The Brazilian Tax SystemPresentation to Students of the School of Business,University of Victoria, Canada in São Paulo 11 April 2013
Tax on Corporate Profits (Income Tax )WORLD WIDE INCOME BASISCompanies domiciled in Brazil are liable toCorporate Income Tax on income arising bothin Brazil and overseas. Brazilian branch offices,agencies or representative offices of companiesdomiciled abroad are subject to income tax onincome arising in Brazil.
Tax Rate The basic rate of Income Tax on corporate profits (including capital gains), as adjusted for tax purposes, for the year 2013 is 15% with an additional surtax of 10% on taxable profits exceeding R$240,000 (approximately US$ 120,000 per annum.
Tax Basis Income Tax is payable based on either real, presumed or imputed profits (“lucro real, presumido ou arbitrado”). Law nº 9.249/95 et al The so-called “real” profit is represented by accounting profit as adjusted for tax purposes, whilst the estimated or imputed profits are calculated by applying a percentage over the company’s turnover to determine the “profit” figure, upon which Income Tax is calculated at the rates indicated above. The imputed profit basis is used when a company fails to produce proper accounting or make annual tax returns and is calculated based upon the application of certain percentages fixed in law to the company’s turnover.
Treatment of Expenses Income and expenses are to be recognized on an accrual basis and the general rule for the deduction of expenses is that they should be “necessary to the activity of the company and the maintenance of the respective income producing source.” Necessary expenses are considered to be those “paid or incurred and which may be considered normal or usual in the company’s transactions, operations or activities.” Certain expenses, such as medical assistance, are only considered deductible when the benefit is extended to all the company’s employees and are not permitted if only extended to, say, the company’s directors.
Losses The losses originated in an accounting period may be carried forward for relief against future profits, without time limit, but the offset is limited to 30% of current year taxable income. No carry-back of losses is allowed under Brazilian legislation. Pre-operational (start up expenses) should be treated as deferred assets and amortized over a period of not less than five years from the date of commencement of operations.
Social Contribution on Net Profits In addition to the liability for income tax on profits, as referred above, a company is liable to social contribution tax (“Contribuição social sobre o lucro” – “CSLL”) upon its income and capital gains. The applicable tax rate is 9%. Effective Tax Rate on profits – 34%
Capital Gains on Foreign Direct Investment Capital Gains arising on the disposal by non-residents of investments registered with the Central Bank (BACEN) are liable to tax at source at 15%. Where the investor is resident in a tax haven jurisdiction the rate is 25%. Base value for the calculation is the foreign currency investment registered with BACEN. Tax still applies even if sale takes abroad
WITHHOLDING TAXES Dividends – zero Interest – 15% or 25% if tax haven Royalties – 15% (plus CIDE 10%) or 25% (plus CIDE) if tax haven Service payments – 15% plus CIDE
CIDE Since 1 January 2002, the contribution for Intervention in the Economic Domain (“CIDE”) is also due over the amounts paid, credited, delivered, used or remitted, on a monthly basis, to non- resident beneficiaries, for royalties and remuneration in the following types of contracts: a) Licensing and assignment of patents; b) Technical support (in relation to technical assistance and specialized technical services) c) Assignment and licensing of trademarks; d) Software supply (only when occurs the transfer of its technology); e) Technology supply; and f) Contracts for the supply of technical services, administrative assistance and other similar services. This contribution is levied at rate of 10 per cent over the amounts paid, delivered, credited, used or remitted per month as payments under the types of agreements mentioned above to beneficiaries who are resident abroad. Due to its specific tax incidence, the provisions of treaties to avoid double taxation to which Brazil is a signatory are not available to permit any reduction or exemption in relation to this base.
TAX TREATIES Brazil has signed double taxation treaties with Argentina, Austria, Belgium, Canada, Chile, China, the Czech and Slovak Republics, Denmark, Ecuador, Finland, France, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, Netherlands, Norway, Philippines, Portugal, South Africa, South Korea, Spain, Sweden and Ukraine. No Tax Treaty with the UK or USA. Brazil not a member of OECD.
