Brazilian Tax System

overview
Brazilian Taxes overview

In Brazil, the major tax guidelines are defined by the Federal

Constitution, which sets down general principles, the limits of taxing
authority, jurisdictions and the question of sharing of tax revenues.

Consequently, our National Tax System was instituted by the

Constitution itself, which determines that the Union, States, Federal
District and Municipalities can institute taxes.

According to the 1988 Constitution (with the alterations

introduced by Constitutional Amendment no. 3, dated 03/17/93), the
taxes under the specific jurisdiction of the Union, States and Federal
District and Municipalities are as follows, classified by their nature:
Brazilian Taxes by nature:
Note on Brazilian Taxes
Aside from the taxes listed before, the Federal Constitution
reserves exclusive authority to the Union to institute social
contributions, contributions on intervention in the economic domain
and those of interest to professional or economic categories.
In the case of social contributions, one should stress that the
States, Federal District and Municipalities may levy contributions on
their civil servants in order to cover the costs of their Social
Security and social assistance systems targeted to those workers.

Among social contributions, the following deserve mention:

 Contribution to Social Security Financing – COFINS
 Contribution to the Social Integration Program and Civil Service Asset
Formation Program – PIS/PASEP
 Social Contribution on Net Corporate Profits – CSLL
 Provisional Contribution on Financial Operations – CPMF; and
 Social Security Contribution on payroll (employee/employer) and the self-
employed.
Federal Taxes
Federal Taxes

Eliminated
in 2009
Taxes and contributions adminstrated by the
Internal Revenue Services (Federal Level)

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Tax Incentives/Benefits applicable in Brazil

Federal Level

 ADA/ADENE areas (North and Northeast) – Income Tax (IRPJ) reduction

(up to 75%) and tax exemption on the import of certain equipment.
 Free Trade Zones (i.e.Manaus) – goods acquired in these free trade zones
do have tax exemptions for PIS, COFINS, Import Duties (II) and Excise Tax
(IPI).
 Special Customs Regimes – i.e. Temporary Admission, Drawback, Blue
Line, RECOF, REPEX, REPETRO, REPORTO, RECOM, Bonded
Warehouse, among others.
 Exports – tax exemption from PIS, COFINS and Excise Tax (IPI).
 Exporters – PIS and COFINS exemption on the acquisition of fixed assets.

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State taxes & Municipal taxes
 State taxes & Municipal taxes
 27 STATES  5.565 Cities
- Autonomy for defining rates (Internal and - Competence to edit law.
External)

- Several exceptions (Calc. basis reduction, - Requiring digital information and inspecting
exemption, Special Regime, etc.)
Tax Incentives/Benefits applicable in Brazil

State Level – some examples

 Special Programs, such as, FOMENTAR (State of Goiás); PROVIN (State

of Ceará); PRODEP (State of Pernambuco); DESENVOLVE (State of
Bahia); and
FUNDOPEM (State of Rio Grande do Sul), which grant deferral of ICMS
payment and /or reduction of the tax calculations basis;
 Tax war among the Brazilian States – legality of the tax incentives granted
by such States;
 State Tax Package – possibility to negotiate a package of tax incentives with
the State government upon the installation of the company in that State;
 Free Trade Zones (i.e.Manaus) – goods acquired in these free trade zones
do have tax exemption for ICMS; and
 Exports – tax exemption for ICMS.

Brazil macroeconomic and tax overview

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Tax Incentives/Benefits applicable in Brazil

Municipal Level – some examples

 ISS rate rduction (5 to 2%) – lower rates available in Municipalities loated

closed to large centers in order to attract service providers;
 Municipal Tax Package – possibility to negotiate a package of tax incentives
with the municipal government upon the installation of the company in the
corresponding municipality;
 Exports – tax exemption for ISS; and
 Macaé Municipality reduces in 50% the ISS rate for services provided to
Petrobras, limited to 2%.

