Brazil Legal Requirements and Laws

BRAZIL LEGAL REQUIREMENTS

TAXES

04/22/23

Topics

● Introduction

● Main Taxes

● Main Tax Books and Accessory Obligations

● SPED

● Substituição Tributária

● Off Set rules

● Statute of Limitations

● Tax Incentives

● Accounting Practices in Brazil

● Banking communication

• The Brazilian tax system is based on The Brazilian tax system is based on

• the Federal Tax Code of 1966the Federal Tax Code of 1966

• the Federal Constitution of 1988.the Federal Constitution of 1988.

• There are three jurisdictions and tax collection levels in BrazilThere are three jurisdictions and tax collection levels in Brazil

• FederalFederal

• StateState

• MunicipalMunicipal

• The Federal Tax System is managed by the The Federal Tax System is managed by the Receita Federal do Brasil – RFBReceita Federal do Brasil – RFB, which is , which is part of the Ministry of the Economy. States and municipalities have similar structures. part of the Ministry of the Economy. States and municipalities have similar structures.

Introduction Corporate Tax in Brazil

Basic tax requirements to operate in BrazilBasic tax requirements to operate in Brazil

• The company needs to defineThe company needs to define in the Article of Incorporation, the types of activities that it n the Article of Incorporation, the types of activities that it will perform (services, sales, manufacturing, distribution, etc);will perform (services, sales, manufacturing, distribution, etc);

• The Article of Incorporation needs to be registered in the Registry of Commerce (The Article of Incorporation needs to be registered in the Registry of Commerce (Junta Junta ComercialComercial););

• In addition, such entity must be registered in:In addition, such entity must be registered in:

• the Federal Tax Authorities - the Federal Tax Authorities - CNPJCNPJ

• the State Tax Authorities – State Inscription (depending on the activities the State Tax Authorities – State Inscription (depending on the activities performed)performed)

• the Municipal Tax Authorities – Municipal Inscriptionthe Municipal Tax Authorities – Municipal Inscription

• the Social Security Systemthe Social Security System

• the Central Bank and Siscomex System (for import process)the Central Bank and Siscomex System (for import process)

Introduction Corporate Tax in Brazil

According to the Brazilian Tax Legislation, it’s mandatory that any commercial transaction According to the Brazilian Tax Legislation, it’s mandatory that any commercial transaction (involving goods or services) or any goods movement have a invoice (Nota Fiscal), even that (involving goods or services) or any goods movement have a invoice (Nota Fiscal), even that it can be exempted of taxes. Examples:it can be exempted of taxes. Examples:

- Raw or packaging material sale;- Raw or packaging material sale;

- Finished goods sale or resale;- Finished goods sale or resale;

- - Return goods to the SupplierReturn goods to the Supplier;;

- - Send fixed assets to be repaired in a third partySend fixed assets to be repaired in a third party;;

- - Send raw and packaging material to be manufactured in a third partySend raw and packaging material to be manufactured in a third party;;

- - Transfer finished goods from a facility to a distribution centreTransfer finished goods from a facility to a distribution centre;;

- - Render services (maintenance, cleaning, manufacture, etc)Render services (maintenance, cleaning, manufacture, etc)

Nowadays the invoice needs to be printed in a special form;Nowadays the invoice needs to be printed in a special form;

To print these forms, the company needs to have a previous authorization from the Tax To print these forms, the company needs to have a previous authorization from the Tax Authority (AIDF). Generally the Tax Authority authorize the company to print a determined Authority (AIDF). Generally the Tax Authority authorize the company to print a determined number of forms (example 1.000 forms).number of forms (example 1.000 forms).

Nota Fiscal - Invoice

• Tax rate can vary according to State, product, Municipality or serviceTax rate can vary according to State, product, Municipality or service

• Taxes are applied at different points in the process (example sales or services taxes Taxes are applied at different points in the process (example sales or services taxes can be calculated and paid in the invoice and/or in the tax closure book).can be calculated and paid in the invoice and/or in the tax closure book).

Federal State Municipal Social Security

Tax on Income IR (or IRPJ)

CSLL

Sales and Purchase taxes on products

IPI

PIS / COFINS

Import

ICMS

Tax on services PIS / COFINS ICMS ISS INSS

Funrural

Tax on property ITR IPVA

ITBI

IPTU

Others IOF

CIDE

Main taxes

Taxes Definition

IR (or IRPJ) Income tax

CSLL Income tax - Social Contribution Tax on Profits

IPI Tax on the manufacturing and import of goods

ICMS Tax on the movement of goods (including the import of products, electricity, inter-municipal and interstate transportation services and communication services)

PIS / COFINS Tax on revenues

Import tax Tax on import

ISS Tax on services

CIDE Tax on the import of services and the payment of royalties

IOF Tax on credit, exchange, insurance transactions and intercompany loans.

