1. Overview of tax
1.1 Tax system
1.1.1History of tax system
[The current Brazilian taxation system was introduced by the 1988 Constitution, which granted power to Federal, State and Municipal Governments to collect taxes. Due to the several regulations enacted by each of these governmental instances, Brazilian taxation system is very complex, leading to an environment in which taxpayers are required to comply with many obligations, both comprising tax collection and reporting (accessory obligations).]
1.2 Brazilian tax law
1.2.1 Types of tax
· Federal taxes, regulated and collected by the Federal government
· State taxes, regulated and collected by each state’s government
· Municipality taxes, regulated and collected per each municipality’s government
1.2.2 Federal tax and local tax
184.108.40.206 Federal tax
[Federal taxes vary according to their nature, being the most important to the upstream industry those levied on:
•Revenues / Sales: Social Contributions on Gross Revenues (PIS and COFINS) and Federal Tax on Industrialized Goods (IPI);
•Importation of Goods: Federal Tax on Industrialized Goods (IPI), PIS-importation and COFINS importation;
•Importation of Services: PIS-importation and COFINS-importation; and
•Profits / Net Income: Corporate Income Tax (IRPJ), and Social Contribution on Profits (CSLL).
Federal taxes also comprise Social Security Taxes (INSS and FGTS) and taxes levied upon financial transactions (IOF), which are briefly commented in this introductory section and for which we provide further comments in the specific sections.]
220.127.116.11 Local tax
[-State Taxes The 1998 Constitution granted authority to the Brazilian States to collect the tax on the circulation of merchandise and on rendering of interstate and inter municipal transportation services and on communications, even when the transaction and the rendering of services start in another country, including import operations. It is not a cumulative tax, that is, such tax is only assessed on the increase in the price of the product in each part of the circulation process. The calculation process involves a system that, in each payment period, the taxpayer must check the amount of ICMS debits (generated on the circulation of merchandise/ rendering of services) and ICMS credits (generated on the acquisition of goods) and if the taxpayer has more debits than credits, it will have to pay the tax on the difference. Since the collection of this tax is under state responsibility, each of the Brazilian states has specific regulations concerning ICMS calculation, rates, payments and accessory obligations. Therefore, companies that operate in different states are subject to several different compliance requirements. The ICMS is collected by most states at the rate of 17%, except for the states of São Paulo and Minas Gerais, whose tax rate is 18%, and Rio de Janeiro, whose tax rate is 19% - special rates apply to interstate sales.
-Municipal Taxes 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 # 116/2003. 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 and its rates vary from 2% to 5%. ISS is also due on the purchase of services from entities domiciled overseas (the so called importation of services) in case the service is performed in Brazil or in case the results of this service are verified in our country]
1.2.3 Direct tax and Indirect tax
18.104.22.168 Direct tax
[A direct tax will refer to any levy that is both imposed and collected on a specific group of people or organizations. An example of direct taxation would be income taxes that are collected from the people who actually earn their income.]
22.214.171.124 Indirect tax
[Indirect taxes are collected from someone or some organization other than the person or entity that would normally be responsible for the taxes.]
2. Tax for making inroads into foreign markets
2.1 Tax for making inroads into foreign markets
[The new law imposes a tax charge only on distributions of affiliated companies’ profits. Profits earned by a Brazilian entity through a foreign affiliate therefore generally will be taxable in Brazil only on December 31 of the year in which they were actually distributed to the Brazilian entity, provided that the affiliate satisfies certain conditions set forth in the new law.]
2.1.1 When doing business without a branch
A branch in Brazil is taxed at the same rate as a Brazilian company.
2.1.2 When doing business with a branch
A branch in Brazil is taxed at the same rate as a Brazilian company.