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 Government - Legislation

 Number of Laws and Regulations edited per day in Brazil

TOTAL RULES
GENERAL Tax related
EDITED SINCE 1988
FEDERAL 154.173 28.591
STATE 1.095.279 83.516
MUNICIPAL 2.906.463 137.017
  4.155.915 249.124

NUMBER OF RULES EDITED PER DAY

Laws and tax rules   GENERAL Tax related
FEDERAL 19 4
in force: STATE 136 10
18.409 MUNICIPAL 362 17
  517 31

Fonte:http://www.ibpt.com.br
Tax Burden by Tax Base and Government Level
Tax Base Tax % Federal State Municipal
Collection
Income 212.056 20.50 % 212.056 0 0
Payroll 233.023 22.53 % 209.595 17.810 5.618
Property 35.679 3.45 % 417 18.763 16.499
Goods and Services 500.637 48.40 % 258.582 220.083 21.972
Financial Transactions 21.146 2.04% 21.146 0 0

Others 31.856 3.08% 18.339 10.075 3.442

Total 1.034,397 100.00% 720.134 266.731 47.531
TAX REVENUE SHARING – 100% OF GROSS TAX REVENUE
Trend for IT heavy investments

Bookkeeping
System Digital Electronic Invoice
NF_e
(Tax and Accountant)
 On-line pre-checkings to aprove an invoicing

Customer Base and Transport

Suppliers Base

Conference of customer/supplier data: Conference of the carrier data:

 CNPJ  CNPJ
 State Registration  State Registration
 Adress  Adress
 District  District
 Municipal  Municipal
 Municipal Code  Municipal Code
 State  State
 Country  Country
 Country Code  Country Code
 Registration in another State  Type of freight
 Insurance
Tax compliance - Product Registration & Operation

 PRODUCT BASE  TAX OPERATIONS

- Tax Classification by product with - CFOP (Tax Code of Operations)

different Rates
- For Exemple: Sales (with reduced basis,
- Exceptions ( Isent Product, Special exemption, immunity, Replacement Tax,
Regime) regional benefits – SUFRAMA, etc)
Carlos Iacia from PricewaterhouseCoopers in Brazil comments on the Brazilian
tax system and in particular on compliance issues.

“The Paying Taxes study revealed one of the most concerning issues of the Brazilian tax system. In
Brazil, taxpayers spend more time than anywhere else (2,600 hours a year) complying with their tax

Some details on
obligations.
The issues range from the number of taxes charged, to the competence granted to each government
authority (Federal, State and Municipal) to charge such taxes. The Brazilian VAT, ICMS (tax on the

Brazilian taxes
movement of goods, transport services and communication services), can be charged by the 27 states of
the Brazilian Federation.
The municipal tax on services (ISS) is charged by more than 5,000 Brazilian municipalities. Each one of
these governmental bodies has the power to legislate on the tax computation and collection, guided by
one major law that provides general rules - the National Tax Code (CTN).
When we think of ‘compliance’, it may seem an easy task: it is only a matter of calculating and paying
taxes.
However, this process of computation is extremely complicated in Brazil since the taxpayer has
to consider the legislation and compliance obligations of each taxing body. These, in most
cases, require taxpayers to file several different monthly returns including the total tax accrued,
paid or offset.

In addition, companies require tax clearance certificates (CND), which are essential documents
for the purposes of obtaining loans, participating in bidding and applying for tax incentives. This

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gives rise to further bureaucracy and obstacles for the development of corporate business.

In view of the above, companies are required to maintain professionals among their tax

Brazilian taxes
personnel who are fully dedicated to the correct compliance with such tax matters, in order to
avoid potential errors or distortions which may end up increasing the Brazilian tax burden even
more.

Therefore, the World Bank survey is very important since it evidences the urgent need for huge
reform in the Brazilian tax system. Several different bills of law have been discussed at the
Brazilian National Congress, proposing, among other tax changes, the unification of ICMS. The
approval of these changes, which are so important for the development of the country, requires
discussions among the Federal, State and the Municipal bodies as they all have their numerous
and different interests and needs, considering the conditions of each region of the country, and
the level of tax collections. The issue, therefore, is to put together all these interests
and make a fair distribution of the tax income, which represented 34.23% of the GDP (gross
domestic product) in 2006.”
Some details about

Brazilian Taxes
Taxes on Imports

goods & services

Taxes levied on the importation of goods

 Taxes on imports are levied on top of one another, as follow:

I. II is levied on the CIF price (FOB price plus insurance and freight);
II. IPI is levied on CIF price plus II;
III. ICMS is levied on CIF price, plus II, IPI, PIS and COFINS due on
imports; ICMS is included in its own basis;
IV. PIS and COFINS are levied on CIF price plus ICMS due on imports.
They are included in their own bases.

