This article was developed by the tax team of Update Brazil Consulting (updatebrazilconsulting.com).
The Brazilian tax system is one of the most complex in the world and, according to many economists, one of the reasons for the strong social inequality in the country.
The Brazilian Tax Code was promulgated in 1966 and, starting from 1988 – the year in which the new Constitution came into force – almost 400,000 (!) tax laws were approved. It is easy to imagine the resulting tangle of regulations, creating duplications and overlaps that make business life very difficult.
Even without wanting to be overly educational, it is still necessary to define:
– the 3 economic categories on which the tribute falls:
– eonomic activity
– the 3 federal instances responsible for the provision / collection of taxes:
By constructing the “categories / instances” matrix it is possible to view the main Brazilian taxes:
|Income||a. Income Taxes (IR)
b. Social contributions
c. Contributions for accidents at work
|Patrimony||d.Taxes on rural land ownership (ITR)
e. Taxes on large fortunes
f. Improvement contributions
|a. Taxes on inheritance and donations (ITCMD)
b. Motor Vehicle Property Tax (IPVA)
c. Improvement contributions
|a. Tax on the Properties of Buildings and Urban Territories (IPTU)
b. Tax on the Transmission of Real Estate (ITBI)
c. Improvement contributions
|Economic activities||g. Industrial Products Tax (IPI)
h. Tax on Financial Operations (IOF)
i. Import taxes (II)
l. Export Taxes (IE)
m. Social Contribution for Social Security (COFINS)
n. Social Integration Program (PIS)
o. Social Contribution on Net Profit (CSLL)
p. Contribution of Economic Domain Intervention (CIDE)
|d. Goods and Services Circulation Tax (ICMS)||d. Tax on Services of any kind (ISS)
It is evident, even at a first glance, the strong concentration of tax collection in the hands of the Union, which alone accounts for about 70% of the total value of taxes collected in Brazil (25% goes to the States and only the 5% to the municipalities). With a situation of this kind, the so-called “federative pact” (which should allow an equitable distribution of resources according to local needs) tends to be less.
It is equally true that greater regionalization of public spending according to each State’s capacity to pay would lead to a concentration of investments / spending in the wealthier regions, aggravating (if not perpetuating) the backwardness of the poorest states, particularly in the regions of North and North East of Brazil.
Despite the Brazilian tax burden being one of the largest in the world (Brazil, unfortunately, is specialized in accumulating negative records), the counterpart in services and investments is very low and of a poor level. That is: you pay a lot of taxes and receive low quality services.
For those who decide to invest in Brazil this is a reality to be taken into consideration very carefully, given that about 44% of tax revenue comes from taxes on economic activities.
The tributation of economic activities
So let’s concentrate on the taxes that fall on the companies. Depending on their characteristics, size and corporate structure, companies can choose between different rating systems.
The "Simples Nacional"
A first important distinction concerns the size of companies. The Brazilian system allows micro and small companies to opt for a simplified system, known as “Simples Nacional”.
By choosing the “Simples Nacional” the company opts to pay a single tax, whose value is represented by a rate on turnover. There are more than 20 tax rates, which depend on the type of activity carried out, ranging from 4.5% (for the lowest turnover) to 33% (for turnover between 3.6 and 4.8 million reais) .
In order to choose to pay taxes through “Simples Nacional”, the company must have the following characteristics:
– his social contract must be of “Small Business” (ME or EPP) or “Micro Individual Entrepreneur” (MEI).
– must have an annual turnover not exceeding R $ 4,800,000.00.
– the member (or the members) must be resident in Brazil (therefore the branch of a foreign company can not opt for the “Simples Nacional”)
The advantages of Simples Nacional are many; the main ones are:
– the fee is lower than the other existing schemes (“real profit” and “presumed profit”)
– allows the payment of federal, state and municipal taxes through a single unified tax (DAS – Documento de Arrecadaçao do Simples Nacional)
– simplifies company accounting and reduces bureaucracy
The main disadvantage to take into consideration is that, even if the company is at a loss, it can still be forced to pay taxes, given that their calculation is made on the turnover achieved.
Real profit or presumed profit?
If a company can not or does not want to join the “Simples Nacional” has two possibilities: the regime of “real profit” or that of “presumed profit”. It is a choice that must be made at the beginning of each fiscal year and can not be changed until the next financial year, so it must be carefully planned to avoid possible “fiscal disasters”.
The choice between these two schemes affects the calculation of the following taxes:
– IRPJ (tax on the income of legal entity)
– CSLL (Social Contribution on Net Profit)
– COFINS (Social Contribution to Social Security)
– PIS (Social Integration Program)
The regime of "Presumed Profit"
As it is easy to understand, the choice of this regime avoids – for tax purposes – the calculation of the economic result for the year. That is, the fact that the company earns so much, whether in balance or in loss, does not affect the calculation of taxes. What counts is the turnover: it is on this that all taxes due are calculated. This means that the “presumed profit” regime is normally preferred by companies that expect to have high profit margins.
In fact, in this case, the determination of IRPJ and CSLL is calculated on the basis of a profit margin set by the legislation, based on the company’s activity. It is therefore not necessary to calculate the profit actually earned through its business, with the exception of that derived from specific situations (for example, gains, gains from financial investments, etc.).
For example, in commercial activity, the alleged profit margin is 8% of gross sales. In the provision of services, the margin is 32%. Therefore, even if the company has achieved a higher profit margin, the tax will only be on the margin set by the law.
On the other hand, if the effective profit margin is lower than the fixed margin, the above taxes will in any case be calculated on the presumed margin. At this point, a not well thought-out decision by the entrepreneur can result in unnecessary tax levies.
Companies that adopt the presumed profit are also obliged to calculate PIS and COFINS (which are social contributions on the turnover) through a cumulative scheme, whose overall percentage is equal to 3.65% of the turnover.
The regime of "Real Profit"
In case you opt for the “Real Profit” scheme, the company must calculate IRPJ and CSLL on the actual profit (with the adjustments, additions, exclusions and compensations foreseen by the legislation).
In this case, since there is no “presumption of profit”, if the company should close the fiscal year in balance or at a loss it will be exempt from the collection of such taxes.
On the other hand, by choosing the “Real Profit” scheme, the company is obliged to calculate PIS and COFINS according to the non-cumulative regime. In this case, the total percentage is 9.25% of turnover and, from the calculated amount, the company can deduct credits calculated on the basis of various factors (eg value of purchased raw materials, amount of depreciation, consumption of energy electric, etc.).
In choosing between the two tax regimes we must also consider the greater administrative / bureaucratic costs imposed by the accounting management using the “Real Profit” regime: more bureaucracy, more personal information management, higher costs of specialized consultancy, etc.
It is common knowledge that some companies use a “trick” to optimize tax issues: the opening of two companies, one opting for “real profit” and the other opting for “presumed profit”. In the company that opts for “real profit”, turnover and deductible costs are concentrated so as to arrive at a balanced budget, and therefore exempt (or almost) from the payment of IRPJ and CSLL; in the company opting for the “presumed profit”, the excess turnover and the lower deductible costs are concentrated instead. This is an illegal and risky practice which – if discovered by the local tax police – can lead to very high fines.
- Study of the Ministry of Finance on the Brazilian tax scene (December 2018):
- Guide to the new tax legislation for small and medium-sized enterprises (Sebrae, 2018):
- Article published by Exame “5 difficulties of companies when paying taxes” (September 2018)