126.96.36.199 When doing business with a local subsidiary
[In order for profits from a Brazilian subsidiary to be remitted back to a foreign investor, the Brazilian subsidiary must purchase the foreign currency by presenting certain documentation such as proof of tax payment and the mandatory registration with the BACEN. The mandatory registration includes the sum of the original investment, any additional investments made, plus profit reinvestments in the subsidiary. The total amount registered serves as the basis for the calculation of capital gains and any repatriation of capital. Amounts, that exceed what was registered, sought to be remitted abroad are treated as capital gains and subject to a 15% withholding tax (or higher if the foreign investor resides in a tax haven) and approval by the BACEN, Banco Central do Brasil (Central Bank of Brazil).]
2.2 Verification of methods of return of investment
2.2.1 Return from branches to parent company
188.8.131.52 The method of return to parent company by dividend
[Under the new law, dividends from profits generated between January 1, 2008, and December 31, 2013, that are greater than the amount calculated using the Tax Balance Sheet are not subject to tax. In the original version of PM 627, this rule was limited to dividends paid by November 12, 2013, if the company made an election to apply the new law from January 1, 2014. The new law removes this limitation.]
3. Several arguments of domestic tax law
3.1 Personal income tax
3.1.1 Overview of personal income tax
[Foreigners resident in Brazil (and all Brazilians as well) are subject to personal income tax known as imposto de renda das pessoas físicas - IRPF. This tax is a Union tax and payment is collected by the Federal Government. In April, taxpayers must also report their annual income in annual tax returns.]
3.1.2 Definition of residents
[In accordance with Brazilian legislation, a foreigner working in Brazil is considered resident if:
· On the date of arrival in Brazil the foreigner has a permanent visa
· On the date of arrival in Brazil, the foreigner has a temporary visa, (i) to work under a labor contract; (ii) on the 184th day, consecutive or not, of his stay in Brazil, within a 12-month period; or (iii) on the date he obtains a permanent visa or a labor contract, if this occurs before the 184th day of his stay in Brazil, within a 12-month period.
Income tax is payable by any resident individual (pessoa física) who receives more than R$ 23,499.15 in the tax year from a salaried job, non-salaried job, pensions, rental activity or rural activity. Employers are required to withhold income tax and there are cases of certain streams of income in which the individual is required to self-assess the income tax and pay it directly.
The tax is collected on all income, including wages, bonds, commissions, prizes and other forms of remuneration. Housing expenditures and student fees amongst others are classified as an indirect wage and are taxable.]
3.1.3 Calculation of amount of tax
3.1.4 Declaration and payment of personal income tax
[Individual tax returns must be filed with the Ministry of Finance (Receita Federal) as follows:
· Online: A downloadable progamme (Programa Gerador da declaração) is made available by the Ministry of Finance (Receita Federal) that allows taxpayers to calculate their taxes, fill in the forms and file their returns.
o Declare income tax online
Note: Declarations and payment made online must be completed before 23h59min59s (Brasília time) annually on 30 April. Payments after this time are considered late. The tax returns filed on diskette and through forms (Formulário) at the post office (Correios) are not accepted anymore.]
3.2 Corporate income taxes
3.2.1 Overview of corporate income tax
[Resident companies are taxed on worldwide income. A foreign company is subject to Brazilian taxation only if it carries out certain sales activities in Brazil through agents or representatives that are domiciled in the country and that have the authority legally to bind the foreign seller before the domestic purchaser, or through a domestic branch of the foreign seller. A representative acting as an agent, with the final transaction being concluded by the non-resident company abroad, will not give rise to a legal presence in Brazil.]
3.2.2 Taxable companies
[Corporate income tax, or IRPJ, is levied on the taxable profits of an entity at a rate of 15%.
The social contribution on profits, or CSLL, is levied on entities subject to the IRPJ in order to finance the Brazilian federal social security system. The CSLL rate is 15% for financial institutions and 9% for other institutions. The basic income tax applies to operating profits derived by a company in Brazil]
3.2.3 Taxable income
[Brazil's corporate income tax rate is 34% on net profits. The tax consists of a base tax of 15%, a surtax of 10% (on annual income over R$ 240,000.00), and 9% for social contributions. A foreign company is only considered "resident" if it is incorporated in Brazil.