Main taxes

Legal Reporting – Tax books

FederalFederal

DIPJDIRFDACONGFIPDCTFSPEDDEREXBACEN

StateState

Sintegra / Sintegra STGIAGIA STCIAPEFDEFD PIS/COFINSEFD CIAPNFE

CityCity

DESGISSDMSNFE

Main Tax AccessoryObligations

For 2010 Axis doesn´t have the obligations in red.

• SPED is an electronic instrument that unify the activities of receipt, validation, storage and SPED is an electronic instrument that unify the activities of receipt, validation, storage and

authentication of the tax books.authentication of the tax books.

• Due to the implementation of SPED, certain accounting and fiscal books in paper format are Due to the implementation of SPED, certain accounting and fiscal books in paper format are

substituted by an electronic format.substituted by an electronic format.

• SPED regarding digital accounting bookkeeping will have to be delivered before June 30, SPED regarding digital accounting bookkeeping will have to be delivered before June 30,

2009, with respect to transactions that occurred in 2008 for those entities that were notified. 2009, with respect to transactions that occurred in 2008 for those entities that were notified.

Other companies will deliver SPED in 2010 with regards to transactions having occurred in Other companies will deliver SPED in 2010 with regards to transactions having occurred in

2009.2009.

• SPED regarding digital fiscal bookkeeping will be delivered from 2009 considering the SPED regarding digital fiscal bookkeeping will be delivered from 2009 considering the

transactions occurred in 2008. Each State will determine the date of delivery.transactions occurred in 2008. Each State will determine the date of delivery.

SPED – Sistema Público de Escrituração Digital

Substituição Tributária was implemented by the Brazilian government with the objective to Substituição Tributária was implemented by the Brazilian government with the objective to guarantee that the taxes generated in all phases of the supply chain are collected.guarantee that the taxes generated in all phases of the supply chain are collected.

In other words, the big company became responsible for the payment of the small one that In other words, the big company became responsible for the payment of the small one that came after in the supply chain.came after in the supply chain.

This is applicable to special situations. It depends on the type of the commercial transaction. This is applicable to special situations. It depends on the type of the commercial transaction.

There are 3 regimes, defined by the Tax Authority to calculate the ST:- “Margem de valor agregado” (margin of aggregated value give by the government )- “Valor pauta” ( Std Value give by the government ) - “Preço sugerido ao consumidor” (price suggested to the consumer define by the industry sector)

(*) ICMS base considering that the commercial transaction (*) ICMS base considering that the commercial transaction occur in the same stateoccur in the same state

(**) rate defined by the Tax Authority based on the type of (**) rate defined by the Tax Authority based on the type of goodgood

Substituição Substituição TributáriaTributária

Sales Invoice

Customer

Sales Invoice

TOTAL DistributorCommercial Transaction 1

Commercial Transaction 2

Invoice Value 2000.00

ICMS base 2000.00

ICMS value 360.00

ICMS ST 146.05

ICMS Total 506.05


ICMS base 2976.75

ICMS value 506.05

ICMS credit = 360.00


ICMS base 0.00

ICMS value 0.00

This Commercial Transaction is exempt of Tax (ICMS)


ICMS base 2000.00

ICMS value 360.00

Without ST - Distributor With ST – Distributor

State A State B

Without ST - Distributor With ST - Distributor

Substituição Tributária (not Applicable for sales to distributor)

In some situation we can pay one tax using a existing credit for another tax.In some situation we can pay one tax using a existing credit for another tax.

The basic rule is that the tax credit and the tax payable must be of the same jurisdiction The basic rule is that the tax credit and the tax payable must be of the same jurisdiction (Federal or State).(Federal or State).

The most common off set ,is between PIS/Cofins and IPI.The most common off set ,is between PIS/Cofins and IPI.

Off set rules / CompensationOff set rules / Compensation on special situation on special situation

All taxes are subject to the statute of limitations of 5 years (social security is 10 years).All taxes are subject to the statute of limitations of 5 years (social security is 10 years).

In practical terms if no tax assessment is issued then the liability will prescribe based on the In practical terms if no tax assessment is issued then the liability will prescribe based on the statute of limitationsstatute of limitations

Otherwise, if the Tax Authority find any issue during the assessment process, the tax year Otherwise, if the Tax Authority find any issue during the assessment process, the tax year related to the this issue remains “opened”.related to the this issue remains “opened”.

Statute of LimitationsStatute of Limitations

• A wide range of government incentives is available for startup projects in Brazil. A wide range of government incentives is available for startup projects in Brazil.

• Usually, incentives take the form of subsidized loan financing (BNDES) and tax Usually, incentives take the form of subsidized loan financing (BNDES) and tax exemptions or reductions.exemptions or reductions.

• Brazilian tax incentives are subject to frequent revisions, then companies that are Brazilian tax incentives are subject to frequent revisions, then companies that are planning to analyze the incentive programs should, as a first step, obtain the latest planning to analyze the incentive programs should, as a first step, obtain the latest available information.available information.

