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.
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.
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.
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.
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.
8% for non-financial institutions
(3) WITHHELD INCOME TAX (TAXED AT SOURCE - IRF)
Imposed on profits, income and capital gains.
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.
(6) CONTRIBUTION FOR THE FINANCING OF SOCIAL SECURITY (COFINS)
Assessment based on monthly gross invoicing of goods and services.
(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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