OTHER CONSIDERATIONS Thin Capitalisation Rules (2:1) Transfer Pricing legislation effective since 1997 (connected companies and tax havens) CFC Legislation Amortisation of goodwill on acquisition through Brazilian corporate vehicle
Other Taxes Social Contribution on Invoicing - COFINS This tax is levied on a non-cumulative basis at a general rate of 7.6 per cent on the gross revenue from sales of merchandise and the rendering of services. For those companies that ascertain their profits using the “presumed profit basis”, and for some kinds of revenue arising from some specific business activities, this tax is levied on a cumulative basis at a general rate of 3 per cent on the gross revenue from sales of merchandise and the rendering of services. As of 2004, COFINS is also levied on imports of products, equipment and services from abroad at general rate of 7.6%. In relation to services, COFINS is levied on those rendered by a foreign-base legal entity or individual even if those services are rendered directly in Brazil and for services whose results can be “verified” in the country.
Other Taxes Contribution to the Social Integration Program - PIS This contribution is generally charged on a non-cumulative at rate of 1.65 per cent on the gross revenue from sales of merchandise and the rendering of services. For those companies that ascertain their profits using the “presumed profit basis”, and for some kinds of revenue arising from some specific business activities, this tax is levied on a cumulative basis at a general rate of 0.65 per cent on the gross revenue from sales of merchandise and the rendering of services. As of 2004, PIS is also levied on imports of products, equipment and services from abroad at general rate of 1.65%. In relation to services, PIS is levied on those rendered by a foreign-base legal entity or individual even if those services are rendered directly in Brazil and for services whose results can be “verified” in the country.
Other Taxes Tax on Industrial Products - IPI IPI is a federal tax charged on industrial products at selective rates varying according to the class of products per the classification in the table included in the IPI tax law (Law 4.502/64 and Decree-Law 34/66). According to Law 9.532/97, products for export can leave the industrial establishment with suspension of the IPI when: a) Acquired by an export trading company, with specific purpose of export; and b) Remitted to customs deposit areas or other places where the customs brokerage takes place. An industrialised product is considered as being a product resulting from an operation that modifies the nature, function, finish or appearance of a product. The rate varies and depends on the classification of the goods as specified by the law. The IPI tax on the wholesale purchase price of goods is registered as a credit in the books of the purchaser and, on the sale of the finished product, the amount of tax shown on the invoice is registered as a debit. The balance which results each month is the tax to be paid to the federal authority. IPI is also levied on the importation of goods and equipment.
Other Taxes Tax on Operations on the Circulation of Merchandise and Services – ICMS The tax on operations on the circulation of merchandise and services (“ICMS”) is a state tax charged on all products. In the case of São Paulo, the rate is generally 18 per cent of the value of the merchandise or services. When materials are purchased, the ICMS tax is already included in the price. In operations between South of Brazil and the Southeast, the rate is 12 per cent, and between the North, Northeast, Middle-West regions and the state of Espírito Santo the rate is 7 per cent (Article 52 of State Decree 45.490/2000). ICMS and IPI calculations are identical. ICMS is also levied on the importation of goods and equipment.
Other Taxes Import tax - The Common External Tariff Mercosul introduced the Common External Tariff – CET, created by the Protocol of Buenos Aires and in Brazil by Decree 1.343 of 23 December 1994 as amended. The CET tariff applicable to trade between any signatory of Mercosul with third-party countries and varies between 0% and 35% depending upon the product. For imports from other countries, the rates vary based on the fiscal classification of the product, pursuant to Decree-Law 37/66.
Other Taxes Service Tax - ISS ISS is a tax charged by the municipal authorities on the rendering of services. In the city of São Paulo, according to Municipal Law 13.701/03 of 24 December 2003, the tax is generally charged at rate of 5% on the services value. For some activities there are lower rates (2 and 2.5 per cent) and there are special tax regimes for specific services such as legal, accounting, medical etc. As of January 2004, ISS is levied on the purchase of foreign services. Based on that, the Brazilian beneficiary is liable for the payment of this tax. In addition, ISS is also levied on exportation of services when the results occur in Brazil (despite the fact that payment is made by a foreign resident).
Other Taxes Real Estate Transfer Tax and Tax on Inheritances and Donations Tax Levied on Urban Property Tax On Financial Operations (IOF) Additional Contribution Over the Freight for Shipping Renewal (AFRMM)
Thank YouRobert E. WilliamsPartner – International Tax Department email@example.comAv. Brigadeiro Faria Lima, 1485 - Torre Norte -17º Andar 01452-002 São Paulo-SP BrasilTel: 55-11 5188-8090 | Fax: 55-11 5184-0097