Value Added Tax (VAT) Guidelines: Brazil

Brazil’s political-administrative organization comprises three levels: the Union, Federated States, Municipalities and the Federal District (where the capital Brasília is located) which enjoys the attributions of the latter two. Thus, more than one executive authority is entitled to charge the taxes that approach the European concept of VAT.

 

In fact, there are four different types of value added taxes in Brazil, each burdening certain kind of transaction in favor of a different authority, namely:

 

Therefore, all supplies of goods and services in Brazil are taxable by at least two kinds of VAT, but by three at most – ICMS and ISS should never burden an operation simultaneously. Such widespread tax competence often causes conflict among authorities, whether because more than one political entity believes itself to be entitled to collect taxes from a certain kind of operation, or because the service/product supply breaches the territorial competence of more than one authority.

 

Considering the multitude of tax authorities and taxable events reached by the four kinds of Brazilian VAT, tax rates are also extremely variable, depending on the transaction at hand, origin and destination of the good as well as tariff code of the good (Brazil applies the customs tariff based on MERCOSUR Common Nomenclature (NCM). In general, rates are:

 

There are different sorts of tax neutral operations, from a Brazilian tax law perspective based on the Federal Constitution: For example tax immunity, tax exemption and zero rate.

 

The most relevant, reaching all sorts of VAT, is the tax free for product and service exports – Brazilian supplies for customers abroad are free of all VAT taxation.

 

Tax immunity is granted to certain entities or transactions by the Federal Constitution, so none of the political authorities can exercise taxation powers upon them – as VAT or otherwise. Immunity reaches, for example:

 

Tax exemptions are granted by Federal, State and Municipality law, but limited to the Federal Constitution mainframe. All of the four kinds of VAT observed in Brazil are doted of certain exemptions. Zero rate is applicable whenever the tax authority deems it is necessary or interesting for economic reasons. Whenever a Brazilian supplier sends goods to another country, those exports are tax free. 

 

On the other hand, importers are faced with very heavy tax burden. Whenever a Brazilian company purchases goods from abroad, besides the Import Duty, it is obligated to pay ICMS, IPI and PIS/COFINS. 

 

Following the same principle of exemption on exports, services rendered by Brazilian suppliers to foreign recipients are deemed tax free. For municipal authorities service is only considered exported when all of its provision process and results are performed and verified outside of the country, thus payment from abroad alone is not enough to grant tax exemption.

 

Furthermore, imported services, besides Withholding Tax due by the beneficiary, are subject to PIS/COFINS and ISS, Contribution for Intervention in the Economic Domain (CIDE) and Tax on Financial Transaction. 

Part of the process of incorporating any company in Brazil is obtaining a Federal Taxpayer Number (“CNPJ”), which is also granted for individual entrepreneurs. During that registration process, the taxpayer indicates what sort of economic activity it will carry out, thus pointing out a need for registration at the state tax authority (“Inscrição estadual”) and/or at the municipal tax authority (“Inscrição municipal”) where it is located.

 

Non-Brazilian entities can normally signing contracts and invoicing from out of the country, however it will be not possible to recover and offset any VAT credit when it is possible i.e. it cannot operate in their own name in the country, for tax purposes – either a Brazilian branch/subsidiary is incorporated to operate locally, or the recipient of foreign goods/services will be liable to pay import charges for all transactions with the foreign entity.

 

A considerable simplification in registration and other bureaucratic matters available for Brazilian taxpayers is called “SIMPLES”, which is a special taxation program for micro and small businesses that condenses all tax dues – from all authorities – in a single collection system. 

 

Usually employed when it concerns ISS for services rendered outside the supplier’s municipality, but also applicable for PIS/COFINS contributions, the liability for tax collection is transferred from the supplier to the recipient of the supplies.

 

The taxation of certain products is concentrated in only one taxpayer, who stands in for all others in the production/commercial chain of transactions and pays tax in their stead. 

Considering the difference in treatment of our four kinds of VAT, it is necessary to analyze each one of them individually in what refers to accessory obligations:

Penalties regarding irregular VAT registration, collection and accessory obligations are as varied as the VAT charges themselves. For each kind of infraction there are specific legal provisions at federal, state and municipal level, so a comprehensive list of penalties is virtually impossible to achieve. 

 

It is memorable, however, that non-compliance, or tax deficiency that is solved by the taxpayer’s own volition, before any official audit procedure, is granted a “spontaneous denouncement” bonus – penalties can be decreased in such cases (not applicable in case of mistakes on the ancillary obligations).

 

Credit recovery depends on the kind of tax and activity at hand to be observed. General rules are:

Generally no refund in cash is paid by the Brazilian Tax Authorities. VAT offset in Brazil is usually limited and conditioned to certain circumstances, according to the tax authority in charge. 

Mandatory invoice models are defined by state and/or municipal tax authorities, according to the kind of supply provided by the entity and to whom that supply is offered. 

 

Invoices to recipients who are also taxpayers of the taxes in the invoice must also include the name, address and CNPJ number of that recipient.

 

Electronic invoicing, in Brazil, usually involves using software applications/invoice terminals developed by the tax authorities. It is, in fact, the most common way to issue invoices in the country.