The current Brazilian taxation system was introduced by the 1988 Constitution, which granted power to Federal, State and Municipal Governments to collect taxes. The number of taxes and governmental levies in Brazil is extensive. This article aims to give an insight about the company tax system in Brazil.
1. Corporate Income Tax (IRPJ)
1) Brazilian legal entities can apply three methods to verify the calculation basis of the Corporate Income Tax, namely, real profit, presumed profit and arbitrated profit.
2) The choice of the real profit or presumed profit method is discretionary, but the real profit method is mandatory for legal entities (i) whose total annual revenues in the preceding year exceed R$48,000,000.00; (ii) which earn income or gains obtained abroad through foreign branches and/or representative offices (income derived from exports of services or goods are not deemed to have been obtained abroad); (iii) which are financial or similar institutions; (iv) which are engaged in factoring activities; or (v) which are entitled to specific tax benefits and exemptions.
3) In the real profit method, the tax is calculated on an annual or quarterly basis on profits before taxes, duly adjusted in accordance with the provisions of the applicable tax law. Any tax losses incurred in the tax period may be carried forward and offset against taxable income earned in subsequent periods, up to a limit of 30% of the taxable profit in each subsequent period.
4) If the legal entity opts for payment based on yearly profits, said profits will be calculated from the profitand-loss statement drawn up in December, covering the results for the entire calendar year, but the tax must be pre-paid monthly. The monthly pre-payment may be reduced or suspended if the taxpayer submits accounting evidence that the pre-paid value up to that month exceeds the tax value calculated on the basis of real profit.
5) Entities that opt for the real profit method are subject to Corporate Income Tax at a rate of 15%, plus a 10% additional rate on income exceeding R$20,000.00 a month.
2. Import Tax
The Import Tax is levied on imports of goods into the Brazilian territory. Its rates vary according to the nature of the goods and their classification under the Mercosur Common Nomenclature (NMC), but it usually ranges from 0% to 35%. The Import Tax is not a recoverable tax.
3. Municipal Taxes
Service Tax (Imposto sobre Serviços - ISS) is a municipal tax levied on the provision of services. The services to which the ISS applies are listed in a Complementary Law. ISS rates range from 2% to 5%, depending on the domicile of the company providing a taxable service and the type of service being provided. The ISS is usually levied by the municipality in which the company providing a service is established, but in some cases it is levied by the municipality in which the service is provided.
4. Social Contribution on Net Profits (CSL)
The CSL is levied on profits before income tax ascertained in accordance with commercial law, adjusted as set forth in the law. CSL’s rate for non-financial entities is currently is 9% (15% for financial entities). Entities which opt for the presumed method are subject to a presumed basis of 12% or 32%.
5. Contribution for Social Security Financing (COFINS) and Contribution to the Social Integration Program (PIS)
1) PIS and COFINS are contributions levied monthly on gross revenue earned by legal entities. There are two regimes for PIS and COFINS. In general, companies that chose the presumed profit method are subject to the cumulative regime of PIS and COFINS, while those opting for the real profit method are subject to the non-cumulative PIS and COFINS regime.
2) With few exceptions, under the cumulative regime, PIS and COFINS are applied at a combined rate of 3.65% on revenues from sales and services, while under the noncumulative regime, PIS and COFINS are applied at a combined rate of 9.25% on gross revenues.
3) The law regulating the noncumulative regime of PIS and COFINS is very detailed. The following items can be used as credits against PIS and COFINS: (a) assets acquired for resale; (b) assets cand services used in rendering services or in production goods and products for sale, including fuel and lubricants; (c) electricity used by facilities of legal entities; (d) lease of buildings, machinery and equipments paid by legal entities (lease paid by individuals do not generate PIS and COFINS credits); (e) machinery, equipment and other assets incorporated into fixed assets to be used in providing services or in production goods and products for sale; (f) buildings and improvements on real estate owned by the taxpayer or used by third parties in the taxpayer’s activities; (g) returned goods and assets, provided that the correspondent sale revenue was taxed in previous months; (h) storage and freight paid for sales, provided that such expenses were borne by the seller.
4) In general, the payroll of Brazilian enterprises is subject to the following contributions: Social Security Contribution (INSS) at a rate of 20%; Contribution to the Social Service of Commerce (SESC) at a rate of 1.5%, Contribution to the Brazilian Micro and Small Business Support Service (SEBRAE) at a rate of 0.2%, Contribution to the National Institute for Colonization and Agrarian Reform (INCRA) at a rate of 1%, Contribution to the National Industrial Apprenticeship Service (SENAI) at a rate of 1%, Payroll based Contribution to Education (SE) at a rate of 2.5%, and Contribution for Work Accidents (RAT), the rates of which range from 1% to 3% (that is, payroll-based taxes are levied at a combined rate of 26.8%-28.6%).
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