(a) Import Duty
Import duty (Imposto de importação) is levied on imported goods, depending on the type of product and number of items being imported. Import duty rates vary substantially, generally ranging from 2% to 35% on the value of the goods (where ad valorem duty applies).
These rates are based on the Common External Tariff (Tarifa Externa Comum, “TEC”) which is Mercosul’s commonly agreed import duty.
Most goods from other Mercosul countries, and many goods as its associate members, may be imported free of import duty. Note that there are many exceptions to these rules.
Apart from that, Brazil is also a member of the Latin American Integration Association (“ALADI”) and through ALADI Brazil has been bound by multiple partial trade agreements known as Acordos de Complementação Econômica and Acordos de Alcance Parcial with its Latin American partners. The result is lowered import duties which do not circumvent its obligations within Mercosul. From a Brazilian standpoint, the biggest partners in Latin America are Argentina and Mexico. Argentina is a complementary economy to Brazil owing to close and solid relationships deriving from Mercosul statutes.
Furthermore, as a member of Mercosul, Brazil benefits from trade agreements with Israel, India and SACU (South African Customs Union whose members are South Africa, Botswana, Lesotho, Namibia and Swaziland).
(b) Industrialised Products Tax (“IPI”)
Industrialised products tax (imposto sobre produtos industralizados, “IPI”) is a federal tax imposed on the production or importation of certain industrialised goods. Rates are assessed on the value of these goods and vary in accordance with the nature of the merchandise. On average, IPI is levied at rates between 5% and 18%.
IPI’s rates are found in a detailed table that is similar to Mercosul’s TEC. The definitions, however, are not exactly the same and care should be taken to ensure that the correct code is used.
(c) PIS-Import and COFINS-Import
In addition to being a tax imposed on the payment for services supplied from abroad (see above), PIS-Import and COFINS-import is levied on the importing of goods.
On the importing of goods, the PIS-Import and COFINS-Import are assessed based on the customs value. PIS-Import and COFINS-Import rates are 2.1% and 9.65%, respectively, for most goods (it goes as high as 20% for beauty and personal care products). Various goods are exempt, so each good being imported needs to be carefully classified under the Common External Tariff and the IPI table.
(d) State Tax Over the Movement of Goods (and Certain Services) (“ICMS”)
The tax over the movement of goods and services (imposto sobre a circulação de mercadorias e serviços, “ICMS”) is a State tax levied on certain merchandise, communication services, electricity and the transportation of goods. Imported merchandise is also subject to ICMS.
ICMS is a value-added tax and, to some extent, it works somewhat like the VAT in Europe (or the GST in Australia and New Zealand). Rates generally vary between 7% to 25%, but there are major reductions and increases depending on the type of good or service involved. Interstate rates generally vary from 7% to 12% (depending on the state and where the goods will be sold).
Where ICMS is payable on the importing of goods, the following formula applies (the ICMS itself is considered as part of the formula):
ICMS = (T ÷ 0.82) × 0.18
T = (VA + II + IPI + PIS-Import + COFINS-Import + IOF + CIDE + AFRMM + customs expenses)
- VA = customs value;
- II = amount of import duty payable;
- IPI = amount of IPI payable;
- PIS-Import = amount of PIS-Import payable;
- COFINS-Import = amount of COFINS-Import payable;
- IOF = amount of IOF payable;
- CIDE = amount of CIDE payable;
- AFRMM = amount of AFRMM payable (see below); and
- customs expenses = customs expenses paid or payable in Brazil.
(e) Additional to Freight for the Renovation of Merchant Shipping (“AFRMM”)
The additional to freight for the renovation of merchant shipping (“AFRMM”, from the Portuguese original) is a tax assessed on imports entering Brazilian territory by sea. The tax was created to recover the Brazilian naval industry and to support the development of the merchant shipping.
The AFRMM is assessed at the rate of 25% over the international freight amount declared in the shipping documents for long distance sea transport; 10% for coastal transport and 40% for the river and lake transportation of liquid goods in bulk when carried to the North and North-eastern regions of Brazil.
Some goods are exempt from the payment of AFRMM. These include cargoes of books, newspapers and periodicals, as well as their printing paper; cargoes transported by vessels, domestic or foreign, when not used for commercial purposes and exploration activities.
Countries within Mercosul are exempt from the payment of AFRMM.
(f) Tariff Exemptions for Capital Goods, and Technology and Telecommunications Items
Importers may be able to obtain major reductions or full exemptions of import duty (and, in some cases, ICMS) when purchasing capital goods, and telecommunication and information technology items from abroad where no similar products are manufactured in Brazil. These are known as ex-tarifários.