 Import tax (II) is considered cost (not recoverable). ICMS, IPI, PIS and
COFINS paid on imports are generally creditable against internal due ICMS,
IPI, PIS and COFINS.

Brazil macroeconomic and tax overview

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Taxation on import of assets and services

Imports of Assets

 Tax event materialized at the customs clearance;

 Imports os used equipment highly regulated;
 Need of Import License when import tax benefits apply;
 High bureaucracy of obtaining licences and permits (Health, Environment,
etc);
 Customs regulation not standardized;
 Poor Infra-Structure (port inefficiency; quality of roads, etc);
Import of Services
 Services imported by Brazilian companies are also subject to taxation on
imports.

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 Taxation on import of services – for example: MSF
With gross-up Without gross-
up
Service 100 100
Payment
Swedish IRRF (15%) (on 125) (on 100)
18,75 15
ISS (5%) (on 125) (on 100)
6,25 5
Net remitted 100 80
Service Fee Value
CIDE (10%) 10 10
COFINS/PIS (Approx.) (Approx.)
(*) 13 10
(9,25%)
Payment Brazil Co IOF (0,38%) 0,38 0,38
Total cost for (Approx.) (Approx.)
Brazilian 148,38 120,38
company

(*) value of the tax base includes the own

PIS/COFINS and the ISS

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Withholding Tax - IRRF

Currently, the rates below are applicable to the following payments to non
residents:
Dividends Not taxable
Interest
Royalties
Management fees 15%(*) (**)
Technical services
and assistance
Other services 25% (*)

(*) These rates are effective unless otherwise specified by a tax treaty
(**) Payments of any type (besides dividends) made to taxhaven jurisdictions that do not tax imcome or tax imcome at a rate lower than
20%, will be subject to withholding at a rate of 25% (numerus clausus list of tax havens and special tax regimes at Ruling 1,037%/2010
of the Internal Revenue Service).

Brazil macroeconomic and tax overview

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 Brazilian Tax Treaties Network
• Argentina
• Austria • Korea, Rep.of • Slovak Republic Treaties under
• Belgium • Luxembourg • South Africa negotiation or not yet
• Canada • Mexico • Spain Ratified:
• Chile • Netherlands • Sweden
• China, P.R. • Norway • Ukraine Romania
• Czech Republic • Peru Switzerland, the UK,
• Denmark • Philipines the Venezuela
• Ecuador • Portugal Germany terminated
• Finland • Slovak Republic Its tax with Brazil with
• France • South Africa Effects as from January
• Hungary • Spain 2006
• India • Sweden Reciprocal tax treatment
• Israel • Ukraine With the UK, the US and
• Italy Germany (individuals)
• Japan

Brazil macroeconomic and tax overview

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Double Tax convention Brazil - Sweden
Income Article of the Double Tax Usual Brazilian Treaty rate
Convention withholding rate

Dividends Article 10 Exempt (1) 15%-obligation to grant tax credit

Interests Article 11 15% 0% if loans and credits granted by the Swedish

Government
15% in all other cases-obligation to grant tax
credit
Royalties Article 12 15% 25% if royalties paid for use of a trade mark, etc
15% in all other cases
Obligation to grant tax credit
Capital gains Article 13 15% May be taxed in both countries –obligation to
grant tax credit (2)
Other income Article 7(3) and 22 Note 15%, 25% Income not mentioned also taxable in Brazil

(1) Dividends from profits as of Dec/96 are not subject to WHT in Brazil
(2) Capital gain in the sale of BrazilCo.shares by Swedish parent-withholding tax levied at 15% in Brazil
(3) Non distributed profits may not be taxed in the other state
Tax over Financial Transactions (IOF)

 IOF of 6% is charged on foreign loans with tenor up to 2 years.

 Capital contributions are subject to 0.38% IOF.

 IOF rate for payment of dividends and interest on net equity is also 0.38%.

 Payments of imports of goods and fixed assets are subject to 0.38% IOF.

