Brazil's Federal Constitution of 1988 established a new Taxation System. Such a system allows for each political body at federal, state and municipal levels to generate their own tax revenue. The system is a very complex one and includes at least fifty different types of taxes.
Below is a brief description of each tax. For comprehension purposes we have divided the existing taxes into five different areas : Taxes on Importation, Taxes on Domestic Operations, Corporate Taxes, Individual Taxes, and Other Taxes. We have also included a chart summarizing the total tax burden for legal entities in Brazil.
II. IMPORTATION OPERATIONS
Importation operations are subject to the following taxes:
(1) Import Duties (II)
The taxable event is the entrance of merchandise into Brazilian territory.
Rate: The applicable percentage rate varies from 0% to 70%, in accordance with the Common Foreign Tariff - TEC (Mercosul), with products classified based on the Harmonized System.
(2)Tax on Industrialized Products (IPI)
The basis for calculating the IPI for imported products is:
- upon entry into Brazil, the value of the importation, increased by the amount of import duties; and
- at the time of dispatch from the importer's premises, the price of the operation.
Rate: The percentage varies according to the IPI Tax Table - TIPI, with products classified based on the Harmonized System.
(3) Sales Tax (Tax on Operations relating to the Circulation of Merchandise and on the Rendering of Interstate and Intermunicipal Transport and Communications Services - ICMS)
The criteria for calculating this tax are:
- upon customs clearance, the value which served as the basis for calculating the IPI tax, plus the value of such IPI; and
- upon dispatch from the importer's premises, the price of the operation.
Rates:
18% : normal rate adopted by the majority of the Brazilian states. In some states the rate is 17%.
12%: rate for essential products.
25%: rate for superfluous products.
(4) Addition to Freight for the renewal of the Merchant Marine (AFRMM)
This tax is calculated over the value of international maritime freight.
Rate: 25%.
III. INTERNAL MARKET OPERATIONS
The taxes imposed on internal market operations are as follows (in the order of their imposition):
(1) Tax on Industrialized Products (IPI)
The basis of calculation of the IPI on the internal market is the price of the operation (including ICMS), triggered upon the dispatch from the producer of the industrialized product.
Rate: variable depending on the type of product, in accordance with the IPI Tax Table -TIPI.
(2) Sales Tax (Tax on Operations relating to the Circulation of Merchandise and the Rendering of Interstate and Intermunicipal Transport and Communications Services - ICMS)
The basis of calculation is the value of the operation.
Rates:
18%: normal intra-state rate, adopted by the majority of the Brazilian states. In some states this rate is 17%.
12%: rate for essential products.
25%: rate for superfluous products.
7% or 12%: inter-state rate on sales to other ICMS taxpayers.
NOTE: Since ICMS and IPI are imposed on the "aggregate value", in calculating the amount of tax due, the tax paid upon importation or the immediately prior operation are discounted. In other words, these taxes are similar to Value Added Taxes (VAT).
III. CORPORATE TAXES
Corporate entities are subject to the following taxes:
(1) CORPORATE INCOME TAX (IRPJ)
Assessed on net profits during period on an estimated or real monthly basis.
Rate:
(a) Normal:
15% - nominal rate imposed on taxable profits (Real Profit)
(b) Additional (valid only for the 1996 calendar year):
10% on Real Profit in excess of R$ 240,000
(2) SOCIAL CONTRIBUTION ON PROFITS (CSL)
Assessment based on net profits during period on an estimated or real monthly basis.
The tax is not deductible from the its own taxable basis.
Rates:
8% for non-financial institutions
(3) WITHHELD INCOME TAX (TAXED AT SOURCE - IRF)
Imposed on profits, income and capital gains.