Specific procedures for obtaining the reductions apply – an application must be made to the Federal Chamber of International Trade and to the relevant State Chambers of Commerce where the goods are to be used.
(g) Summary of likely applicable taxes on imported goods
Considering the various variables involved in importation of goods, examples of calculations of the applicable taxes may be misleading. However, as a “rough” guide, the taxes likely to apply to the importing of foreign goods and their respective rate ranges (ad valorem) are as follows:
|Import duty||Between 0% and 35%, calculated over the customs value|
|IPI||Between 0% and 30%, calculated over the customs value plus the import duty paid|
|PIS-Import and COFINS Import||11.75% (up to 20% in some cases, but many exceptions apply)|
|ICMS||12% to 18% – see ICMS formula|
Taxation of capital gains obtained by foreign companies or non-resident individuals
Foreign companies that obtain capital gains arising from the sale of any assets or rights in Brazil will be subject to IRRF on a progressive basis, as follows:
- 15% if the capital gain is up to R$5 million;
- 17.5% if the capital gain is more than R$5 million but no more than R$10 million;
- 20% if the capital gain is more than R$10 million but no more than R$30 million;
- 22.5% if the capital gain is more than R$30 million.
If the foreign company is based in a tax haven, the rate will be a flat 25%.
If the buyer is a Brazilian company or resides in Brazil, then the buyer will withhold the amount of tax payable by the foreign seller. If the buyer is a foreign entity or a non-resident, the person who holds the power of attorney will be bound to withhold the amount of tax payable.
Double taxation agreements
Brazil has in place double-taxation agreements with Argentina, Austria, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Ecuador, France, Finland, Hungary, India, Israel, Italy, Japan, South Korea, Luxembourg, Mexico, the Netherlands, Norway, Peru, the Philippines, Portugal, Russia, Slovakia, South Africa, Spain, Sweden, Trinidad and Tobago, Turkey, Ukraine and Venezuela.
Note that not all of these agreements still in full force. Some of them only apply in some specific circumstances. The agreement with the Netherlands is probably the most oft-used of them in international tax structures.
OECD’s base erosion and profit sharing (“BEPS”)
In 2013, the OECD and G20 countries began negotiating a prescriptive legal framework to be implemented in the members’ jurisdictions to prevent loopholes available to multinational enterprises. As a consequence, the OECD Convention on Mutual Administrative Assistance in Tax Matters came into force in Brazil on 29 August 2016.
Brazil is one of more than 55 countries registered for automatic exchange of tax information over companies and persons found in their jurisdictions. It has undertaken to commence exchanging information with other members of the convention from 1 September 2018 (relating to the 2017 tax year). The information includes:
- details about subsidiaries operating in Brazil or elsewhere;
- where the corporate group has its main seat as well as corporate commercial activities in all jurisdictions where it operates;
- the globally-considered allotment of the group’s income;
- the globally-considered allotment of paid taxes and due taxes;
- all companies sitting under the corporate group umbrella and their respective economic activities; and
- other information.
Moreover, from 2017 corporate groups whose assets globally are valued more than BRL2.26 billion will be obliged to present a report of its activities, shareholders, holdings, subsidiaries abroad, as well as other information, based on the fiscal year of 2016. Brazil has also adopted the common reporting standard (CRS) of financial account information.
Transfer pricing rules
Transfer pricing rules apply to related entities and transactions with entities in tax havens, and aim to ensure that these companies relate to each other on an arm’s length basis. Brazil is not yet a member of the OECD and its transfer pricing rules do not follow the OECD principles.
Brazil’s transfer pricing rules apply both to export as well as import transactions. For import transactions, the rules provide that for IRPJ and CSLL purposes the price for the good, service or right being imported will be calculated in accordance with the following methods:
- compared independent prices (preços independentes comparados, “PIC”);
- resale price less profit (preço de revenda menos lucro, “PRL”);
- production cost plus profit (custo de produção mais lucros, “CPL”); and
- price less quoted price on importing (preço sob cotação na importação, “PCI”).
Under the PIC method, the prices of goods, services or rights purchased abroad are compared with similar or identical goods, services or rights that are bought or sold by the company selling the goods to unrelated entities and those bought and sold among other unrelated companies. The calculations take into account the payment terms, quantities, warranties, packaging, freight and insurance, among other things. The weighted average of these prices will be used for assessing deductions of income tax and CSLL.
Under the PRL method, the weighted average of the prices applied to the transactions during the assessment period is calculated and added to one of the following profit margins:
- 40% for the pharmochemical and pharmaceutical sectors, for tobacco-related products, optical, for photographic and cinematographic equipment and tools, for machinery appliances and equipment for dentistry and hospitals, for the extraction of petroleum or natural gas, and for petroleum derivatives;
- 30% for chemical products, for glass and glass derivatives, for pulp, paper and products made out of paper, and for metallurgy;
- 20% for the remaining sectors.
