Tax and Customs

Brazil has one of the most convoluted tax and customs systems in the world. According to the World Bank’s Doing Business publication, Brazil ranks as the country that takes the most number of hours per year to comply with tax obligations. This does not mean, however, that the tax authorities and tax laws are unsophisticated. For instance, Brazil’s Federal Revenue Department has already adopted blockchain technology for certain purposes and this is expected to be expanded.

Many were new to Brazil underestimate the difficulties involved with dealing with Brazilian customs.  For those looking to set up a company (or enter into risk-sharing arrangements), have a good grasp of corporate taxes is important. Also, many misunderstand the extent to which taxes searchers IOF affect international loans and remittances. However, it is the complexities involved in calculating taxes on the importing of services, intellectual property rights and goods that generally confuse foreigners (and Brazilians!) the most. Some capital gains obtained by foreigners are taxed. To add to the difficulties, a few of these rules may be changed by the terms of the few double taxation agreements in force in Brazil and more compliance issues are likely to come up as Brazil is implementing OECD’s base erosion and profit sharing measures (BEPS).

Brazil also has its own transfer pricing rules and complex concepts of tax immunities, non-levying, exemptions and zero-rating. Often, tax-related liability is joint and several and, in some circumstances, government debts can be purchased from other creditors to pay tax debts.

Non-compliance with tax and customs laws usually lead to hefty sanctions.

Brazil’s customs procedures are very formalistic and Brazilian bureaucrats are rarely willing to deal fairly with mistakes contained in documents. Documents should be meticulously prepared to avoid problems. Due to the intricacies of the Mercosul Classification of Goods (Nomenclatura Comum do Mercosul, “NCM”), finding the right classification of goods is often fraught with risks. As an example of how harsh Brazilian customs’ laws can be, a 10% fine over the customs value of the imported merchandise will be imposed where a commercial invoice is not stamped by consular authorities (when required) prior to being presented to customs – and this is likely to apply even if the taxpayer made the mistake in good faith.

Long delays will ensue as a consequence of the slightest mistake in complying with formalities and hefty penalties will be applied by the authorities.

To avoid classification issues, it is not unusual for parties to seek a private tax ruling prior to the goods arriving in Brazil to avoid being fined. When goods are held up by customs the importer has the option of filing for a court injunction to enable the goods to clear customs.

Due to the notorious complexity and uncertainties involving Brazil’s tax rules, and the often erroneous interpretation of the rules by Brazil’s tax authorities, litigation is common (and, in most cases for large businesses, inevitable).

Taxes on profits of legal entities registered in Brazil

(a) Corporate Income Tax (“IRPJ”)

Corporate income tax (imposto de renda das pessoas jurídicas, “IRPJ”) is a federal tax levied on income received by legal entities registered in Brazil. It is generally assessed at 15%, plus a 10% supplementary tax for a company’s income over R$20,000 in a month. IRPJ is calculated in accordance with one of the following methods:

  • the deemed profit method; and
  • the actual profit method.

The actual profit method uses the actual profits made (revenues less deductions) by the company to calculate its income and other taxes, while the deemed profit method deems a percentage of the company’s gross revenues as its profits (regardless of the actual profits made by the company). The actual profit method is substantially more compliance and labour-intensive than the deemed profit method.

For most companies that apply the deemed profit method, the following percentages of revenues will be deemed to be the company’s profits for IRPJ purposes:

  • 8% of the revenues obtained from the sales of goods, real estate purchase and sales and construction, and rural activities; and
  • 32% of the revenues obtained from the provision of services.

Specific percentages apply to companies with revenues lower than R$120,000, for certain types of services (such as transportation services) and on the sale of fuels to retail customers, among others.

In addition to the deemed revenues, capital gains and profits calculated in accordance with transfer pricing rules will be taxed.

The most tax-effective method will generally depend on the level of income expected and the type of services, goods all intellectual property rights the company will be supplying. However, companies with a turnover of more than R$78 million in a given year (or R$6.5 million per month, if the company has been trading for less than 12 months) must adopt the actual profit method in the following year.