Corporate Tax Deductions include:
• Losses, however, in the future, only 30% of any current year's taxable income can be written off as a loss.
• Depreciation is deducted using the straight line method.
• Companies involved in technical research can use accelerated depreciation.
• There is no company consolidation for tax purposes.
• New capitalization rules (relating to interest expenses) took effect on January 1, 2010]
3.2.4 Three methods to calculate the amount of tax
184.108.40.206 The method of real profit system
[In the real profit system, the taxable basis is the net profit reported on the balance sheet, adjusted by additions and exclusions authorized by the fiscal rules (Sections 219 and 247 of RIR/99)]
220.127.116.11 The method of presumed profit system
[In the presumed profit system, the taxable basis is presumed at a pre-established percentage of the gross revenues, plus other income (financial income, capital gains etc.).]
18.104.22.168 The method of arbitrated profit system
[The arbitrated profit system is only applicable when a taxpayer fails to comply with the rules for keeping records or computing taxable income. The taxable income basis would be arbitrated based on the company's activity presumed percentage of profits]
3.2.5 Taxable period
The taxable reporting period is the calendar year (from January 1st to December 31st). In general, all the taxes are filed monthly.
3.2.6 Calculation of amount of tax
22.214.171.124 Revenue recognition criteria of tax
[As a general rule, all revenues accrued by a legal entity must be included and recognized in accrual basis.]
126.96.36.199 Calculation of deductible expense
[If there is no specific rule, deduction of expenses under the real profit system should follow the general rule of Section 299 of RIR/99, which establishes that expenses are tax deductible if they are regular in the company’s activities and necessary in its due course of business. Deduction of an expense should follow a case-by-case analysis.]
188.8.131.52 Deferred assets
[Deferred tax assets are created due to taxes paid or carried forward but not yet recognized in the income statement. Its value is calculated by taking into account financial reporting standards for book income and the jurisdictional tax authority's rules for taxable income. For example, deferred tax assets can be created due to the tax authority recognizing revenue or expenses at different times than that of an accounting standard. This asset helps in reducing the company’s future tax liability. It is important to note that a deferred tax asset will only be recognized when the difference between the loss-value or depreciation of the asset is expect to offset future profit.]
184.108.40.206 Bonus of executive
[Remuneration Guidelines - Brazilian Code of Best Practice of Corporate Governance
2.24 Compensation (Directors) Directors should be adequately compensated, considering market rates, skills, value to the organization and activity risks. The Board’s incentive structures should be different from those people hired for management, given the distinctive nature of these two bodies. Short term results-based compensation should be avoided.
Director compensation should be disclosed individually, or at least as a separate group from management. If there is not individual disclosure, the organization must justify its choice in a broad, comprehensive and transparent manner. The targets and metrics of variable compensation should be measurable, and can be audited and published.]
220.127.116.11 Expenses account
[Law 13,043/2014 made permanent the replacement of the 20% employer social security contribution on payroll with certain percentages on gross income, which was originally set to be valid until 31 December 2014.The percentages of 2% and 1% of gross income are effective as from 1 March 2015 and Law 13,043/2014 also expanded the scope of the reduction in rates. In cases where the 2% rate applies, the law expands the potential beneficiaries to include taxpayers engaged in activities such as storage, training, hospitality, transportation, construction and infrastructure, etc. In cases where the 1% rate applies, the law expands the benefit to companies that manufacture several products under specific IPI codes, such as food, commodities, cosmetics, personal hygiene, etc.]
18.104.22.168 A donation
[The Imposto sobre Transmissão Causa Mortis e Doação, Portuguese for Inheritance upon Death and Donation Tax - or simply ITCMD - is a state tax payable by every person or legal entity that receives goods or rights such as inheritance or donation. The tax must be calculated and declared by the taxpayer themselves, who are obliged to anticipate the payment without prior supervision by the administrative authority. However, any tax exemption must be ratified by the State Treasury.]
