction industry, as the tax is levied by the municipality in which the work is performed.

The most usual applicable rate is 5%. However, please note that said rate varies from city to city and it depends on the service rendered.

ISS is not a creditable tax like IPI and ICMS. However, it is charged to the customer as part of the contract sale price. Since ISS is not considered a value-added tax, the debt/credit method is not applicable for it. Consequently, the amount of ISS the taxpayer collects when a service is rendered for him/her cannot be offset.

Social Integration Program (PIS/Pasep) and Social Contribution on Gross Sales (COFINS)

The Social Integration Program (PIS) was conceived as a mean to share the business profits with the employees, through a mandatory national savings program, financed by monthly deposits collected as a percentage on the gross sales revenues. Some federal social programs are also financed with these funds.
- PIS/Pasep: 1.65%
- COFINS: 7,6%

3. Import Duties and Taxes

The entrance of foreign goods into Brazilian national territory is subject to collection of both federal and state taxes. The federal taxes include the Import Duties ("Imposto de Importação", II) and a Federal Value-Added Tax - IPI. The state value added tax is named ICMS (collected on the circulation of merchandise and on services).

Import Duty ("Imposto de Importação", II)

The Import Duty is paid by the importer and is calculated on the price of the merchandise including insurance and international freight. The amount paid on the importation is not refundable, so it represents a cost for the importer. The Import Duty rate applicable on imported goods varies according to their Harmonized System (HS) code. After analyzing a formal request presented by an import company, the government may grant a reduction on the tax rate based on several factors. Among them is the "non-existence of a similar product manufactured in Brazil during the time of the reduction solicitation".

Federal Value Added Tax - IPI

The IPI is paid by the importer, and is calculated based on the sum of price plus insurance, freight and Import Duty. As with the Import Duty, the IPI rate applicable on imported goods varies according to the product HS classification code.

State Value Added Tax - ICMS

The ICMS is collected by the state of Sao Paulo at the rate of 18%, and is calculated based on the sum of transfer price plus freight, insurance, Import Duty and IPI.

All imports from Mercosur (Southern Common Market) signatory countries (Argentina, Paraguay and Uruguay), regardless of the HS classification, are not subject to collection of II, once for these countries the tax rate of the import duties is reduced to zero percent. Therefore, the taxable base of IPI and ICMS is also reduced. Based on product HS classification, there are reductions on II tax rates for other Latin American countries.

Besides the above-mentioned taxes, imported goods are also subject to various fees, as follows:
- A.F.R.M.M. - This tax is levied on all imports transported via maritime freight, and it corresponds to 25% of the freight cost.
- Warehousing - it is charged for storing the product by a designed entity, and it varies according to the storing period and the product value.
- Capatazia - a fee charged for moving the imported products within port parameters.

The importer will also be charged for accessing the SISCOMEX. This cost is approximately US$ 16.00 per import declaration plus US$ 5.00 per annex on the import declaration.

4. Other Taxes

Real Estate Transfer Tax (ITBI)

This tax is due when transferring the title of any real estate property (land, buildings). Tax rate is progressive, from 2% till 6%, calculated, roughly, on the sale price. Buyer is responsible for the payment of the ITBI. Expense, at the taxpayer's determination, could be either charged to P&L (deductible), or added to the book value of the property.

Real Estate Property Tax (IPTU)

IPTU is assessed on the ownership of real estate. It is paid once a year, being collected by the Municipality where property is located. IPTU is calculated on a deemed "sale price" (which is arbitrated by the Municipality) of the property. Tax rate varies from city to city, but may be estimated in the range from 0.3% (1/3 of 1%, approximately) to 1.0%.
Related expense is charged to P&L; deductible.

Tax on Financial Operations (IOF)

The Brazilian tax system provides a tax on credit, exchange, insurance and financial transactions, which is the IOF. IOF tax varies from 0% to 25%.

Additionally, the following operations are subject to 0% IOF:
- Related to the importation of services into Brazil;
- Related to the exportation of goods and services;
- Payment of dividends, interest, capital repatriation.

CPMF - Tax on Financial Transactions

Since June 17, 1999 all of the financial movements involving checking accounts, savings accounts and financial investments in general made by individuals and legal entities have been subject to the CPMF tax, at 0.38 % rate.

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