(b) Social Contribution on Net Profits (“CSLL”)

Social contribution on net profits (contribuição social sobre o lucro líquido, “CSLL”) is a federal contribution imposed over the company’s profits (calculated under the deemed profit method or the actual profit method). The CSLL rate is generally 9%.

For most companies that apply the deemed profit method, the following percentages of revenues will be deemed to be the company’s profits for CSLL purposes:

  • 12% of the revenues obtained from the sales of goods; and
  • 32% of the revenues obtained from the provision of services.

As with IRPJ, certain activities are subject to specific rules. Also, capital gains and profits calculated in accordance with transfer pricing rules are added to the profits subject to assessment.

Under Law 13,202/2015 CSLL is to be regarded as being within the scope of Brazil’s double tax agreements even if agreements were made prior to CSLL being introduced.

 

Tax on Foreign Exchange Transactions, Loans and Financial Transactions (“IOF”)

IOF is a tax on foreign exchange transactions, loans, insurance and securities and is levied on Brazilian currency purchased or sold, securities sold or purchased, loans and similar transactions, as well as over insurance premiums.

The IOF rate for foreign exchange transactions applies to some international remittances and it is set at 0.38% over the value of the currency exchange transaction (the amount in Brazilian reals of the foreign currency being purchased). If the foreign exchange transaction is made by credit card, then the rate is set at 6.38%.

Additionally, foreign exchange transactions carried out for converting a foreign direct investment into the acquisition of shares traded in the Brazilian stock market are subject to a 0% IOF rate.

Specific rates for IOF-Credit will apply to the following transactions when made by financial institutions: (i) loans with not defined and predefined principal borrowed amounts; (ii) off-setting of receivables; (iii) advance payment to the applicant; (iv) loan and financing where funds are borrowed in instalments; (v) exceeding credit limits; and (vii) financing of non-residential real estate.

As for international loans, IOF rate is set at 6% over the principal if the weighted average for the term of the loan is 180 days or less, and 0% when the term of the loan is 181 or longer.

Taxation of services supplied from abroad

A different regime applies to the taxation of services provided by foreign companies as compared to Brazilian companies providing services domestically. Applicable taxes will vary in accordance with the type of service provided as well as the location where the service will be provided.  Software as a service (SaaS) arrangements are generally taxed as a service (see further here).

(a) Withholding Income Tax (“IRRF”)

Withholding income tax (imposto de renda retido na fonte, “IRRF”) is a federal tax imposed on income paid, credited, remitted or delivered to non-residents, at the rates of 15% or 25% in accordance with the nature of the income. Where the Federal Revenue Department regards the jurisdiction of destination as a tax haven, or the type of entity is included in the privileged tax regime list (check the applicable regulations for both lists), then the IRRF rate will be 25% in all cases.

(b) Tax over Services (“ISS”)

Tax over services (imposto sobre serviços, “ISS”) is a municipal tax that applies on revenues received from the provision of certain services and intellectual property rights. It applies to almost all services provided within Brazil or to Brazilian business or individuals from abroad. The ISS rate varies between 2% to 5% and is assessed on the company’s gross income. Unlike most taxes, no deductions or tax credits apply. 

Complementary Law 157/2016, which came into force in the first quarter of 2017, extended the scope of the ISS Law to the streaming of videos, songs, texts, as well as the provision of cloud storage of documents, among other services.

The law of each Brazilian municipality where the services are being supplied needs to be analysed to ascertain whether the specific service is taxed and the rate applicable.

(c) PIS-Import and COFINS-Import

PIS-Import and COFINS-Import are Federal levies imposed on the payment for services supplied from abroad (as well as on the importing of goods – see further below).

Where the services are supplied from abroad, the combined PIS-Import and COFINS-Import rate will be set at 9.25%.