22.214.171.124 Reserve fund
[The allowance for doubtful accounts is a reduction of the total amount of accounts receivable appearing on a company’s balance sheet, and is listed as a deduction immediately below the accounts receivable line item. This deduction is classified as a contra asset account.
There are several possible ways to estimate the allowance for doubtful accounts, which are:
§ Risk classification. Assign a risk score to each customer, and assume a higher risk of default for those having a higher risk score.
§ Historical percentage. If a certain percentage of accounts receivable became bad debts in the past, then use the same percentage in the future. This method works best for large numbers of small account balances.
§ Pareto analysis. Review the largest accounts receivable that make up 80% of the total receivable balance, and estimate which specific customers are most likely to default. Then use the preceding historical percentage method for the remaining smaller accounts. This method works best if there are a small number of large account balances.]
[A 15% withholding tax, plus the 10% CIDE generally apply to royalties and copyrights paid to non-residents. If the beneficiary resides in a tax haven jurisdiction (see appendix for list), the rate increases to 25%.]
126.96.36.199 Exchange loss
[Brazil has strict foreign exchange controls, and remittances abroad may encounter several Central Bank restrictions. Although remittances that fit into preset categories already defined by the Brazilian Central Bank may not find difficulties in processing, remittances that cannot be classified into the preset categories will probably need approval from the Brazilian Central Bank prior to processing. All remittances of funds from Brazil abroad above BRL10,000 must be made through the official banking system and require certain documentation from the bank. Most common preset categories are:
- Real estate purchase
- Contribution to home country retirement plans by expatriates employed in Brazil
- Transfer of personal assets (when leaving the country)
- Contributions to associations
- Business trips
- Payments in support of dependents abroad
- Educational pursuits
- Medical treatment
- Rental payments
- Use of data services
- Credit cards]
188.8.131.52 Deferred deficit
[Accelerated amortization, for income tax purposes, of the expenses incurred with the acquisition of intangibles related to research and development of industrial and agriculture technology, which may be recorded in the company’s books as a deferred asset for tax purposes. The amortization must be effected during the period in which the intangibles were acquired.]
3.2.7 Tax rate and calculation of the amount of tax
3.2.8 Declaration and payment
184.108.40.206 Method of actual profit
[Actual profits (lucro real) method, pursuant to which tax payments are calculated based on actual net income.]
220.127.116.11 Method of expected and decided profit
[Presumed profits method allows Brazilian companies to calculate tax payments based on a presumed taxable income base]
3.3.1 Taxable companies
[Overall, this system tends to be the best alternative for companies with a guaranteed annual profit higher than the percentages established by the Federal Revenue. In this option, CSLL is calculated on a quarterly basis.]
3.3.2 Taxable period
[Payment is made around the 15th of each month]
3.3.3. Methods to calculate the amount of CSLL
18.104.22.168 Methods to calculate the taxable profits
[The calculation basis for CSLL is susceptible to calculation upon definition of the taxable income or assumed profit (upon application of the percentage that varies pursuant to the activity performed, being such percentage applicable on the gross revenue obtained by the legal person), as per the criterion defined by the taxpayer. The negative tax basis of the CSLL (tax loss for CSLL purposes) may be used to offset the taxable profit in the subsequent periods, limited to 30% of the taxable profit in each calculation period.]
22.214.171.124 Tax rate
[For the taxpayers that have adopted the assumed profit method, the calculation for CSLL takes place on a quarter basis, constituting the calculation basis of 8% over the gross income (however, such percentage for calculation of the assumed profit varies between 8% and 32%, depending on the specific activities carried out by the company). The rate of 9% is applicable to the assumed profit.]
3.3.4. Declaration and payment.
[Similar to IRPJ, the taxpayers that have adopted the Taxable Income may calculate the CSLL on an annual or quarterly basis]