Tax IncentivesTax Incentives

• Accounting practices adopted in Brazil (“Brazilian GAAP”) are based on:Accounting practices adopted in Brazil (“Brazilian GAAP”) are based on:

• Law 6.404/76 - the basic conceptual framework is provided by the Law 6.404/76 - the basic conceptual framework is provided by the Conselho Conselho Federal de Contabilidade Federal de Contabilidade (CFC – Accounting Federal Council).(CFC – Accounting Federal Council).

• Law 11.638/07 - the main objectives of this law is to approximate Brazilian GAAP to Law 11.638/07 - the main objectives of this law is to approximate Brazilian GAAP to IFRS.IFRS.

Financial statements requiredFinancial statements required

• • Balance sheetsBalance sheets

• Statements of incomeStatements of income

• Statements of cash-flows (introduced by Law 11.638/07)Statements of cash-flows (introduced by Law 11.638/07)

• Statements of changes in retained earnings or accumulated lossesStatements of changes in retained earnings or accumulated losses

• Statements of added-value (introduced by Law 11.638/07) Statements of added-value (introduced by Law 11.638/07)

• FootnotesFootnotes

• • Statements of changes in shareholders’ equity are required for publicly-held companies. Statements of changes in shareholders’ equity are required for publicly-held companies.

Accounting Practices Accounting Practices adopted in Braziladopted in Brazil

Record requirements

• Companies must record and maintain proper accounting books in Brazilian Portuguese Companies must record and maintain proper accounting books in Brazilian Portuguese and values must be recorded in Brazilian currency applying Brazilian GAAP. and values must be recorded in Brazilian currency applying Brazilian GAAP.

• The basic accounting books for legal and tax purposes are the journal book The basic accounting books for legal and tax purposes are the journal book (Diário) (Diário) and and general ledger book general ledger book (Razão)(Razão)..

• The other auxiliary books are subsidiary to information contained in the journal and The other auxiliary books are subsidiary to information contained in the journal and ledger.ledger.

Tax year

• The Tax year used in Brazil is from January to December.The Tax year used in Brazil is from January to December.

Chart of Accounting

• The standard chart of accounting used by a company in France can be applied in Brazil.The standard chart of accounting used by a company in France can be applied in Brazil.

• Some adjustment needs to be implemented in order the company can follow the local Some adjustment needs to be implemented in order the company can follow the local requirements (example: creation of accounts to control each kind of tax)requirements (example: creation of accounts to control each kind of tax)

Accounting Practices Accounting Practices adopted in Braziladopted in Brazil

CompanyCompany Customer Customer

BankBank

Duplicata FileDuplicata File

BorderoBordero

BoletoBoleto

BoletoBoleto

Banking communication

Detail about the main Taxes in Brazil

• PIS and COFINS are federal taxes charged on revenues, on a monthly basis, under two regimes:PIS and COFINS are federal taxes charged on revenues, on a monthly basis, under two regimes:

1)1) Non Cumulative AXISNon Cumulative AXIS

Tax rates: PIS = 1.65% COFINS = 7.6%Tax rates: PIS = 1.65% COFINS = 7.6%

Taxpayers are allowed to recognize PIS and COFINS credits over certain costs and expenses:Taxpayers are allowed to recognize PIS and COFINS credits over certain costs and expenses:

a) products purchased for resalea) products purchased for resale

b) goods and services used as inputs in the rendering of services or manufacturing (excl. labor)b) goods and services used as inputs in the rendering of services or manufacturing (excl. labor)

c) consumed electrical powerc) consumed electrical power

d) the rental of real state and fixed assets applied in the activitiesd) the rental of real state and fixed assets applied in the activities

e) the acquisition of fixed assetse) the acquisition of fixed assets

f) return goods f) return goods

Such credits may be used to offset PIS and COFINS due on their taxable revenue.Such credits may be used to offset PIS and COFINS due on their taxable revenue.

This regime is mandatory for companies subject to the actual profit method of computing corporate This regime is mandatory for companies subject to the actual profit method of computing corporate income taxes.income taxes.

PIS and COFINSPIS and COFINS

2) CumulativeCumulative

• Tax rates: PIS = 0.65% COFINS = 3%Tax rates: PIS = 0.65% COFINS = 3%

• Taxpayers are NOT allowed to recognize PIS and COFINS credits.Taxpayers are NOT allowed to recognize PIS and COFINS credits.

• This regime is applicable for certain entities, such as financial institutions and companies under the This regime is applicable for certain entities, such as financial institutions and companies under the presumed profit system, among other entities, and for some revenues deriving from presumed profit system, among other entities, and for some revenues deriving from telecommunications, transport and software development services.telecommunications, transport and software development services.

• Revenues related to export transactions and the sale of permanent assets are, in general, exempt Revenues related to export transactions and the sale of permanent assets are, in general, exempt from these taxes.from these taxes.

• There are special There are special PIS PIS and and COFINS COFINS regimes for companies engaged in some types of industries, regimes for companies engaged in some types of industries, such as automotive, auto parts, cosmetics, such as automotive, auto parts, cosmetics, pharmaceuticalpharmaceutical, oil, beverage, packaging materials, , oil, beverage, packaging materials, energy, and real state, among others.energy, and real state, among others.