On the importing of services or intellectual property rights, PIS-Import and COFINS-Import are assessed on the value of the payment, credit, delivery or remittance to the foreign supplier. The following formula applies:

COFINS-Import = d × V × Z

PIS-Import = c × V × Z

where:

= the amounts paid, credited, delivered or remitted abroad (before the withholding income tax);

c = applicable PIS-Import rate;

d = applicable COFINS-Import rate;

f = applicable Municipal services tax (ISS) rate.

Various exemptions may apply on the application of PIS-Import and COFINS-Import. The application of these exemptions needs to be considered on a case-by-case basis.

PIS-Import and COFINS-Import credits are generally available, but specific conditions and exceptions apply.

(d) Contribution on the Intervention on the Economic Domain (“CIDE”)

The contribution on the intervention on the economic domain (contribuição de intervenção no domínio econômico, “CIDE”) is a Federal levy assessed on amounts paid, credited, delivered or remitted abroad for the payment of royalties (other than for the licensing of software, unless there is a technology transfer registered with the INPI) and certain services. The rate is currently set at 10% and is payable by the company making the remittance. CIDE applies to:

  • the supply of technology;
  • the provision of technical assistance (support and specialised technical services), where there is transfer of technology;
  • administrative and similar services;
  • the transfer and licensing of trademarks;
  • the transfer and licensing of patent explorations.

CIDE may be reduced to zero for companies operating in the semiconductor sector.

In some circumstances, imputation credits may be allowed as deductions of CIDE paid by the importer. Although called a “contribution”, CIDE operates much the same way as IRRF. In some jurisdictions, the CIDE withheld by the Brazilian payer might allow for an offset against the service provider’s income tax under reciprocity principles. This requires an analysis of the laws of the jurisdiction where the service provider is located.

(e) Summary of applicable taxes on imported services

Note that where the services classified under different headings, the invoice should clearly describe classification and the value or otherwise it will be classified at the least beneficial classification.

Type of Service Tax Rate Note
Administrative and technical services (including support) IRRF 15% If services are provided from a tax haven, the rate is 25%
PIS-Import and COFINS-Import 9.25% See formula under PIS-Import and COFINS-Import
CIDE 10% Levied on the full amount being remitted or credited abroad
ISS 2% to 5% Needs to be checked at the Municipal level
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card) Levied on the full amount being remitted or credited abroad
Other services (general rule) IRRF 25% There are various exceptions (for instance, market research for exporting Brazilian products is set at 0%), so this should be checked before making any pricing decisions; see also formula under PIS-Import and COFINS-Import
PIS-Import and COFINS-Import 9.25%
ISS 2% to 5% Needs to be checked at the Municipal level
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card) Levied on the full amount being remitted or credited abroad

(f) Exemptions

Some services are exempted from one or more of various taxes imposed on the importing of services. For instance, fees and commissions charged by foreign agents and representatives appointed exclusively for seeking and brokering foreign sales of products and services of Brazilian companies are not subjected to withholding income tax, unless they are based in a tax haven. A recent Federal Revenue Department Private Ruling found that the fees and commissions are also not subject to PIS-Import and COFINS-Import, but that was found not to be the case in another Private Ruling issued just 1.5 years earlier.

Each service needs to be analysed in detail for an accurate assessment of the taxes payable.

Taxation of IP rights supplied from abroad (and SaaS)

Intellectual property rights licensed by Brazilian companies or individuals are subject to various different taxes. These are largely the same taxes as those levied on services, yet applied differently.

(a) Software

The taxation of software will depend on whether the program is sold as a ready-to-use application (for instance, those sold in a package) or whether the software is customisable, downloadable or provided as a service (SaaS). Where the software is ready-to-use and contained in a package, then it will be deemed to be goods for import purposes and will be taxed as such (see further below). Note, however, that the basis for calculating the applicable rate will vary depending on the State of destination.