Brazil macroeconomic and tax overview

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Thin capitalization rules

 Effective as of January, 2010;

 Related parties, tax havens and ‘privileged tax regime’: concept borrowed
from Brazilian Transfer Pricing rules;
 Thin cap rules provide deductibility thresholds for interest accrued in all
forms of financing (i.e., loans, bonds, debt notes, prepayments), as follow:
- 2x1 debt/equity ratio for the sum of all debt with related parties;
- 0,30x1 debt/equity ratio for the sum of all debt with entities in tax
haven and ‘privileged tax regime’ jurisdictions.
 Interest expenses and gains are deductible (if within thin cap threshold) and
taxable on accrual basis (Loan ballooning: no withholding tax until the time
of payment but interest deduction on accrual basis).

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Interest on Shareholder’s Equity
Background
 The Brazilian legislation allow the deductibility of the payments of interest over the
Equity to its shareholder (this is a heritage from the hyperinflation period).
 In case of a foreign company being the main shareholder it is possible to defend at the
receiver that such interest is in fact Dividends and thus should not be taxable.
 Conclusion: there is a deductibility in Brazil and no taxation in Sweden
 Tax benefit can be up to 52% when compared to the remittance of Dividends
(depending on the level of Capitalization)

Action plan
 We should transfer the shares of all the companies in Brazil to Sandvik AB
 The transfer can be done at book value of the present shareholder (Sandvik do Brasil)
 Dividends from Brazilian companies should be paid as much as possible as “Interest on
Shareholder’s Equity”
Brazilian Transfer Price

Legislation
 Transfer Pricing
calculation methods

Importation:
 PIC – Comparable Uncontrolled
Price Method
 PRL 60 – Resale Price Method (raw
material used in production)
 PRL 20 - Resale Price Method
(finished goods for resale)
Exportation:
 PVEx - Comparable Uncontrolled
Price Method
 PVA – Wholesale Price Method
 PVV – Retail Price Method
 CAP – Cost-plus Method

 CPL – Cost-plus Method  Safe Harbor

Transfer Pricing rules – Key aspects of Brazilian legislation
Adherence to the Uses Scope of Specific Fillings
arm’s lenght OECD Regulations and Dates
standard Style
Methods
Not at all, but in Only the CUP and 1. Import/Exports of goods, Special form As part of
specific points of the the Cost Plus rights, and services with in the Tax the Tax
legislation Method related parties. Return Return-
2. Transactions entered June 30th
into with countries with
favourable taxation or
which have secrecy laws Electronic Upon
or priviled tax regimes. data request of
3. Interest not registered (“AUDIN”) the tax
with BACEN. authorities
(in case of
audit)

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Transfer Pricing rules
Key aspects of Brazilian legislation

 Brazilian rules vs. OEDC Guidelines

 Broad definition of related party
 Absence of methods based on income
 Maximum and minimum margins stipulated in legislation
 Methodology: Utilization of current market prices
 Documents to be maintained by taxpayers include only invoices,
calculations supporting payments and electronic files (“AUDIN”)

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Transfer Pricing rules
Key aspects of Brazilian legislation

Pros Cons Issues

CUP  Straightfoward method  May jeopardize use of  Lack of information on
- low tax risk Brazilian TP as tax planning paramenter price make it
hard to build a defense
file

PRL  May provide flexibility for  Complex calculation;  PRL was designed for
tax planning  Profit margin: 20 % or 60%? the manufacturing
industry

CPL  May provide flexibility for  Production cost of the charter  Related party has to
tax planning agreement from an intermediary open all its accounting
entity may be questioned.
Moderate tax risk.
COMPARABLE UNCONTROLLED PRICE METHOD
(CUP)

 
The average price for identical or similar product,
services or rights purchased in either in Brazilian
or abroad in buy/sell transactions using similar
payment terms. For this purpose, only buy/sell
transactions conducted by non-related companies
may be used.

38
PRODUCTION COST PLUS PROFIT METHOD (CPL)

The average cost to produce identical or similar

products, services or rights in the country of origin,
increased for taxes and duties imposed by that
country on exportation plus a profit margin of 20%,
calculated based on the obtained cost.
 

