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Brazil - Indirect Tax Guide

Brazil - Indirect Tax Guide

Explore the requirements and rules that apply to Indirect Taxes in Brazil.

Explore the requirements and rules that apply to Indirect Taxes in Brazil.

Christ the redeemer statue and the coastline

General

Types of indirect taxes (VAT/GST and other indirect taxes).

There are two types of VAT in Brazil:

  • ICMS ( Imposto sobre Circulação de Mercadorias e Serviços ): tax on the circulation of goods and transportation and communication services, a state sales tax
  • IPI (imposto sobre produtos industrializados): tax on industrialized goods, a federal excise tax.

Are there other indirect taxes?

There are other taxes on supplies of goods or services:

  • ISS imposto sobre serviços: municipal services tax
  • COFINS (contribuição para o financiamento da seguridade social): social contribution for social security financing
  • PIS (programa de integração social): employees’ profit participation program.

What supplies are subject to VAT?

There are two value-added taxes in Brazil. One is a state sales tax (Imposto sobre Circulação de Mercadorias e Serviços - ICMS) and the other is a federal excise tax (imposto sobre produtos industrializados - IPI).

ICMS is due on the physical movement of merchandise and is also levied on inter-state and inter-municipal transport services, communications and electricity.

IPI excise tax is due, with a few exceptions, on all goods imported or manufactured in Brazil.

The tax is paid upon import or on the manufacture of a product. Credit is given with respect to the IPI tax paid on raw materials or component parts used in the finished product or consumed in production. The difference in IPI must also be paid if the goods or products are:

  • imported and sold at a higher price by the importer to a domestic purchaser
  • repackaged for sale at a higher price
  • sold at a higher price by the producer or manufacturer through a branch or
  • sold through exclusive distributors, a joint venture, or through an affiliated concern.

Furthermore, there are other taxes on supply of goods or services:

  • services tax (imposto sobre serviços – ISS)
  • social contribution on billing (contribuição para o financiamento da seguridade social – COFINS)
  • contribution to the social integration program (programa de integração social – PIS).

ISS is a municipal tax on gross billings for services. Services subject to the ISS are defined by federal law. Each municipality/city must have its own list of taxed services. The COFINS is described as a social contribution and is targeted for funding of social welfare programs. The COFINS is charged on gross receipts from supply of goods and services.

The PIS was created to fund the unemployment insurance program.

What are the standard or other rates (i.e. reduced rate) for VAT/GST and other indirect taxes?

  • The ICMS rate of 17 percent applies to the following states: Acre, Alagoas, Ceará, Espírito Santo, Goiás, Mato Grosso, Mato Grosso do Sul, Pará, Piauí, Rondônia, Roraima and Santa Catarina.
  • The ICMS rate of 18 percent applies to the following states: Amazonas, Amapá, Bahia, Distrito Federal, Maranhão, Minas Gerais, Paraíba, Paraná, Pernambuco, Rio Grande do Norte, Rio Grande do Sul, São Paulo, Sergipe and Tocantins.
  • The ICMS rate of 19 percent applies in Rio de Janeiro.
  • The rate applied on interstate movement of goods may vary based on the state of destination: 4, 7 or 12 percent.
  • The IPI is normally charged at an ad valorem rate according to the classification of the goods based on the international harmonized commodity description and coding systems (NCM Code). Rates range from 0 percent to a maximum of 330 percent and average about 10 percent.
  • The ISS standard rate ranges from 2 percent to 5 percent.
  • The PIS and COFINS standard rates under the so-called non-cumulative regime are 1.65 percent and 7.6 percent, respectively. Please note that the rates of PIS and COFINS on importation of goods are 2.10 percent and 9.65 percent, respectively, but different rates may be applied for some specific listed products such as medicine, automotive, chemical, etc.

VAT/GST registration

Who is required to register for VAT/GST and other indirect taxes?

If a business supplies goods and/or services that are subject to IPI, ICMS, ISS, PIS or COFINS in Brazil, registration is compulsory. There is no threshold below which a business is not required to account for these taxes.

Businesses are required to separately register for ICMS in each state and ISS in each city where they have an establishment.