Due to this being an artificial distinction, there have been extensive academic discussion and contradictory court decisions dealing with this issue. In the State of São Paulo, for instance, since 1 January 2016, State Decree 61,791/2016 provides that no ICMS is to be levied on any software (ready-to-use or customisable). However, the National Council of Fiscal Policy (Conselho Nacional de Política Fazendária, “CONFAZ”) a Federal body comprising members from all State-level Treasury Departments, resolved on 29 December 2015 that 19 States (São Paulo included) were to adopt a minimum 5% ICMS rate over the value of the software transaction, be it over ready-to-use or customisable format. Moreover, on 5 October 2017, the CONFAZ issued a new agreement

There are two further important peculiarities that relate to software: CIDE  does not apply where copyright over the software is merely being licensed without more.

However, software that is provided as a service (SaaS) will likely to be taxed as a service (see further here). The Federal Revenue Department has found in at least one private ruling that CIDE will apply over SaaS. Additionally, some Municipalities set the ISS rate at 2% where the software is customised in the Municipality itself while keeping the 5% rate for imported customisable software or for SaaS. As there are over 5,500 Municipalities in Brazil, care should be taken before making final pricing decisions.

(b) Copyright (other than software)

The taxation on the licensing of copyright over works other than software is murky. There is little doubt that IRRF is payable and that ISS is not. However, there is some uncertainty as to whether PIS-Import, COFINS-Import and CIDE are payable.

For instance, in Private Ruling (Solução de Consulta) 71/2015 the Federal Revenue Department decided that the licensing of a trademark, without any services connected to it, implies an undertaking to give something (that is, a tangible or intangible thing), not an undertaking to do something (that is, a service), no PIS-Import and COFINS-Import would be payable.

Moreover, foreign films and similar audio-visual works may be subject to an additional contribution (the Contribution for the Development of the National Cinematographic Industry) and specific fees.

(c) Examples of applicable taxes on imported IP rights and SaaS

It is important to note that imported intellectual property rights may be used to pay up a company’s capital. That may allow for substantial tax advantages.

Moreover, when the intellectual property right is provided together with a service, or when the services or rights can be classified under different headings, the invoice should clearly describe the tasks and the value attributed under each heading or else the full amount will be classified at the least beneficial classification for tax purposes.

Note that each specific situation needs to be analysed individually, as the rules relating to the application of the different taxes (and their respective rates) vary substantially.

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Type of IP right Tax Rate  
Customisable software IRRF 15% Levied on the customs value of the software
PIS-Import and COFINS-Import 9.25%
ISS 2% to 5%, depending on the Municipality Levied on the “price of the service”
Import Duty 16% Levied on the customs value of the storage device (if any); assuming here software stored on a CD (taxed as a good- see below)
PIS-Import and COFINS-Import 11.75%
IPI 15%
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card) Levied on the full amount being remitted or credited abroad
ICMS Generally between 7% to 25% Depending on the State of destination, levied on the value of the storage device or over the full customs value of the package, plus all other applicable Federal taxes
Downloaded, ready-to-use software IRRF 15% Levied on the customs value of the software only
PIS-Import and COFINS-Import 9.25% See formula under PIS-Import and COFINS-Import
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card) Levied on the full amount being remitted or credited abroad
Packaged, ready-to-use software Import duty 16% Levied on the customs value of the full package (taxed as a good – see below)
PIS-Import and COFINS-Import 11.75%
IPI 15%
ICMS Generally between 7% to 25% Depending on the State of destination, levied on the value of the storage device or over the full customs value of the package, plus all other applicable federal taxes
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card) Levied on the full amount being remitted or credited abroad
Software as a service (SaaS) IRRF 15% Levied on the full amount being remitted or credited abroad
CIDE 10%
PIS-Import and COFINS-Import 9.25%
ISS 2% to 5%, depending on the Municipality Levied on the “price of the service”
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card) Levied on the full amount being remitted or credited abroad
Printed and downloadable books No taxes are payable   Immunity under the Federal Constitution
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card) Despite immunity under the Federal Constitution, the Federal tax authorities continue to levy IOF on these transactions
Trade mark licences IRRF 15% If the licensor is based in a tax haven, the rate is 25%
CIDE 10% Levied on the full amount being remitted or credited abroad
ISS 5% Needs to be checked individually depending on the Municipality
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card) Levied on the full amount being remitted or credited abroad
Patent licences IRRF 15% If the licensor is from a tax haven, the rate is 25%
CIDE 10% Levied on the full amount being remitted or credited abroad
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card) Levied on the full amount being remitted or credited abroad
Franchise licences IRRF 15% If the licensor is from a jurisdiction deemed to be a tax haven, the rate is 25%
PIS-Import and COFINS-Import 9.25% See formula under PIS-Import and COFINS-Import
CIDE 10% Levied on the full amount being remitted or credited abroad
ISS 5% Actual rate depends on Municipal laws
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card) Levied on the full amount being remitted or credited abroad
Know-how “technology” licences IRRF 15% If the licensor is from a tax haven, the rate is 25%
CIDE 10% Levied on the full amount being remitted or credited abroad
ISS The better view is that it does not apply  
IOF 0.38% (if paid through wire transfer) or 6.38% (if paid via credit card)   Levied on the full amount being remitted or credited abroad