• The import of goods and services are also subject to The import of goods and services are also subject to PIS PIS and and COFINS COFINS at a combined rate of at a combined rate of 9.25%. In some cases, taxpayers may recognize PIS and COFINS credits on the import (ex: 9.25%. In some cases, taxpayers may recognize PIS and COFINS credits on the import (ex: purchase of raw-materials).purchase of raw-materials).


Regime for Industrial CompaniesRegime for Industrial Companies

PIS PIS

2.1%

Purchase

Import Finished Goods

Sales

2.1%

COFINS COFINS

9.9%

Purchase Sales

9.9%

1.65%

Purchase

Manufacture

Sales

2.1% 7.6%

Purchase Sales

9.9%

Laws n.º 10.147/0010.637/0210.833/0310.865/04

• According to the Law 10.865/05, the pharmaceutical products are subject to the “single-phase” regime.According to the Law 10.865/05, the pharmaceutical products are subject to the “single-phase” regime.

• This regime is: This regime is:

• non-cumulative in the raw materials purchase;non-cumulative in the raw materials purchase;

• cumulative when the Pharma company sell the products to the client (special tax rates)cumulative when the Pharma company sell the products to the client (special tax rates)

• the product is exempted of PIS and COFINS, in the next commercial transaction.the product is exempted of PIS and COFINS, in the next commercial transaction.


• IPI is a federal tax levied on the manufacturing and import of goods. In many aspects, it operates IPI is a federal tax levied on the manufacturing and import of goods. In many aspects, it operates like a value added tax, which is charged on the value aggregated to the final merchandise.like a value added tax, which is charged on the value aggregated to the final merchandise.

• The applicable rate depends on the product and its classification under the The applicable rate depends on the product and its classification under the IPI IPI tax rates table tax rates table (TIPI)(TIPI). . The classification within The classification within TIPI TIPI generally follows the Brussels Harmonized Tax Codes.generally follows the Brussels Harmonized Tax Codes.

• Each facility (branch) is considered a separate taxpayer for Each facility (branch) is considered a separate taxpayer for IPI IPI tax purposes.tax purposes.

• For domestic transactions, in most cases, the taxable event is the exit of the manufactured product For domestic transactions, in most cases, the taxable event is the exit of the manufactured product from the facility where it was manufactured. from the facility where it was manufactured. IPI IPI is usually applied on the value of the transaction plus is usually applied on the value of the transaction plus ICMS ICMS tax.tax.

• IPI IPI taxpayers are entitled to an taxpayers are entitled to an IPI IPI tax credit equivalent to the tax paid upon the acquisition of the tax credit equivalent to the tax paid upon the acquisition of the inputs to be used in the manufacturing process. This credit may be offset against inputs to be used in the manufacturing process. This credit may be offset against IPI IPI triggered by triggered by subsequent transactions. subsequent transactions.

• Under certain circumstances, excess Under certain circumstances, excess IPI IPI tax credits that cannot be offset against tax credits that cannot be offset against IPI IPI due on due on subsequent transactions may be offset against other federal taxes. subsequent transactions may be offset against other federal taxes.

• IPI IPI does not apply on the sale of fixed assets.does not apply on the sale of fixed assets.

• For imported products, the taxable event is the customs clearance as well as the first exit of the For imported products, the taxable event is the customs clearance as well as the first exit of the product from the importer’s facilities (generally the sale). For most products, product from the importer’s facilities (generally the sale). For most products, IPI IPI on imports is on imports is charged on the CIF value plus certain customs expenses and import tax.charged on the CIF value plus certain customs expenses and import tax.

IPI - Imposto sobre Produtos IPI - Imposto sobre Produtos IndustrializadosIndustrializados

• ICMS ICMS is a state type of value added tax levied on the import of products and certain transactions is a state type of value added tax levied on the import of products and certain transactions involving goods (including electricity), inter-municipal and interstate transportation services and involving goods (including electricity), inter-municipal and interstate transportation services and communication services.communication services.

• The rates vary according with the State and the product (7%, 12%, 17%, 18%, 19% or 25%).The rates vary according with the State and the product (7%, 12%, 17%, 18%, 19% or 25%).

• Sales of automobiles, communications services and electricity are subject to 25% Sales of automobiles, communications services and electricity are subject to 25% ICMSICMS..

• On imports, in general, the On imports, in general, the ICMS ICMS tax base is equal to the tax base is equal to the CIF CIF value plus the applicable import tax, value plus the applicable import tax, IPIIPI, certain customs expenses, the , certain customs expenses, the ICMS ICMS itself and itself and PIS PIS and and COFINS COFINS due on the import.due on the import.

• ICMS ICMS is also due either when a product is resold in the domestic market or when it is physically is also due either when a product is resold in the domestic market or when it is physically removed from a manufacturing facility. The taxable base is equal to the value of the transaction, removed from a manufacturing facility. The taxable base is equal to the value of the transaction, including the including the ICMS ICMS itself (gross-up), insurance, freight and conditional discounts. itself (gross-up), insurance, freight and conditional discounts.