39
 RESALE PRICE MINUS PROFIT METHOD (PRL)
 

The average net price for reselling products or rights

minus a profit margin of:

(A)60% for raw materials; and

(B) 20% for finished goods.

For this purpose, only prices charged by the company

to non-related buyers may be used.

40
TP Metodology to calc.Income Tax adjust on raw material

Law 9.959/00 Normative Act

A - Raw Material A - Raw Material

B - COGP B - COGP

C = B-A C = A/B

D – Net Sales D – Net Sales

E = D-C E = C xD

F = E x 60% F = E x 60%

G = D-F G = D-F

H = IF(A<G;0;A-G) H = IF(A<G;0;A-G)
Law 9.959/00

A - Raw Material

B - COGP
Profit P P
F’
C = B-A E
60% F

Raw
A A F”
A G
material
D – Net Sales
Value C C C
E = D-C added

B=COGS D=Net Sales

F = E x 60%
G = D-F

H = IF(A<G;0;A-G)
Normative Act

A - Raw Material

B - COGP
V V V
C = A/B Value
G

added V Profit P P P
60%
D – Net Sales E
Raw A C% A A A F
material

E = C xD B=COGS D=Net Sales

F = E x 60%
G = D-F

H = IF(A<G;0;A-G)
Legislation on fixed margins – Law no 9430/96
Normative ruling no 32/01 Normative ruling no 243/02 – Challenged in court

Raw material 7,600 (a) Raw material 7,600 (a)

import cost import cost
Added cost in 3,190 (b) Added cost in 3,190 (b)
Brazil Brazil

End product 10,790 (c)=(a)+(b) End product 10,790 (c)=(a)+(b)

cost cost

Average sales 14,000 (d) Average sales 14,000 (d)

price price

Discounts, 2,000 (e) Discounts, 2,000 (e)

sales tax, sales tax,
brokerage fees, brokerage fees,
commissions commissions
Raw 70,44% (f)=(a/c)
Calculation 8,810 (f)=(d-e-b)
material/End
basis of 60% product price
margin
Participation of 8,452.80 (g)=(f) x (d-e)
60% profit 5,286 (g)=(f x 60%) raw material in
margin
net sales price
Parameter price 6,714 (h)=(d-e-g) 60% profit 5,071 (h)=(g x 60%)
margin
Adjustment 886 (i)=(h-a) Parameter price 3,381.12 (i)=(g-h)

Adjustment 4,218.88 (j)=(i-a)

Some important aspects of the Corporate Income
Taxes (CIT)

Total corporate income tax burden of 34%

Tax loss carry forward

 Tax losses may be carried forward indefinitely, but offset is limited to 30%

of the annual taxable income prior to the compensation

 Tax losses of an acquired company can not be carried forward to be offset
against the taxable income of a new activity if the following two
conditions are simultaneously met:
a) modification in the ownership of the company; and
b) modification in the activity of the company.

Brazil macroeconomic and tax overview

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 ICMS

State VAT
VAT : Background information

 Brazil was one of the first country to introduce a full-fledged VAT (1967):
 Tax on Operations Related to the Circulation of Goods (ICM), which had
uniform rates nationally.
 The ICM substituted the tax on sales and consignment (IVC), which was a
cumulative tribute on goods’ sales.
 Initially, a single tax rate of 15% was approved, but it was modified later to
make it compatible with the higher rates of IVC in the North and Northeastern
regions (between 4 and 11%, the average was 6.63%).
 At the time there was an intense debate about the regional impact of the
richest ones.
 During this initial phase, the granting by states os fiscal incentives to promote
industrialization was very common.
ICMS (VAT) : Background information
 The Constituiton of 1988 broadened the base of the ICM by incorporating
into it the production of oil and oil by-products, as well as selected services:
electrical energy, telecommunications, and inter-state transport services.
 Other services are taxed by municipalities (ISS)
 The ICM was renamed as Tax on Operations Related to the Circulation of
Goods and on Interstate and Inter-municipal Transportation and Commu-
nications Services (ICMS)
 The intra-state rates are set by each state within a range determined by the
Brazilian Senate.
 Basic necesseties: Exempt and zero-rated or 7%
 Industrial sectors: 12-18%
 Utilities and oil/fuels: 25%
 Luxury and excisable goods: 30-35%
ICMS (VAT) : Background information

 The ICMS follows the origin-principle (revenue accrues to the state where
the good or service is produced)

 The ICMS is a credit invoice VAT (sale-by-sale and purchase-by-purchase

basis tracking)

 Over the years, the ICMS has become a more specific and complex tax

 Today we observe a trend to anticipate the ICMS in the whole value chain
(ST – Tributary Substitution) as a way to decrease the costs to inspect and
also the informality of the market
Operations and functioning
How does Brazil’s ICMS differs from most VATs ?