Taxation of goods imported from abroad

(a) Import Duty

Import duty (Imposto de importação) is levied on imported goods, depending on the type of product and number of items being imported. Import duty rates vary substantially, generally ranging from 2% to 35% on the value of the goods (where ad valorem duty applies).

These rates are based on the Common External Tariff (Tarifa Externa Comum, “TEC”) which is Mercosul’s commonly agreed import duty.

Most goods from other Mercosul countries, and many goods as its associate members, may be imported free of import duty. Note that there are many exceptions to these rules.

Apart from that, Brazil is also a member of the Latin American Integration Association (“ALADI”) and through ALADI Brazil has been bound by multiple partial trade agreements known as Acordos de Complementação Econômica and Acordos de Alcance Parcial with its Latin American partners. The result is lowered import duties which do not circumvent its obligations within Mercosul. From a Brazilian standpoint, the biggest partners in Latin America are Argentina and Mexico. Argentina is a complementary economy to Brazil owing to close and solid relationships deriving from Mercosul statutes.

Furthermore, as a member of Mercosul, Brazil benefits from trade agreements with Israel, India and SACU (South African Customs Union whose members are South Africa, Botswana, Lesotho, Namibia and Swaziland).

(b) Industrialised Products Tax (“IPI”)

Industrialised products tax (imposto sobre produtos industralizados, “IPI”) is a Federal tax imposed on the production or importation of certain industrialised goods. Rates are assessed on the value of these goods and vary in accordance with the nature of the merchandise. On average, IPI is levied at rates between 5% and 18%.

IPI’s rates are found in a detailed table that is similar to Mercosul’s TEC. The definitions, however, are not exactly the same and care should be taken to ensure that the correct code is used.

(c) PIS-Import and COFINS-Import

In addition to being a tax imposed on the payment for services supplied from abroad (see above), PIS-Import and COFINS-import is levied on the importing of goods.

On the importing of goods, the PIS-Import and COFINS-Import are assessed based on the customs value. PIS-Import and COFINS-Import rates are 2.1% and 9.65%, respectively, for most goods (it goes as high as 20% for beauty and personal care products). Various goods are exempt, so each good being imported needs to be carefully classified under the Common External Tariff and the IPI table.

(d) State Tax Over the Movement of Goods (and Certain Services) (“ICMS”)

The tax over the movement of goods and services (imposto sobre a circulação de mercadorias e serviços, “ICMS”) is a State tax levied on certain merchandise, communication services, electricity and the transportation of goods. Imported merchandise is also subject to ICMS.