• Each branch of a company is considered a separate taxpayer for Each branch of a company is considered a separate taxpayer for ICMS ICMS tax purposes.tax purposes.

• In general, In general, ICMS ICMS taxpayers are entitled to a tax credit in the amount of the tax paid in the previous taxpayers are entitled to a tax credit in the amount of the tax paid in the previous transaction with the same asset (inputs), provided the purchaser is an transaction with the same asset (inputs), provided the purchaser is an ICMS ICMS taxpayer with respect to taxpayer with respect to that product, i.e., the subsequent transactions with the purchased product are also subject to that product, i.e., the subsequent transactions with the purchased product are also subject to ICMSICMS. . The tax credit may be offset against future The tax credit may be offset against future ICMS ICMS payables.payables.

• If the purchaser is not an If the purchaser is not an ICMS ICMS taxpayer, taxpayer, ICMS ICMS may become a cost and will not be recoverable as a may become a cost and will not be recoverable as a credit.credit.

ICMS - Imposto sobre ICMS - Imposto sobre Circulação de MercadoriasCirculação de Mercadorias

• Import tax applies to the CIF (cost, insurance and freight) value of imported products at variable Import tax applies to the CIF (cost, insurance and freight) value of imported products at variable rates. rates.

• This is a final tax, meaning that no credits are granted.This is a final tax, meaning that no credits are granted.

• The classification of products under The classification of products under TEC TEC determine the applicable tax rate. determine the applicable tax rate.

• Specific rates depend on the classification of the imported product in Specific rates depend on the classification of the imported product in TEC TEC (Mercosur’s common (Mercosur’s common external tariff)external tariff)

• TEC TEC is based on the Brussels Harmonized Code. is based on the Brussels Harmonized Code.

• The taxable event is the customs clearance. The taxable event is the customs clearance.

• Other customs fees include minor ones such as a processing fee for the import license, when Other customs fees include minor ones such as a processing fee for the import license, when necessary, a freight duty which funds the merchant marine fleet (levied at 25% on the freight cost), necessary, a freight duty which funds the merchant marine fleet (levied at 25% on the freight cost), as well as miscellaneous port charges.as well as miscellaneous port charges.

Import TaxImport Tax

(*) According to TIPI (Tabela do IPI)

and TEC (Tarifa Externa Comum) the IPI tax rate for pharmaceutical goods is 0%.

The Import tax rate vary from 4 to18%.

The ICMS tax rate of São Paulo is

18%.

• Brazil imposes federal, state and, sometimes, municipal taxes on the import of goods and services. Brazil imposes federal, state and, sometimes, municipal taxes on the import of goods and services.

• The import of goods is subject to The import of goods is subject to II II (import tax or custom duty), (import tax or custom duty), IPI, ICMS, PIS IPI, ICMS, PIS and and COFINS COFINS and other miscellaneous and other miscellaneous customs duties.customs duties.

• The classification of products under The classification of products under TEC TEC (Mercosur’s common external tariff) is crucial to determine the applicable (Mercosur’s common external tariff) is crucial to determine the applicable rate for most taxes. rate for most taxes. TEC TEC is based on the Brussels Harmonized Code.is based on the Brussels Harmonized Code.

Taxes on ImportTaxes on Import

• ISS ISS is a municipal tax levied on the revenues derived from the provision of services.is a municipal tax levied on the revenues derived from the provision of services.

• Although it is a municipal tax, the services subject to the Although it is a municipal tax, the services subject to the ISS ISS are listed in federal law (are listed in federal law (Lei Lei Complementar Complementar 116/03).116/03).

• The tax base is the price of the service and the rates vary from 2 to 5%, according to the The tax base is the price of the service and the rates vary from 2 to 5%, according to the municipality where the service provider is located, where the service is provided and the type of the municipality where the service provider is located, where the service is provided and the type of the service. service.

• For most services, there is significant debate as to whether the For most services, there is significant debate as to whether the ISS ISS should be paid to the should be paid to the municipality where the service provider is located or where the service is performed.municipality where the service provider is located or where the service is performed.

• The taxpayer is, in principle, the service provider. However, the municipal tax legislation may The taxpayer is, in principle, the service provider. However, the municipal tax legislation may impose a withholding responsibility to the company hiring the services.impose a withholding responsibility to the company hiring the services.

• As of January 2004, As of January 2004, ISS ISS also applies on the import of services. The Brazilian company retaining the also applies on the import of services. The Brazilian company retaining the services is obliged to withhold the tax on the service fees paid to the nonresident.services is obliged to withhold the tax on the service fees paid to the nonresident.

• Furthermore, Furthermore, Lei Complementar Lei Complementar 116/03 introduced an 116/03 introduced an ISS ISS exemption to certain exports of services.exemption to certain exports of services.

• When the provision of the service also involves the provision of goods, When the provision of the service also involves the provision of goods, ISS ISS applies on the total price applies on the total price of the service, except when there is a specific provision determining the applicability of of the service, except when there is a specific provision determining the applicability of ICMS ICMS on the on the value of the goods.value of the goods.

