The tax system in Brazil is one of the most complex in the world.
According to the Brazilian Federal Court of Accounts (TCU), since the promulgation of the Federal Constitution of 1988, an average of 37 tax regulations have been issued per day. As a result, companies spend approximately US$ 36.2 billion per year to maintain personnel, systems to keep up with legislative changes.
In Brazil, the federal, state and municipal governments can levy taxes. The rules regarding which taxes each level of government can levy and how they should be calculated are authorized in the Federal Constitution. It not only defines the limits of each state to create taxes but also explains the different types of taxes that can exist and how they should be charged.
Having an efficient tax system is fundamental to increase the competitiveness of companies, thus accelerating the pace of economic growth in the country, generating jobs and income for the population.
Tax system in Brazil: an overview
Generally speaking, there are four main types of tax in Brazil: taxes, fees, special assessments, and compulsory loans.
Although Article 145 of the Federal Constitution and Article 5 of the National Tax Code expressly classify only taxes, fees, and special assessments as taxes, the majority doctrine and the Supreme Federal Court understand that compulsory loans and contributions are also autonomous tax species, due to their autonomous legal regime and their clear tax nature.
This understanding is supported by Article 4 of the National Tax Code, according to which the “specific legal nature of the tax is determined by the fact that generates the respective [tax] obligation“, regardless of the denomination, the formal characteristics adopted by the law, and the legal destination of the revenue collected.
Taxes – payment made by the citizen to maintain the functioning and provision of state services, but which is independent of any specific state activity in relation to the taxpayer;
Fees – directly related to a service provided or made available to the taxpayer, or even to the exercise of police power. Fees cannot have the same tax base as taxes;
Special assessment – may be charged to cover the cost of public works, such as the construction of a square near the taxpayer’s residence.
Compulsory loan (Article 148 of the Constitution), to meet extraordinary expenses, resulting from a public calamity, foreign war or its imminence; or in the case of urgent public investment of relevant national interest.
Read also: Taxes in Brazil for foreigners: what are the incentives?
Tax system in Brazil: types of tax
Taxes in Brazil can be classified as direct and indirect.
Direct Taxes
They directly affect the taxpayer’s economic capacity, such as Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL).
Indirect Taxes
They are embedded in the price of products and services, being transferred to the final consumer. Examples: Tax on Industrialized Products (IPI), Tax on the Circulation of Goods and Services (ICMS), Tax on Services of Any Nature (ISS), Social Integration Program (PIS), Contribution for the Financing of Social Security (COFINS).
Taxing Powers
Taxing power is the permission granted by the Federal Constitution to create taxes. In Brazil, this permission is given to the Union, States, and Municipalities.
Union: The Union has the power to institute taxes such as
- Corporate Income Tax (IRPJ),
- Social Contribution to Net Profit (CSLL),
- Tax on Industrialized Products (IPI),
- Social Integration Program (PIS),
- Contribution for the Financing of Social Security (COFINS).
States: States institute the ICMS and other taxes on goods sales. The ICMS stands for “Tax on the Circulation of Goods and the Provision of Interstate and Intermunicipal Transportation and Communication Services”
Municipalities: Municipalities have the power to institute the Service Tax (ISS) and the Property and Territorial Urban Tax (IPTU).
Main Taxes on Companies in Brazil
Companies in Brazil are subject to a series of taxes, among which the following stand out:
IRPJ: Corporate Income Tax, levied on the real profit or revenue of the company depending on its tax regime.
CSLL: Social Contribution Tax complements the IRPJ, and levied on the real profit or revenue of the company depending on its tax regime.
PIS and COFINS: Contributions for the financing of Social Security, levied on the gross revenue of companies.
ICMS: Value Added Tax (VAT), levied on the circulation of goods and services.
ISS: Service Tax, levied on the provision of services.
Let’s discuss a little bit more about companies, by analyzing their tax regimes.
Tax Regimes for companies in Brazil
Companies can opt for different tax regimes, each with its own characteristics and requirements. The main regimes are:
Real Profit: The company’s profit is determined based on the accounting, and taxation occurs on the net profit.
Presumed Profit: Profit is presumed based on percentages applied to gross revenue. Simplified Regime: A simplified regime for small businesses, with unified taxation and reduced rates.
The choice of the appropriate tax regime depends on several factors, such as the company’s size, type of activity, revenue, and complexity of operations.
Taxes among States
In Brazil, each of the more than 5,500 municipalities, the 26 states, and the federal government have the power to create their own taxes. This means that a company can pay different taxes depending on where it is located or where it sells its products. For example, a product may have a higher tax in one state than in another.
Additionally, all this complexity makes it very difficult for companies to understand and comply with all tax rules.
To make life easier for companies, it would be interesting if each government published a complete guide with all tax rules. This way, companies could consult only one document to know what they must pay. Unfortunately, this practice is still not common in Brazil.
This lack of clarity ends up generating many disputes between companies and the government. These disputes can take years to resolve, which generates many costs for both companies and the government.
Legal Complexity in Brazil
While most countries have only one tax on consumption, in Brazil there are at least five. In Brazil, for example, ICMS, ISS, IPI, PIS/Pasep, and COFINS are levied on consumption, but in most other countries, only the Value Added Tax (VAT) is applied. Additionally, each of the 27 states has its own ICMS rules, and each of the 5,570 municipalities has its own ISS rules.
The large number of taxes, the different calculation methods, the uncertainties associated with “physical credit”, the constant changes in rules, and the large number of exceptions make tax collection and auditing extremely complex and costly, in addition to generating conflicts between taxpayers and the tax authorities.
The World Bank’s Doing Business survey shows that Brazil ranks last among the surveyed countries in terms of time spent paying taxes.
Regarding the reflections of the complexity of the tax system on legal uncertainty, a recent study by Insper points out that, in 2019, tax disputes represented about R$ 5 trillion, which is equivalent to 73% of the national GDP.
The more complex the tax system, the greater the legal uncertainty, the larger the lawsuits, and the smaller the investments.
Compliance with Best Practices
The Brazilian consumption tax system differs from the international standard. For this reason, foreign companies often have difficulty entering the Brazilian market, as what they know about taxation does not apply here. This requires a great deal of effort on their part to adapt. Therefore, it is recommended to have specialized consulting when starting a business in Brazil.
In this case, Europartner is the best option for your business: it has over 15 years of experience and has advised over 300 companies around the world.
The company’s employees are both Brazilian and European. Due to this cultural diversity, problems of various natures can be overcome efficiently and transparently.
Contact us now.