ICMS is a value-added tax and, to some extent, it works somewhat like the VAT in Europe (or the GST in Australia and New Zealand). Rates generally vary between 7% to 25%, but there are major reductions and increases depending on the type of good or service involved. Interstate rates generally vary from 7% to 12% (depending on the state and where the goods will be sold).

Where ICMS is payable on the importing of goods, the following formula applies (the ICMS itself is considered as part of the formula):

ICMS = (T ÷ 0.82) × 0.18

where:

T = (VA + II + IPI + PIS-Import + COFINS-Import + IOF + CIDE + AFRMM + customs expenses)

  • VA = customs value;
  • II = amount of import duty payable;
  • IPI = amount of IPI payable;
  • PIS-Import = amount of PIS-Import payable;
  • COFINS-Import = amount of COFINS-Import payable;
  • IOF = amount of IOF payable;
  • CIDE = amount of CIDE payable;
  • AFRMM = amount of AFRMM payable (see below); and
  • customs expenses = customs expenses paid or payable in Brazil.

Because of the way ICMS is calculated on imports, its effective rate will be much higher than the customs value of the merchandise, so care should be taken when making pricing decisions.

(e) Additional to Freight for the Renovation of Merchant Shipping (“AFRMM”)

The additional to freight for the renovation of merchant shipping (“AFRMM”, from the Portuguese original) is a tax assessed on imports entering Brazilian territory by sea. The tax was created to recover the Brazilian naval industry and to support the development of the merchant shipping.

The AFRMM is assessed at the rate of 25% over the international freight amount declared in the shipping documents for long distance sea transport; 10% for coastal transport and 40% for the river and lake transportation of liquid goods in bulk when carried to the North and North-eastern regions of Brazil.

Some goods are exempt from the payment of AFRMM. These include cargoes of books, newspapers and periodicals, as well as their printing paper; cargoes transported by vessels, domestic or foreign, when not used for commercial purposes and exploration activities.

Countries within Mercosul are exempt from the payment of AFRMM.

(f) Tariff Exemptions for Capital Goods, and Technology and Telecommunications Items

Importers may be able to obtain major reductions or full exemptions of import duty (and, in some cases, ICMS) when purchasing capital goods, and telecommunication and information technology items from abroad where no similar products are manufactured in Brazil. These are known as ex-tarifários.

Specific procedures for obtaining the reductions apply – an application must be made to the Federal Chamber of International Trade and to the relevant State Chambers of Commerce where the goods are to be used.

(g) Summary of likely applicable taxes on imported goods

Considering the various variables involved in importation of goods, examples of calculations of the applicable taxes may be misleading. However, as a “rough” guide, the taxes likely to apply to the importing of foreign goods and their respective rate ranges (ad valorem) are as follows:

Import duty Between 0% and 35%, calculated over the customs value
IPI Between 0% and 30%, calculated over the customs value plus the import duty paid
PIS-Import and COFINS Import 11.75% (up to 20% in some cases, but many exceptions apply)
ICMS 12% to 18% – see ICMS formula

Taxation of capital gains obtained by foreign companies or non-resident individuals

Foreign companies that obtain capital gains arising from the sale of any assets or rights in Brazil will be subject to IRRF on a progressive basis, as follows:

  • 15% if the capital gain is up to R$5 million;
  • 17.5% if the capital gain is more than R$5 million but no more than R$10 million;
  • 20% if the capital gain is more than R$10 million but no more than R$30 million;
  • 22.5% if the capital gain is more than R$30 million.

If the foreign company is based in a tax haven, the rate will be a flat 25%.

If the buyer is a Brazilian company or resides in Brazil, then the buyer will withhold the amount of tax payable by the foreign seller. If the buyer is a foreign entity or a non-resident, the person who holds the power of attorney will be bound to withhold the amount of tax payable.

Foreign investors that trade shares in the BM&FBovespa are exempt from all capital gains tax.

