Knowing which taxes to pay, to which government entity, and for which product or service poses a serious challenge to businesses operating in Brazil. There are different types of taxes, different deadlines, and different rates that vary from state to state and from municipality to municipality. The complexity of Brazil’s tax system often results in businesses either paying the wrong amount of tax or paying tax on the wrong goods and services.
Why is the tax system in Brazil so complicated? The tax system established by the 1988 Constitution granted power to the federal, state, and municipal governments to collect taxes. Each of the government entities then created its own tax regulations and rates.
Since 1988, there has been a continuous progression of changes to the tax system. Most recently, in May 2013, the Economic Affairs Committee of the Brazilian Senate passed a bill that cuts the ICMS tax rate on goods and services from an average of 17% to 4%. Some believe that the new law will help lower taxes and simplify Brazil’s tax structure once it is approved by Congress. However, others believe that the tax system will become more complex, partly because of the many exceptions built into the law.
Here are brief explanations of the two tax categories that cause the most confusion for businesses.
ISS – Municipal Tax on Services Rendered
ISS tax (Imposto sobre Serviços) is a tax paid by a service provider for services rendered that are not subject to the ICMS tax. The average rate of the ISS tax across municipalities is 5%. This basic definition disguises the difficulty of understanding exactly to which services the ISS tax applies.
Also, this service tax is due to the municipality in which the company is established even if the service is rendered in another municipality. Of course, there are exceptions that add to the complexity.
ICMS – State Tax on the Circulation of Goods and Services
Under the Constitution, Brazilian states have the authority to collect tax on the circulation of merchandise, the rendering of interstate and intermunicipal transportation services, and communications that are not subject to the ISS tax. The average ICMS tax rate across states is 17%. ICMS tax (Impostos Sobre Circulação de Mercadorias e Prestação de Serviços) applies even when the transaction and the rendering of services began in another country.
To make things even more complex, the ICMS tax rate, collection procedures, and accessory obligations vary from state to state. The rate also varies based on the nature of the goods sold. This means that companies that conduct business in multiple states are subject to multiple compliance requirements.
Understanding and Managing Business Tax Liabilities
The above definitions don’t come close to describing the intricacies of Brazilian business taxes. It’s crucial that both Brazilian businesses and foreign business that operate in Brazil seek legal and financial advice to establish adequate accounting and tax payment procedures.