ISS – Imposto sobre ISS – Imposto sobre Serviços AXISServiços AXIS

• There are two income taxes in Brazil:There are two income taxes in Brazil:

• Income Tax (IR or IRPJ)Income Tax (IR or IRPJ)

• Social Contribution Tax on Profits (CSLL)Social Contribution Tax on Profits (CSLL)

• They are charged on similar bases;They are charged on similar bases;

• There are three methods provided by legislation to calculate IR and CSLL:There are three methods provided by legislation to calculate IR and CSLL:

• Actual Profit AXISActual Profit AXIS

• Presumed ProfitPresumed Profit

• Arbitrated ProfitArbitrated Profit

IR and CSLLIR and CSLL

Income Tax – IR or IRPJ

• The income tax regulations in force are consolidated under Decreto 3.000 of March 26, 1999.The income tax regulations in force are consolidated under Decreto 3.000 of March 26, 1999.

• These regulations apply to all taxpayers.These regulations apply to all taxpayers.

• Only the federal government may charge income tax, however, part of the income tax collected is Only the federal government may charge income tax, however, part of the income tax collected is

transferred to states and municipalities.transferred to states and municipalities.

• Brazilian corporate income tax is federal tax charged on net taxable income. It applies at a basic Brazilian corporate income tax is federal tax charged on net taxable income. It applies at a basic

rate of 15%, plus a surtax of 10% on annual income that exceeds R$ 240,000 per year or R$ 20,000 rate of 15%, plus a surtax of 10% on annual income that exceeds R$ 240,000 per year or R$ 20,000

per month.per month.

Social Contribution Tax on Profits – CSLL

• This tax was introduced to fund social and welfare programs and is paid in addition to the corporate This tax was introduced to fund social and welfare programs and is paid in addition to the corporate

income tax.income tax.

• CSLL is also a federal tax levied on net taxable income and is applied at a rate of 9%. It is not CSLL is also a federal tax levied on net taxable income and is applied at a rate of 9%. It is not

deductible for corporate income tax purposes. CSLL’s tax base is similar to the tax base of the deductible for corporate income tax purposes. CSLL’s tax base is similar to the tax base of the

corporate income tax.corporate income tax.


Actual Profit System AXIS

• Under the actual profit system, net taxable income corresponds to the company’s net book profit, arrived at by Under the actual profit system, net taxable income corresponds to the company’s net book profit, arrived at by

applying Brazilian GAAP, adjusted by some inclusions and deductions per Brazilian corporate tax legislation.applying Brazilian GAAP, adjusted by some inclusions and deductions per Brazilian corporate tax legislation.

• In this sense, under the actual profit system, companies are required to keep appropriated accounting records, an In this sense, under the actual profit system, companies are required to keep appropriated accounting records, an

income tax book (LALUR) and supporting documentation and calculations in order to demonstrate the amount of tax income tax book (LALUR) and supporting documentation and calculations in order to demonstrate the amount of tax

due.due.

• Main inclusions relate to non-deductible accounting provisions (provisions deductible are labor social charges or Main inclusions relate to non-deductible accounting provisions (provisions deductible are labor social charges or

expenses based on contracts) and non-deductible expense (expenses not related to the core activity of the business, expenses based on contracts) and non-deductible expense (expenses not related to the core activity of the business,

tax penalties)tax penalties)

• Deductible expenses are generally all items relating to the ordinary business of a company, properly documented and Deductible expenses are generally all items relating to the ordinary business of a company, properly documented and

which are necessary to maintain its source of income. The following are some examples of rules related to the which are necessary to maintain its source of income. The following are some examples of rules related to the

deductibility of expenses for income tax purposes:deductibility of expenses for income tax purposes:

• Depreciation may be charged based on the useful life of the related asset. There is a detailed list of assets Depreciation may be charged based on the useful life of the related asset. There is a detailed list of assets

published by tax authorities which contains the accepted depreciation rates. Higher rates may be accepted if published by tax authorities which contains the accepted depreciation rates. Higher rates may be accepted if

certain requirements are met. In case the company works in two or three shifts, these rates may be increased by certain requirements are met. In case the company works in two or three shifts, these rates may be increased by

50% and 100%, respectively. 50% and 100%, respectively.

• Deferred expenses – expenses that will benefit future years such as interest paid during the construction and Deferred expenses – expenses that will benefit future years such as interest paid during the construction and

preoperational phase of a new plant, and expenditures on company reorganization, should be deferred for future preoperational phase of a new plant, and expenditures on company reorganization, should be deferred for future

amortization.amortization.


Actual Profit System AXIS

• Startup expenses should be deferred until the project is operational, at which these expenses Startup expenses should be deferred until the project is operational, at which these expenses

should be amortized over at least five years.should be amortized over at least five years.