Double taxation agreements

Brazil has in place double-taxation agreements with Argentina, Austria, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Ecuador, France, Finland, Hungary, India, Israel, Italy, Japan, South Korea, Luxembourg, Mexico, the Netherlands, Norway, Peru, the Philippines, Portugal, Russia, Slovakia, South Africa, Spain, Sweden, Trinidad and Tobago, Turkey, Ukraine and Venezuela.

Note that not all of these agreements still in full force. Some of them only apply in some specific circumstances. The agreement with the Netherlands is probably the most oft-used of them in international tax structures.

OECD’s base erosion and profit sharing (“BEPS”)

In 2013, the OECD and G20 countries began negotiating a prescriptive legal framework to be implemented in the members’ jurisdictions to prevent loopholes available to multinational enterprises. As a consequence, the OECD Convention on Mutual Administrative Assistance in Tax Matters came into force in Brazil on 29 August 2016.

Brazil is one of more than 55 countries registered for automatic exchange of tax information over companies and persons found in their jurisdictions. It has undertaken to commence exchanging information with other members of the convention from 1 September 2018 (relating to the 2017 tax year). The information includes:

  1. details about subsidiaries operating in Brazil or elsewhere;
  2. where the corporate group has its main seat as well as corporate commercial activities in all jurisdictions where it operates;
  3. the globally-considered allotment of the group’s income;
  4. the globally-considered allotment of paid taxes and due taxes;
  5. all companies sitting under the corporate group umbrella and their respective economic activities; and
  6. other information.

Moreover, from 2017 corporate groups whose assets globally are valued more than BRL2.26 billion will be obliged to present a report of its activities, shareholders, holdings, subsidiaries abroad, as well as other information, based on the fiscal year of 2016. Brazil has also adopted the common reporting standard (CRS) of financial account information.

Transfer pricing rules

Transfer pricing rules apply to related entities and transactions with entities in tax havens, and aim to ensure that these companies relate to each other on an arm’s length basis. Brazil is not yet a member of the OECD and its transfer pricing rules do not follow the OECD principles.

Brazil’s transfer pricing rules apply both to export as well as import transactions. For import transactions, the rules provide that for IRPJ and CSLL purposes the price for the good, service or right being imported will be calculated in accordance with the following methods:

  • compared independent prices (preços independentes comparados, “PIC”);
  • resale price less profit (preço de revenda menos lucro, “PRL”);
  • production cost plus profit (custo de produção mais lucros, “CPL”); and
  • price less quoted price on importing (preço sob cotação na importação, “PCI”).

Under the PIC method, the prices of goods, services or rights purchased abroad are compared with similar or identical goods, services or rights that are bought or sold by the company selling the goods to unrelated entities and those bought and sold among other unrelated companies. The calculations take into account the payment terms, quantities, warranties, packaging, freight and insurance, among other things. The weighted average of these prices will be used for assessing deductions of income tax and CSLL.

Under the PRL method, the weighted average of the prices applied to the transactions during the assessment period is calculated and added to one of the following profit margins:

  • 40% for the pharmochemical and pharmaceutical sectors, for tobacco-related products, optical, for photographic and cinematographic equipment and tools, for machinery appliances and equipment for dentistry and hospitals, for the extraction of petroleum or natural gas, and for petroleum derivatives;
  • 30% for chemical products, for glass and glass derivatives, for pulp, paper and products made out of paper, and for metallurgy;
  • 20% for the remaining sectors.

Under the CPL method the average costs in the country where the good is manufactured, the service is provided or the right is created, will be calculated. The cost-base will take into account taxes and fees charged by the country of origin, as well as the cost of raw materials, personnel, lease, maintenance, depreciation, amortisation and reasonable damages and losses in the manufacturing process. The average cost will be added by 20%, which is the deemed profit.

Finally, under the PCI method the price quoted at internationally renowned exchanges (including futures exchanges) or research institutions (these are listed in the annexes of the regulations), adjusted in accordance with the applicable premium on the date of the transaction.

The importer can choose any of the three methods set out above to assess whether the transaction complies with transfer pricing rules. However, the PCI method applies to the importing of all commodities.

