Brazil: Social Taxes Merger Could Double Charge for Some Employers

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By Ed Taylor

July 24 — Proposals to unite two social welfare taxes in Brazil have come under attack from the country's services sector following an industry survey that found the measure could more than double their tax liabilities.

Finance Minister Joaquim Levy outlined proposals July 17 that would merge the two existing methodologies used by companies to pay the welfare taxes and apply a single rate to all entities. Levy told a congressional hearing that although a single tax rate has yet to be determined, it is expected to be above the current rates paid by employers. To ease the burden on companies, the changes would include the provision of tax credits for the purchase of goods and services used for production.

The finance minister said he plans to have the new rules approved by parliament by the end of 2015, so they can take effect in 2016.

This or That

Employers can currently choose one of two methods to pay the Programas de Integracao Social (PIS) and the Contribuicao para o Financiamento da Seguridade Social (Cofins) taxes.

The noncumulative method is mainly used by industry sectors such as manufacturing. Under this process, the combined PIS/Cofins rate is 9.25 percent (1.65 percent for PIS and 7.6 percent for Cofins), and companies can obtain tax credits for costs incurred from the purchase of goods and services related to the production process.

The alternative cumulative method, under which companies pay a combined rate of 3.65 percent for PIS and Cofins taxes, is used principally by service providers. Under this method, companies are not entitled to the tax relief noncumulative taxpayers are.

Proposals Would Hike Tax Burden for Service Sectors

The proposals to amend the existing tax structure have come under attack from service providers and construction firms, for which labor costs account for 50 percent or more of company expenses.

An association of services companies commissioned a study from the Brazilian Institute of Tax Planning, a business advocacy group, to examine the impact of the proposed changes based on a tax rate of 10 percent and taking into consideration what expenses could be used by service firms to generate tax credits.

The study concluded that the unification of the PIS and Cofins taxes as currently proposed with a higher tax rate of 10 percent would result in a 104 percent increase in the annual tax load on the services sector, raising it by $10 billion a year.

The estimated tax burden rise is linked to the labor costs incurred by service companies. Currently, salaries are not eligible for PIS and Cofins tax credits because they are not considered an input expense, which the study said would leave these businesses at a disadvantage.

“Service providers will be the principal losers because their largest input is manpower, which does not have PIS/Cofins charges to give them credits,” said Janssen Murayama, attorney at law firm Murayama Attorneys. “It will be terrible for them

According to Murayama, the only way to compensate for the impact of an increase in the PIS and Cofins rates would be to allow service providers to deduct their labor expenses as inputs, something that is not currently allowed.

Proposals Under Negotiation

Faced with growing opposition to the unification plan, Levy promised congressional leaders that the government would negotiate the proposal with them before finalizing it and tabling it in parliament in the coming months.

The government's economic team is under intense pressure to cut spending and increase revenues to meet its fiscal targets this year and in 2016. Although Levy has insisted that the PIS/Cofins proposal is not aimed at raising tax collections, this has been challenged by analysts.

“The minister is looking to see where he can come up with extra tax revenues to meet the target,” said Alberto Borges de Carvalho, legal advisor at the Sao Paulo Federation of Commerce.

To contact the reporter on this story: Ed Taylor in Rio de Janeiro at

To contact the editor responsible for this story: Anjana Solanki at

For more information on Brazilian HR law and regulation, see the Brazil primer.