Under the CPL method the average costs in the country where the good is manufactured, the service is provided or the right is created, will be calculated. The cost-base will take into account taxes and fees charged by the country of origin, as well as the cost of raw materials, personnel, lease, maintenance, depreciation, amortisation and reasonable damages and losses in the manufacturing process. The average cost will be added by 20%, which is the deemed profit.
Finally, under the PCI method the price quoted at internationally renowned exchanges (including futures exchanges) or research institutions (these are listed in the annexes of the regulations), adjusted in accordance with the applicable premium on the date of the transaction.
The importer can choose any of the three methods set out above to assess whether the transaction complies with transfer pricing rules. However, the PCI method applies to the importing of all commodities.
Immunities, non-charging, exemptions and zero-rating
Brazilian taxation law differentiates between immunities (imunidades), exemptions (isenções), non-charging (não-incidência) and zero-rated (alíquota zero) classifications.
Immunities relate to taxes that cannot apply due to provisions set out in the Federal Constitution. These apply to the taxation of religious temples, assets, income or services of political parties, trade unions, educational and non-profit organisations and on the sale or importing of books and paper to be used for the printing of books.
Importantly, it also applies to the taxing of different entities which make up the Brazilian Union: the federal Union, States and Municipalities cannot impose taxes on one another, insofar as these taxes relate to assets, income or services. Government entities are likely to be able to avoid payment of the other federal entities’ taxes (for instance, when supplying goods to a Municipality, for as long as the goods are to be incorporated as part of that Municipality’s assets, then no federal taxes are likely to be payable – although some of the contributions may be). This can be of benefit to New Zealand companies looking to supply goods and services in international tenders put out by Municipalities, States and the Union.
Non-charging relates to those transactions where the elements required to trigger a tax event do not occur. Taxes can only be imposed when all elements which make up a taxable event are met. When they do not, the tax cannot be imposed.
Exemptions assume that a tax exists and that it would be charged in a particular set of circumstances. But for the exemption being set out in the law, the tax would have been imposed in those circumstances. The taxpayer has the burden to show that the conditions set out in the law for the exemption to apply are met.
Finally, zero rating relates to imposing a rate of nil where the company would otherwise meet the requirements to be taxed. A taxable event occurs but no tax is imposed as the rate is set at zero.
Joint and several liability
Under Brazilian law, it is not uncommon that both parties to a transaction be jointly and severally liable for tax obligations arising from that transaction. For instance, banks may be held liable if the proper taxes are not paid on certain international remittances.
Directors of companies as well as shareholders are also often found personally liable for tax debts incurred by the company itself. There is no sure way of avoiding this liability, however, risks can be minimised by undertaking audits and seeking evidence that other parties to transactions are compliant with their tax obligations.
“IOUs” by governments (precatórios)
Under Brazilian law, and the Union, States and Municipalities are allowed to pay debts over 60 minimum wages (approximately R$50,000) in 10 annual instalments, rather than as a lump sum, as a consequence of a judgment. These “IOUs” are called precatórios.
While the federal precatórios have generally been paid on time or with a one to two-year delay, States have been notoriously slow in complying with their obligations – there are states where some judgment debts have not been paid in over a decade. Therefore, it is recommended that utmost care be taken when effecting tax payments, as overpayments may take many years to be recovered.
There is even a secondary market for precatórios, as these may be used for setting off tax debts of other parties in specific circumstances.
Sanctions for non-compliance with tax obligations
Brazilian law provides for many sanctions in the case of non-compliance. Sanctions vary from the imposition of hefty fines and seizure of imported goods to imprisonment terms, depending on the gravity of the offence.
Often, the first practical consequence of any non-compliance with deadlines and tax payments is that the company’s tax number (Cadastro das Pessoas Jurídicas, “CNPJ”) appears as non-compliant on the Municipal, State, and/or federal database. This prevents companies from applying for seeking credit, setting up bank accounts and entering into contracts with many businesses (it is common that more sophisticated businesses request evidence that the company has no outstanding tax debts).
Penalties include a 75% fine over the amount of taxes owed for simple non-payment (increased to 112.5% if the company does not provide information to the tax authorities when requested to do so) and 150% where fraud is proved (increased to 250% if the company does not provide information to the tax authorities when requested to do so), as well interest at 12% per year (in addition to having the debt adjusted to inflation) and up to 20% for simple lateness in payment – among other sanctions.
Therefore, retaining a careful and skilled accountant is especially important in Brazil. However, note that mistakes are to be expected as even the best professionals find it difficult to keep up with the constantly changing rules and the interpretation given to them by the tax authorities.