Immunities, non-charging, exemptions and zero-rating

Brazilian taxation law differentiates between immunities (imunidades), exemptions (isenções), non-charging (não-incidência) and zero-rated (alíquota zero) classifications.

Immunities relate to taxes that cannot apply due to provisions set out in the Federal Constitution. These apply to the taxation of religious temples, assets, income or services of political parties, trade unions, educational and non-profit organisations and on the sale or importing of books and paper to be used for the printing of books.

Importantly, it also applies to the taxing of different entities which make up the Brazilian Union: the Federal Union, States and Municipalities cannot impose taxes on one another, insofar as these taxes relate to assets, income or services. Government entities are likely to be able to avoid payment of the other Federal entities’ taxes (for instance, when supplying goods to a Municipality, for as long as the goods are to be incorporated as part of that Municipality’s assets, then no Federal taxes are likely to be payable – although some of the contributions may be). This can be of benefit to New Zealand companies looking to supply goods and services in international tenders put out by Municipalities, States and the Union.

Non-charging relates to those transactions where the elements required to trigger a tax event do not occur. Taxes can only be imposed when all elements which make up a taxable event are met. When they do not, the tax cannot be imposed.

Exemptions assume that a tax exists and that it would be charged in a particular set of circumstances. But for the exemption being set out in the law, the tax would have been imposed in those circumstances. The taxpayer has the burden to show that the conditions set out in the law for the exemption to apply are met.

Finally, zero rating relates to imposing a rate of nil where the company would otherwise meet the requirements to be taxed. A taxable event occurs but no tax is imposed as the rate is set at zero.

Joint and several liability

Under Brazilian law, it is not uncommon that both parties to a transaction be jointly and severally liable for tax obligations arising from that transaction. For instance, banks may be held liable if the proper taxes are not paid on certain international remittances.

Directors of companies as well as shareholders are also often found personally liable for tax debts incurred by the company itself. There is no sure way of avoiding this liability, however, risks can be minimised by undertaking audits and seeking evidence that other parties to transactions are compliant with their tax obligations.

“IOUs” by governments (precatórios)

Under Brazilian law, and the Union, States and Municipalities are allowed to pay debts over 60 minimum wages (approximately R$50,000) in 10 annual instalments, rather than as a lump sum, as a consequence of a judgment. These “IOUs” are called precatórios.

While the Federal precatórios have generally been paid on time or with a one to two-year delay, States have been notoriously slow in complying with their obligations – there are states where some judgment debts have not been paid in over a decade. Therefore, it is recommended that utmost care be taken when effecting tax payments, as overpayments may take many years to be recovered.

There is even a secondary market for precatórios, as these may be used for setting off tax debts of other parties in specific circumstances.

Sanctions for non-compliance with tax obligations

Brazilian law provides for many sanctions in the case of non-compliance. Sanctions vary from the imposition of hefty fines and seizure of imported goods to imprisonment terms, depending on the gravity of the offence.

Often, the first practical consequence of any non-compliance with deadlines and tax payments is that the company’s tax number (Cadastro das Pessoas Jurídicas, “CNPJ”) appears as non-compliant on the Municipal, State, and/or Federal database. This prevents companies from applying for seeking credit, setting up bank accounts and entering into contracts with many businesses (it is common that more sophisticated businesses request evidence that the company has no outstanding tax debts).

Penalties include a 75% fine over the amount of taxes owed for simple non-payment (increased to 112.5% if the company does not provide information to the tax authorities when requested to do so) and 150% where fraud is proved (increased to 250% if the company does not provide information to the tax authorities when requested to do so), as well interest at 12% per annum (in addition to having the debt adjusted to inflation) and up to 20% for simple lateness in payment – among other sanctions.

Therefore, retaining a careful and skilled accountant is especially important in Brazil. However, note that mistakes are to be expected as even the best professionals find it difficult to keep up with the constantly changing rules and the interpretation given to them by the tax authorities.

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