Getting to Grips with Brazil’s Byzantine Indirect Tax Regime

Complex and time consuming.

Those are the words for the Brazilian indirect tax system, according to Murilo Mello and Marienne Coutinho, partners at KPMG, Brazil, in a recent article published in the BBNA Indirect Taxes Journal.

Since Brazil has the highest GDP in Latin America, and is a key FDI destination, many foreign traders and investors have no choice but to grapple with the intricacies of its tax system, including five different types of federal, state, and municipal value added tax – some of which may apply concurrently.

To help taxpayers navigate this system – after all, even Magellan needed a compass! – Brazil's Indirect Tax System: an Overview, by Mello and Coutinho, summarises the key Brazilian indirect taxes and their requirements as follows:

Imposto Sobre Produtos Industrializados (IPI): IPI is a federal excise tax levied on the import and manufacture of goods. As a general rule, IPI is creditable, i.e., IPI paid on a prior transaction can offset the IPI liability arising out of subsequently taxed operations. Under certain circumstances, excess IPI tax credits that cannot be offset against the taxpayer’s subsequent IPI liability may be offset against other federal taxes. The applicable rate depends on the product and its classification under the IPI tax rates table. IPI does not apply to fixed asset sales meeting certain requirements. 

Imposto Sobre Circulação de Mercadorias e Serviços (ICMS): ICMS is a value added tax imposed at the state level, and due when a product is imported, resold in the domestic market or physically shipped. ICMS is also levied on the import of products and certain transactions involving electricity, communication services, and inter-municipal and inter-state transportation services. IPI tax must be added to the ICMS tax base in certain cases. ICMS is generally imposed at a rate of 17% - 19% in the case of intrastate transactions or imports. ICMS rates for inter-state transactions vary from 4% - 12%. Input tax is generally creditable by ICMS taxpayers for ICMS purposes, though it may only be used to offset future output ICMS.

Imposto Sobre Serviços (ISS):  ISS is a municipal tax levied on the revenues derived from the provision and importation of services, and in some cases, on service exports. The services subject to ISS are governed by federal law. Rates vary from 2% to 5%, depending on the municipality of the provider, where the service is provided and the type of service.

Programa de Integração Social (PIS) and Contribuição para o Financiamento da Seguridade Social  (COFINS): PIS and COFINS are federal gross revenue taxes computed on a monthly basis, under either a cumulative or non-cumulative regime, generally imposed at rates of 0.65%/3% (cumulative) or 1.5%/7.6% (non-cumulative), respectively. The cumulative regime potentially triggers a harmful cascading effect, since no credit is provided with respect to revenues that were previously taxed. Special rules determine whether a transaction is subject to the cumulative or non-cumulative regime. Revenues related to export transactions and the sale of permanent assets are generally exempt from PIS and COFINS. The importation of goods and services is subject to PIS and COFINS at a combined rate of 9.25% or, in the case of certain goods and services, 11.75%.

Brazil's Indirect Tax System: an Overview , by Murilo Mello and Marienne Coutinho is published in the January, 2016 issue of BBNA Indirect Taxes Journal.

by Joanna Norland, Technical Tax Editor, Bloomberg BNA

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