 It is colected by the states, not the central government;

 It is not a broad-based tax since it is restricted to goods and selected
services;
 It has many rates (intra and inter-state);
 The internal rates are defined by the state and the interstate rates are
determined by the Senate (there are more than 40 rates and 27
legislations);
 The tax liability is calculated on a tax-inclusive basis, not on a tax-exclusive
basis;
 It is mainly na origin-based tax, not a destination-based tax.
Operations and functioning
How the other consuption taxes work in Brazil?

 IPI – Imposto sobre Produtos Industrializados / Tax on Industrialized Goods

 A federal, single-stage tax that falls on manufactured goods only.

 COFINS – Contribuição para o Financiamento da Seguridade Social /

Contribution for the Financing Social Security
 A federal, cumulative tax that has incidence on goods and services.

 CIDE – Contribuição de Intervenção no Dominio Econômico / Contribution

of Intervetion in the Economic Domain
 A federal, single-stage tax that falls on gasoline and diesel.

 ISS – Imposto sobre Serviços / Tax on Services

 A municipal, cumulative tax that falls on services.
Main shortcomings of the ICMS

 The legislation regulating the ICMS varies from state to state

 This gives rise to excessive complexity, high compliance costs for

taxpayers, and opens scope for evasion and predatory tax competition

 Preservation to some degree of the cumulative taxation due to the exclusion

of the services of the tax base (which prevents the crediting of the tax paid

on service inputs in the production process)

 The tax is much more productive in states that are large producers and net

exporters of industrialized good

Main shortcomings of the ICMS

 Another problem has been the exporters’ tax credit accumulation. In theory,
the firm would be entitled to a refund from the state where the tax
originated, but in practise exporters just kept accumulating credits that lost
their value over time as a result of inflation
 High level of evasion, part of which is due to the difference between the
rates applied to intra-state and inter-state transactions
 There is no administrative integration (vertical coordination), between the IPI
and ICMS.
 Brazilian sates have to deal with cross-border trade due to the origin
principle that applies to interstate trade (horizontal coordination).
Main shortcomings of the ICMS

 With the broadening of the tax bases os the ICMS a space was open for the
expansion of tax competition (fiscal wars) through proliferation of tax benefits
 Such benefits affect the location decisions of firms and generate resistance to
adopt the destination principle
 Fiscal wars create distorcions because the allocation os resources is based on
tax costs, not on the relative prices of the factors of production and it also
creates unfair advantages for the firms benefiting from tax reductions
 Fiscal wars have also meant a loss of current revenue with the possibility of not
generating a stream of revenue that would compensate for the current tax
benefits in the future if the firms decide to move away from their current location
 The fiscal war among the states disturbs the harmony in the federation
encourages tax planning and facilitates tax evasion.
Main shortcomings of the ICMS
Lack of efficient coordination mechanisms among the states

 The CONFAZ (National Tax Policy Council), a committee of all the Treasury
secretaries of the Brazilian states initially was charged with approving any tax benefit
granted by individual states.
 At the time of the military government, CONFAZ was the key to inhibiting the fiscal
wars.
 When the Brazilian states were granted greater autonomy on legislative matters of
the ICMS in 1998, CONFAZ started to relax its stance on the ICMS.
 Direct ICMS exemptions still needed unanimous approval of CONFAZ, but indirect
benefits were profusely utilized (Ex. the granting os state credits with below-market
interest rates on ICMS owed).
 The result of these practises were the fiscal wars between Brazilian states.
 With the passinf of time, CONFAZ was blatantly ignored and no longer functioned as
a harmonizing body for the ICMS rules.