Brazilian Tax System
Call it complex or simply confusing, the Brazilian tax system has its peculiarities. Different types of duties are charged and sometimes it is hard to tell the difference between them. This article will try to answer why this system works like it does.
A total of 90 taxes, duties and contributions are currently charged in Brazil. Some are really specific and almost unknown, like the Fee for Metrological Services, for example. The main ones, however, are commonly known by anyone doing business in the country.
Taxes in Brazil can be divided into various categories, based on different governmental sphere:
- Federal taxes, regulated and collected by the Federal government
- State taxes, regulated and collected by each state’s government
- Municipality taxes, regulated and collected per each municipality’s government
A recurring question: what is the criteria adopted to categorize each tax? There are some questions about taxes which could be more efficiently used if administered by different governmental spheres, for example.
Also, some of the taxes are classified as non-cumulative in order to avoid a “domino effect”, where duties might be calculated on an amount already affected by taxes. Some other duties are cumulative tributes either due to fewer stages on the value chain, or due to the fact that services are being taxed, not goods. This happens with ISS, for example, even though this measure is widely criticized.
With this in mind, the list below was compiled in an effort to make the Tax System easier to understand.
Import and Export Taxes
Whenever a foreign product either enters or leaves the country, a tax will probably be applied. Some of the main ones are the Export Tax, Import Tax, Tax on Industrialized Products and State Tax on Circulation of Goods and Services.
The first three are collected by the Federal Revenue, since they are either charged due to activity taking place at customs areas or whenever an industrialized product leaves the factory. The last one, known as ICMS, is applied by each Brazilian State, varying from place to place.
IE - Export Tax
Named Imposto sobre a Exportação in Portuguese, this tax is usually referred to by the abbreviation IE. It is applied when domestic goods leave the country towards other markets.
IE is calculated based on the product’s regular price when leaving Brazil. The tax rate is set at 30% of this price, but can possibly be changed according to governmental strategies to either facilitate or hamper the export of those goods, with a maximum limit of 150%.
The cases of Export Tax exemptions are rare, and are only possible in very particular situations. Basically, the only products that are not charged with IE when leaving the country are:
II - Import Tax
Imposto sobre a Importação, in Portuguese, or II, as it is commonly known, is applied when foreign products enter Brazilian territory. The tax rate varies a lot according to the type of good entering the country. The Common External Tariff, established by Mercosul and also known as TEC/NCM, lists all of the current rates.
Importers might benefit from an II exemption or reduction under certain circumstances. The Brazilian law states that this measure is only applied to products that can are those with no similar produced in the country and also that was transported on a Brazilian flag vessel, unless the government strictly affirm the opposite. That is set to avoid a possible weakening of the local production.
Import Tax exemption may be conceded when specific goods enter the country or under particular circumstances, such as:
- Import under drawback regime
- Staple food, fertilizers, pesticides and some other raw material for the production of agricultural goods and cattle
- Parts and components destined to the repair and maintenance of aircrafts and vessels
- Some medication, e.g. HIV medicine
Other cases where this tax is not applied are:
- Goods imported to replace other identical merchandise previously imported, but identified as defective or inappropriate
- Foreign merchandise that was lost
- Goods returned to other countries prior to the registration of the Import Declaration
IPI - Tax on Industrialized Products
Known as IPI, short for Impostos sobre Produtos Industrializados, this tax is applied for both national and foreign products which were somehow modified for use. It can be applied when it leaves the factory or when it is imported.
Sometimes this duty is modified in order to discourage or incentive the consumption of products. Reductions were already announced and used when charging the duty on home appliances and cars, for example. Some other products, like military aircrafts and equipment used in scientific researches, also have IPI exemption.
IPI is classified as a non-cumulative tax, which essentially means that the amount paid in one stage can be deducted from further stages in the value chain. So the IPI paid when a good leaves the factory, for example, will be converted into credit to lower other tax payments.
ICMS - State Tax on Circulation of Goods and Services
Named Imposto sobre Circulação de Mercadorias e Serviços, ICMS is the tax charged upon sales, services, transportation, communication services, and supplying of any goods. It is applied whenever merchandise is transferred from one party to another and, therefore, circulates.
This tax is charged from companies, who generally pass on the costs to the final price of products, and, consequently, to the consumers. It was once known as IVC, a cumulative tax, until it was changed by a supplementary law which turned it into a non-cumulative tax in order to avoid to charge taxes out of taxes.
Each Brazilian State defines its own ICMS rate, which the governor approves by a decree. ICMS is considered the most important tax for the States’ governments, representing up to 80% of all the tax collected. This is one of the reasons why it is maintained as a state tax, even though many affirm it could be a Federal duty instead. Other explanation is that since every good or service might virtually be taxed, a state fiscalization makes it easier to supervise.
ICMS exemption is also different from State to State, and may involve several items. Some are exempt by the Federal Constitution, like:
- Operations destined to sell merchandise to countries abroad
- Operations that destine to other countries goods like oil, lubricants, liquid and gas fuel, and electricity
- Communications services like the diffusion of radio and images with free reception
Since the list of products may be very different between each State, the best option is to take a look at the RICMS, short for the Regulation of ICMS.
ISS - Tax on Services of Any Nature
Imposto sobre Serviços de Qualquer Natureza, better known as ISS or ISSQN, is a tax applied by municipalities and paid by companies and the civil society whenever their remunerated activity is related to service provision.
Even though the Federal government has fixed a tax rate minimum of 2% and a maximum of 5%, it is a responsibility of the municipalities to charge it. Services exported to other countries than Brazil are exempted from the payment of ISS.
This duty is a bit similar to ICMS, since the last one may also be applied upon both services and goods circulation. However, there are a few differences. ISS is a municipality tax, mainly because it is generally charged by the city where the service provider is established, not necessarily where the service is made.
It is important to highlight that, differently from ICMS, ISS is a cumulative tax in most cases. This means that if a decoration company offers a service to a hotel, users of this establishment will pay both ISS taxes: from the decoration service and from the hospitality one.
Tax On Urban Land x Tax On Rural Real Estate
Both taxes are really similar, but are fiscalized and applied by different governmental entities. While Property Tax for Urban Land is charged by municipalities, Tax on Rural Real Estate is charged by the Federal government.
The main reason: some rural properties might be placed in more than one city, and, why not, more than one state. If this duty was supervised by municipalities, for example, chances of discussions and arguments about the tax collection could be really frequent.
IPTU - Property Tax for Urban Land
Named Impostos sobre a Propriedade Predial e Territorial Urbana in Portuguese, IPTU is the tax charged upon the possession of an urban property. It is imposed by the Federal Constitution. This tax is calculated annually, being fiscalized and established separately by each municipality. Together with ISS, IPTU is one of the main sources of tax collections in the Brazilian cities.
Some of the properties that may apply for the IPTU exemption are:
- Pensioners and retirees that receive less than three Minimum Salaries per month, does not own other property in the same city and also lives in the property asking for an exemption
- Properties of cultural entities
- Properties of sports’ associations
- Properties with value under BRL 73,850, as long it is not only a terrain
ITR - Tax on Rural Real Estate
Impostos sobre a Propriedade Territorial Rural, in Portuguese, is commonly known as ITR. It is pretty similar to IPTU, with the main difference that the tax is charge over rural properties, outside urban territories.
It is paid annually and it is calculated upon the percentage of naked land — which is the amount of land that is not used for any kind of production — of each property. The biggest non-producing area, the higher tax rate.