Is voluntary registration for VAT/GST and other indirect taxes possible for an overseas company (e.g. if the annual turnover is below the relevant VAT/GST and other indirect taxes registration threshold)?

No, foreign businesses are able to register for IPI, ICMS, ISS, PIS and COFINS only if they have a permanent establishment in Brazil and perform taxable transactions in the country. This will most likely give rise to corporate income and other local tax liabilities in Brazil.

Are there any simplifications that could avoid the need for an overseas company to register for VAT?

Foreign companies that operate in Brazil are subject to the same legal requirements as domestic companies, assuming that they have established a permanent business in the country.

Does an overseas company need to appoint a fiscal representative?

Only when the company has a permanent establishment.

Which forms and supporting documentation does an overseas company need to submit for VAT/GST and other indirect tax registrations?

Not applicable.

Is grouping* for VAT/GST and other indirect taxes possible?

VAT grouping is possible for the purposes of calculating and withholding contributions for PIS and/or COFINS. Some states may offer some tax grouping (e.g. headquarter branches located within the state’s territory).

VAT/GST compliance

How frequently are VAT/GST and other indirect tax returns submitted?

Monthly.

What are the exchange rate rules in your country?

If a business receives a purchase invoice in foreign currency, the value of the goods needs to be converted into Brazilian currency using the exchange rate published by the Brazilian Central Bank.

Businesses cannot issue VAT invoices in a foreign currency. The invoices must be issued in the local currency.

International Supplies of Goods and Services

Exports – Goods

How are exports of goods treated?

The Brazilian Federal Constitution establishes that goods intended for export have tax immunity (exemption).

Exports - Services

How are exports of services treated for VAT/GST purposes?

The Brazilian Federal Constitution establishes that services intended for export have tax immunity (exemption) irrespective of whether the purchaser is an individual or a business.

Imports – Goods

How are goods dealt with on importation?

As a rule, import operations are subject to the following taxes: II (import duty), ICMS, IPI, PIS/COFINS.

From a Brazilian regulatory, tax and legal perspective there is no restriction on having an individual as the importer of record (IOR). Nevertheless, some requirements should be met:

  • the individual will be required to pay an import duty of 60 percent of the value of the goods and also a State Tax (VAT) of 18-25 percent of the value of the goods
  • the maximum value for goods imported by individuals into Brazil is USD3,000
  • compliance with supporting documentation requirements as well as practical requirements (e.g. the individual may be requested to physically receive a parcel at a local post office).

The company located overseas can hire the services of a Brazilian post office and include the total amount of such service and taxes in the value of the goods (in case of e-commerce), if the client is informed about this procedure. In this case, the post office will be responsible for paying the taxes, completing the necessary documentation and delivering the goods directly to the client’s address.

Imports – Services

How are services brought in from abroad treated for VAT purposes?

The company importing the services will be responsible for paying the taxes (ISS, PIS and COFINS). The non-resident is not obliged to register for VAT in Brazil and will not be responsible for any taxes.

On importing services, ISS, PIS and COFINS are paid, as well as other federal taxes (not indirect taxes), such as IOF (tax on financial transactions), CIDE (contribution of intervention in the economic domain) and IRRF (withholding income tax).

VAT/GST recovery

Can an overseas company recover VAT/GST and other indirect taxes if not registered for VAT/GST locally?

No.

Are there any exemptions with the right to recover or deduct input VAT?

Not applicable.

Are there any restrictions to the deduction of input VAT? 

In general, goods, services or products do not generate a right to a credit if the final product was tax exempt.

However, the legislation establishes some exceptions as far as ICMS, IPI, PIS and COFINS are concerned.

Tax points

When is VAT/GST due on a supply of goods or services?

The ICMS triggering event is the output of products (i.e. the physical circulation of products) and the customs clearance of imported goods. The IPI triggering event is the output of manufactured products and the customs clearance of imported goods. The ISS triggering event is when the service is rendered. Finally, the PIS and COFINS triggering events are the receipt of revenue by the company.

Invoices

Is a business required to issue tax invoices?

Yes.

Is it possible/mandatory to issue invoices electronically?

Yes, most companies are required by law to issue invoices electronically.