• Technical assistance and royalty payments are tax deductible subject to specific conditions Technical assistance and royalty payments are tax deductible subject to specific conditions

and limits established by law, which among other things require the approval of the Federal and limits established by law, which among other things require the approval of the Federal

Intellectual Property Agency (INPI).Intellectual Property Agency (INPI).

• Fines for tax assessment and non-tax related fines are not tax deductible. Tax for late tax Fines for tax assessment and non-tax related fines are not tax deductible. Tax for late tax

payments are deductible.payments are deductible.


Presumed Profit System

• Brazilian companies may elect to compute corporate taxes based on presumed net profit, provided they:Brazilian companies may elect to compute corporate taxes based on presumed net profit, provided they:

•A) do not have total revenues in the preceding year higher than R$ 48 million;A) do not have total revenues in the preceding year higher than R$ 48 million;

•B) are not financial institutions, similar entities or factoring companies;B) are not financial institutions, similar entities or factoring companies;

•C) do not earn foreign profits, income or gains (i.e. directly or through foreign subsidiaries) andC) do not earn foreign profits, income or gains (i.e. directly or through foreign subsidiaries) and

•D) do not qualify for an exemption or reduction of the corporate income tax.D) do not qualify for an exemption or reduction of the corporate income tax.

• The election is made annually, at the beginning of the year and the choice may be renewed every year. The election The election is made annually, at the beginning of the year and the choice may be renewed every year. The election

is valid for both IRPJ and CSLL. Under the presumed tax regime, the taxes must be calculated and paid on a quarterly is valid for both IRPJ and CSLL. Under the presumed tax regime, the taxes must be calculated and paid on a quarterly

basis.basis.

• The presumed profit is arrived at by applying a certain predetermined percentage, which varies according to the The presumed profit is arrived at by applying a certain predetermined percentage, which varies according to the

activity, over the gross sales. The total amount of capital gains, financial revenue and other revenue must be added to activity, over the gross sales. The total amount of capital gains, financial revenue and other revenue must be added to

this presumed profit base to compute the corporate taxes. The corresponding tax rates are then applied over the this presumed profit base to compute the corporate taxes. The corresponding tax rates are then applied over the

presumed profit.presumed profit.

• For instance, for the income tax, the percentage for the revenues derived from the sale of products is 8%, while the For instance, for the income tax, the percentage for the revenues derived from the sale of products is 8%, while the

percentage for services revenue is 32%. For the social contribution tax on profits, the percentages are 12% and 32%, percentage for services revenue is 32%. For the social contribution tax on profits, the percentages are 12% and 32%,

respectively.respectively.


Arbitrated System

• Under certain circumstances, such as inadequate or unreliable record keeping, the tax authorities Under certain circumstances, such as inadequate or unreliable record keeping, the tax authorities may arbitrate profits. may arbitrate profits.

• In this sense, the method is a type of punishment applicable in situations provided for by law. In this sense, the method is a type of punishment applicable in situations provided for by law.

• The income tax paid on the arbitrated profit is definitive and cannot be offset against future The income tax paid on the arbitrated profit is definitive and cannot be offset against future payments. payments.

• The arbitrated profit system is similar to the presumed profit, but with higher percentages to be The arbitrated profit system is similar to the presumed profit, but with higher percentages to be applied over the gross sales. In addition, penalties may be charged by tax authorities.applied over the gross sales. In addition, penalties may be charged by tax authorities.


The following withholding taxes can be charged on service invoices (domestic The following withholding taxes can be charged on service invoices (domestic transactions):transactions):

• Income TaxIncome Tax (tax rate = 1% or 1,5%)(tax rate = 1% or 1,5%)

• CSLLCSLL (tax rate = 1%)(tax rate = 1%)

• PISPIS (tax rate = 0,65%)(tax rate = 0,65%)

• COFINSCOFINS (tax rate = 3%)(tax rate = 3%)

• ISSISS (tax rate = between 2% and 5%)(tax rate = between 2% and 5%)

• INSSINSS (tax rate = 11%)(tax rate = 11%)

Withholding TaxesWithholding Taxes

• CIDE (Contribuição de Intervenção no Domínio Econômico) CIDE (Contribuição de Intervenção no Domínio Econômico) is a 10% contribution levied is a 10% contribution levied on payments due to nonresidents in the form of royalties, technical and administrative on payments due to nonresidents in the form of royalties, technical and administrative services and technical assistance, among others, at a rate of 10%. services and technical assistance, among others, at a rate of 10%.

• Differently from the withholding income tax, Differently from the withholding income tax, CIDE CIDE is a tax imposed on the Brazilian is a tax imposed on the Brazilian payer of the fees and, therefore, may not be reduced by tax treaties and does not payer of the fees and, therefore, may not be reduced by tax treaties and does not generate a tax credit abroad.generate a tax credit abroad.

• There is a limited tax credit granted to the Brazilian entity for There is a limited tax credit granted to the Brazilian entity for CIDE CIDE paid on royalties for paid on royalties for the use of trademarks or trade names which reduces the tax’s effective rate (during a the use of trademarks or trade names which reduces the tax’s effective rate (during a period the tax payer can take a credit of 30% related to the previous payment).period the tax payer can take a credit of 30% related to the previous payment).