Rates:
Income from Financial Applications 15% Royalties for Patents and Trademarks 15% Technical Assistance, Cost Sharing, Know How 15% (*) Dividends 0% (*) Income and Capital Gains of Foreign Residents 15% (*) Interest 15% (*) Payments to non-identified beneficiaries 35%
(*) Rates vary due to the existence of tax treaties to avoid double taxation between Brazil and the country where the beneficiary of the income is domiciled. Currently, Brazil has tax treaties to avoid double taxation with the following countries:
Germany Denmark Italy
Argentina Ecuador Japan
Austria Spain Luxembourg
Belgium Philippines Norway
Canada Finland Portugal
China France Netherlands
Korea Hungary Sweden
India Czech and Slovak Republic
(4) TAX ON FINANCIAL OPERATIONS (IOF)
Assessment based on credit and exchange operations and insurance premiums.
Rates: variable by virtue of the operation; there are constant alterations due to the fact that this tax is used by the government as an instrument of economic policy.
(5) PROGRAM OF SOCIAL INTEGRATION (PIS)
This tax is assessed on monthly gross operational revenues.
Rate: 0.65%.
(6) CONTRIBUTION FOR THE FINANCING OF SOCIAL SECURITY (COFINS)
Assessment based on monthly gross invoicing of goods and services.
Rate: 2.0%.
(7) Service Tax
Assessment based on the price of services rendered.
Rates: variable from municipality to municipality. The normal rate is 5%, however, there are certain municipalities where the rates are reduced.
V. Other Taxes
Among other taxes worthy of mention are:
(1) Tax on the Transmission of "Immovable Property" - Real Estate (ITBI)
(a) The tax is imposed by the States on causa mortis transfers or on real estate donations.
Rate: variable in function of state legislation (from 1% to 6%).
(b) The tax is imposed by municipalities on onerous inter vivos transfers of property.
Rate: variable by virtue of municipal legislation (from 1% to 6%).
(2) Tax on Urban Territorial Property - Real Estate (IPTU)
The tax is assessed based on the fair market value of the immovable property.
Rate: variable by virtue of municipal legislation.
VI. - SUMMARY OF THE TOTAL TAX BURDEN FOR THE 1996 CALENDAR YEAR
LEVEL TAX BASIS OF RATE SEE NOTES
CALCULATION ON
FEDERAL
Import Duties (II) FOB value plus "Ad Importation
international Valorem" Operations
freight and
insurance
Industrialized Value of Selective I.O./
Products Tax (IPI) Operation Internal
Market
Operations
(I.M.O.)
Corporate Income Net profits Basic: 15% Corporate
Tax (IRPJ) during period Additional: Taxes
(real monthly 10%
basis)
Social Net profits 8% Corporate
Contribution during period Taxes
on Profits (CSL) (real monthly
basis)
Income Tax at Profits, Income Variable Corporate
Source (IRF) and Capital Taxes
Gains
Financial Credit and Variable Corporate
Operations Tax exchange Taxes
(IOF) operations
and insurance
premiums
Social Gross Sales 0.65% Corporate
Integration Revenues, plus Taxes
Program financial income
Contribution
(PIS)
Social Security Billings 2.0% Corporate
Financing Taxes
Contribution
(COFINS)
Additional International 25% I.O.
for Renovation of maritime
Merchant Marine freight
(AFRMM)
STATE
Sales Tax (ICMS) Price of Variable I.O./
Merchandise I.M.O.
Immovable Transfer Value Variable Other
Property of Immovable Taxes
Transfer Tax Property
(ITBI) "Causa Mortis"
MUNICIPAL
Service Tax (ISS) Price of Service 5% Corporate
(For Sao Paulo) Taxes
Urban Property Fair Market Variable Other
Tax (IPTU) Value of Taxes
Property
Immovable Transfer Value Variable Other
Property of Immovable Taxes
Transfer Property
Tax (ITBI) "Inter-Vivos"
* The content of this article is intended to provide a general guide to the subject matter. A specialist's advice should be sought in order to provide professional advice on a case to case basis which will meet specific circumstances.
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