Is it possible for the vendor to issue an invoice (i.e. self-billing)?

As a rule, self-invoicing is not allowed except in specific situations established in the legislation.

Record-Keeping Requirements

How long must records and invoices be retained?

They must be retained for five years. However, regarding electronic invoices (NF-e), the issuer must retain only the XML file.

Can the invoices be stored abroad?

No.

Audits

Do tax audits take place on a regular basis?

Yes, some taxpayers are audited monthly. However, this applies to large taxpayers. Regular taxpayers are audited, on average, once every five years.

Are audits done electronically in your country (e-audit)? If so, what system is in use?

Yes, Brazilian legislation requires taxpayers to provide all information electronically.

What penalties can arise from non-compliance?

Penalties range from 1 percent to 150 percent. The regular penalty is 75 percent of tax due.

Special Indirect tax rules

Are there any special rules for the sale of a company by one taxpayer to another where VAT is not due on the sale?

If a company sells its business while it is in operation, tax cannot be levied. However, it is a requirement for this benefit that the company is sold with all of its assets and inventory, without any moving of such assets. Otherwise, taxes shall be levied.

Are there unique, specific indirect tax rules that you would not expect to find in ‘standard’ VAT jurisdictions

Yes, the indirect tax rules in Brazil are very specific. For example:

  • on sales, even if the supplier does not receive the payment from the customer, all indirect tax should be collected and paid to the tax authorities
  • for the supply of several goods, the ICMS tax payment is attributed to the importer or manufacturer as responsible for the tax due on operations that will occur subsequently. This transfer of responsibility for the tax payment is known as the taxpayer substitution regime
  • taxation in Brazil is based on physical movement of products as well as sales. For example, if one company has two different establishments and transfers goods between them, tax is collected by the sender and is offset as a credit by the recipient
  • there are some special regimes applied per sector or activity for ICMS, PIS and COFINS purposes (e.g. ICMS ST and PIS-COFINS single phase).

Does a reverse-charge mechanism apply for goods or services?

No.

Are there indirect tax incentives available (e.g. reduced rates, tax holidays)?

Yes, there are several tax incentives.

Certain supplies are exempt from ICMS, such as supplies of books, newspapers and paper consumed in the printing of such goods; sale of fixed assets, fruits, vegetables, farm and garden produce and preservatives.

The reduced IPI rate of 0 percent applies, for example, to live animals and animal products, plant products, chemical products, textile products and shoes.

Certain supplies are exempt from IPI, such as supplies of vessels (except sporting or pleasure boats), exports, books, newspapers, periodicals and paper consumed in the printing of such products, electric energy, petroleum products, fuel and minerals belonging to the country.

The ISS rates may vary from one municipality to another but are always in the range of 2 to 5 percent. Certain supplies are exempt from ISS, such as exports of services, amounts intermediated in the bonds and securities market, the amount of bank deposits, the capital, interests and default interests regarding credit operations performed by financial institutions.

Certain supplies are exempt from PIS and COFINS, such as the exportation of goods, the exportation of services with payment in convertible currency, sales of products to a commercial export company for export purposes specifically and sales of fixed assets. Finally, some Brazilian states grant ICMS benefits (reductions and exemptions) for new business but this situation, called 'tax war', could trigger questioning among the states.

Rulings

Are rulings and decisions issued by the tax authorities publicly available?

Yes.

For further information please contact

Elson Bueno
Partner
KPMG in Brazil
T: +55 11 3940 3281
E: ebueno@kpmg.com.br

Lúcio Bastos
Partner
KPMG in Brazil
T: +55 11 3940 5071
E: lbastos@kpmg.com.br

Maria Isabel Ferreira
Partner
KPMG in Brazil
T: +55 11 3940 2020
E: miferreira@kpmg.com.br

Maria Vilma Andrade
Partner
KPMG in Brazil
T: +55 11 3940 4172
E: mvandrade@kpmg.com.br

Footnotes

*By ‘grouping’ we mean: either a consolidation mechanism between taxpayers belonging to the same group (payment and refund are compensated but taxpayers remain distinct) or a fiscal unity for VAT/GST purposes (several taxpayers are regarded as a single taxpayer).

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