CIDECIDE

• IOF IOF is a federal tax levied on credit, exchange, insurance and securities transactions executed is a federal tax levied on credit, exchange, insurance and securities transactions executed through financial institutions. The tax also applies to gold transactions and includes intercompany through financial institutions. The tax also applies to gold transactions and includes intercompany loans.loans.

• The The IOF IOF is levied at varying rates, depending on the maturity terms and type of transaction.is levied at varying rates, depending on the maturity terms and type of transaction.

Credit transactions 0 - 1.5% per dayCredit transactions 0 - 1.5% per day Securities transactions 0 - 1.5% per daySecurities transactions 0 - 1.5% per day

Insurance transactions 0 - 25%Insurance transactions 0 - 25% Exchange transactions 0 - 25%Exchange transactions 0 - 25%

• For loan transactions in Brazilian currency, the For loan transactions in Brazilian currency, the IOF IOF is levied on the average daily balance or on a is levied on the average daily balance or on a transaction basis, at 0.0079% a day when the borrower is a legal entity, limited to 365 times the daily transaction basis, at 0.0079% a day when the borrower is a legal entity, limited to 365 times the daily rate applicable for loans with determined maturing dates.rate applicable for loans with determined maturing dates.

• The liquidation of foreign exchange contracts for the remittance of dividends and interest on equity The liquidation of foreign exchange contracts for the remittance of dividends and interest on equity abroad, is abroad, is IOF IOF zero-rated.zero-rated.

• Currently, for foreign exchange transactions, the Currently, for foreign exchange transactions, the IOF IOF tax rate ranges from 0% to 5.38% depending tax rate ranges from 0% to 5.38% depending on the type of transaction. The rate is 0.38% for most transactions.on the type of transaction. The rate is 0.38% for most transactions.

• IOF IOF is zero-rated on foreign exchange operations related to the inflow of revenue derived from the is zero-rated on foreign exchange operations related to the inflow of revenue derived from the export of goods and services and outflow of funds derived from the import of goods. The import of export of goods and services and outflow of funds derived from the import of goods. The import of services, however, is subject to services, however, is subject to IOF IOF at 0.38%.at 0.38%.

IOFIOF

• Withholding income tax applies on certain domestic transactions, such as payment of fees to some Withholding income tax applies on certain domestic transactions, such as payment of fees to some service providers, payment of salary and financial income resulting from banking investments. service providers, payment of salary and financial income resulting from banking investments.

• In most cases, the withholding tax is a prepayment of income tax on the entity’s final tax return. In most cases, the withholding tax is a prepayment of income tax on the entity’s final tax return.

• However, in some cases it is considered a final taxation.However, in some cases it is considered a final taxation.

• Also, withholding income tax is due on most nonresidents’ income that has a Brazilian source of Also, withholding income tax is due on most nonresidents’ income that has a Brazilian source of payment (e.g., royalties, service fees, capital gains, interest, etc.). payment (e.g., royalties, service fees, capital gains, interest, etc.).

• According to Brazilian tax law, withholding tax is due upon the payment, credit, delivery, utilization or According to Brazilian tax law, withholding tax is due upon the payment, credit, delivery, utilization or remittance of the funds, whichever occurs first.remittance of the funds, whichever occurs first.

• The rates depend upon the nature of the payment, the residence of the beneficiary and the existence The rates depend upon the nature of the payment, the residence of the beneficiary and the existence of tax treaties between Brazil and the country where the beneficiary is located. of tax treaties between Brazil and the country where the beneficiary is located.

• Most common rates range from 15 to 25%.Most common rates range from 15 to 25%.

Withholding Income TaxWithholding Income Tax

Non-Cumulative Non-Cumulative – (applies to IPI/ICMS/PIS/COFINS) In order to avoid a cascade tax-effect, the – (applies to IPI/ICMS/PIS/COFINS) In order to avoid a cascade tax-effect, the taxpayer is allowed to offset (partially or totally) the tax charged by the supplier.taxpayer is allowed to offset (partially or totally) the tax charged by the supplier.

Non-retroactiveNon-retroactive - The Government is forbidden to collect taxes for taxable events that occurred before - The Government is forbidden to collect taxes for taxable events that occurred before the law which instituted or increased such taxes came into force.the law which instituted or increased such taxes came into force.

Prospective basisProspective basis - The Government is forbidden to collect taxes in the same fiscal year in which the law - The Government is forbidden to collect taxes in the same fiscal year in which the law that instituted or increased such taxes was enacted. For social contributions the term is 90 days.that instituted or increased such taxes was enacted. For social contributions the term is 90 days.

Enacted BasisEnacted Basis - The Government is forbidden to impose or increase taxes without law duly enacted by - The Government is forbidden to impose or increase taxes without law duly enacted by Congress.Congress.

Constitutional PrinciplesConstitutional PrinciplesTax relatedTax related

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Brazil Legal Requirements and Laws

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