INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 2): BRAZIL
By Nidi Andreia da Cruz and Doriluzi da S. Borges, PRA Global
According to the World Bank’s Doing Business report, Brazil has one of the most complex tax systems in the world. Taxes are charged on three levels: federal, state and municipal. The federal constitution and laws set forth general rules for all taxes; however, each state and municipality have powers to enact their own laws and regulations for the collection of state and municipal taxes, respectively.
In addition, there are almost daily changes in legislation in all three of these spheres, adding to the complexity and diffculty for the average business owner in keeping track of all the declarations and filings that need to be undertaken. Non-compliance of the ancillary obligations can lead to heavy fines, which increases the overall risk in running a business in Brazil. Finally, there is almost no uniformity between the state and municipal filing systems, meaning that the general complexity increases even more as a business expands into other regions/cities.
Foreign Tax and Financial Reporting Requirements for Brazil
1. Main types of business
Currently in Brazil there are two types of legal structures that are commonly used by foreign investors:
a. Sociedade Limitada (Ltda)
Similar to a limited liability company, its capital is divided into units of ownership (quotas) representing the interest of each member who owns the company’s capital.
b. Sociedade por Ações – SA
Similar to a corporation, its share capital is divided into shares and it may be a privately held or publicly traded company. Publicly traded companies are subject to regulatory rules set by the Brazilian Securities Commission (CVM). Both entities can use real profit or presumed profit as a tax regime and can opt for one or the other at the beginning of each fiscal year.
The type of tax regime will define which types of ancillary obligations will be sent to federal, state, and municipal agencies, and which tax rates will be collected and credited accordingly.
2. Taxes for each entity
The main federal taxes collected from commercial entities are:
a. Corporate Income Tax (IRPJ)
Taxed at 15% of taxable income at the end of each fiscal year. A surcharge of 10% is charged on taxable income in excess of BRL 240,000 per year.
b. Social Contribution on Net Income
(CSLL) is 9% and calculated on the net income before the provision for IRPJ.
c. Contribution to Social Security Financing (COFINS) and Social Integration Programme (PIS)
The tax rate charged is respectively 7.6% to 1.65% when the tax regime is real profit. For the presumed profit, the rate paid will be 3% (COFINS) and 0.65% (PIS). For the real profit system there is a credit/debit system, similar to VAT in other countries.
d. Industrial Goods Tax (IPI)
IPI rates vary by product, ranging from 0% to 330%. Currently, the highest rates are reserved for nonessentials such as cigarettes, alcohol, cosmetics, and similar products.
e. Import Tax (II)
Import duty rates range from 0% to 35%, depending on the nature of the products and the MERCOSUR Common Nomenclature (NCM).
Transactions Tax (IOF) The IOF rate for domestic credit transactions performed by legal entities is 0.0041% per day. In addition, individuals or corporations impose a surcharge of 0.38% on all credit operations performed.
Currently, some currency inflows and outflows are subject to the 0% IOF rate.
g. Economic Intervention Contribution (CIDE)
Focuses on remittances abroad for payment of royalties, technical services, and administrative assistance and support. This tax is charged at a rate of 10% on the amounts remitted abroad and is paid by the Brazilian company.
CIDE tax is not charged on software license payments or trade/distribution rights.
The main state tax collected from commercial entities is tax on circulation of goods and services (ICMS):
Tax on goods and transactions within the state are taxed at a rate of 12% or 18%. Interstate transactions are subject to a 4%, 7%, or 12% rate, depending on the location of the buyer or recipient. ICMS is like VAT in other countries.
The main municipal tax collected from commercial entities is service tax (ISS): Taxes on services rendered vary from 2% to a maximum rate of 5%, depending on municipality and type of service.
3. Trusts, foundations and tax rates for each structure
Trusts are not recognised in Brazil, therefore, due to the legislative absence, it is not possible to establish a trust in Brazil. Foundations are non-profit legal entities intended to provide services to the community. Independent foundations that work with education, health, or social assistance are exempt from the payment of income tax and social contribution, provided that they meet the requirements established by law. Immune and exempt entities are subject to the payment of PIS on payroll at the rate of 1%.
4. Tax compliance requirements for owners of foreign assets such as bank accounts, insurance policies, shares, etc.
Investment by non-resident investors in Brazil in the financial and capital markets in the country, and their financial transfers abroad, must comply with the provisions of Resolution 4373/2014 of the National Monetary Council. Taxes that may be levied on such transactions are IR and IOF.
Responsibility for complying with tax obligations lies with both the taxpayer and the paying source, who must be notified of the non-resident status of the income recipient.
5. Tax compliance requirements for estate and wealth planning matters
In Brazil, holding companies are used for estate and wealth planning, and are legal entities constituted to receive, generally, the entire capital of an individual or family.
A holding company should be constituted as one of the types already mentioned above, being commonly incorporated either as a limited company or as a corporation.
6. Tax compliance requirements on sale of real estate
- Real Estate Transfer Tax (ITBI): levied upon transfer of title deeds and is paid by the acquirer. The tax rate ranges from 2% to 6% and the tax base is the sale price.
- Urban Property Tax (IPTU): property tax payable each year based on the fair market value of properties in urban areas. The rate varies from municipality to municipality and according to the location of the property. The maximum rate is 5% and in some cases tax exemption is possible.
Collaboration with Other GGI Members
PRA’s business proposition is the growth and expansion of our clients into new, vibrant markets. These internationalisation services exclude public accounting and legal services, and, as a consequence, we rely on the assistance of GGI members to deliver these services to our clients.
Future Developments, Outlook, and Summary
The excessive number of taxes, fees, and contributions currently charged in Brazil complicates competitiveness in the domestic and foreign markets.
That said, the current government is working on a tax reform, which aims to replace five taxes (PIS, Cofins, IPI, ICMS and ISS) with the Tax on Goods and Services (IBS).
This should reduce complexity and improve the overall attractiveness of Brazil to foreign investors.
Nidi Andreia da CruzGGI member firm
São Paulo, Brazil
T: +55 11 3208 4930/1851
PRA Global is an international business development firm that expands clients into new markets through its unique capabilities and assets. Their business model allows clients to mitigate risk and minimise investment, all while achieving global objectives. PRA Global is headquartered in the US with branches in India, China, Singapore, Poland, the United Arab Emirates, South Korea, and Brazil.
Nidi Andreia da Cruz is the Managing Partner of PRA-Brazil. Nidi has an MA in international management and business administration (ESPM/ PMDGI), with a Brazilian postgr
Doriluzi da S. BorgesGGI member firm
São Paulo, Brazil
T: +55 11 3208 4930/1851
Doriluzi da S. Borges is Financial Analyst of PRA Global Business Development. Doriluzi has a BBA with a postgraduate specialisation in financial controllership and tax management (FSA/USCS). Doriluzi manages the complete range of day-to-day financial and tax payments for international and national client companies.
Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: Julio Ricco - stock.adobe.com