Brazilian Tax System and Taxation of Foreign Corporations – General Aspects
Brazil is well known for having a complicated tax system that intrigues and annoys the local and international community, not necessary in that order.
The country adopts all major principles regarding tax, as annuity, a new tax shall be only applied the next fiscal year, and avoidance of double taxation. In this sense, municipalities, state governments and the federal government may not impose taxes that incur on the same taxable event (i.g. two rural property taxes). However, there might be some exceptions to both rules. Annuity may be restricted to a 90 days period, in some cases (reduced annuity), and taxes on the same taxable event may be allowed by constitutional permission.
b) Federal Taxes
In terms of competence to produce taxes, article 153 of our Federal Constitution defines as federal taxes the ones on “importation of foreign products (I); exportation to other countries of national or nationalized products; (II); income and earnings of any nature (III); industrialized products (IV);
credit, foreign exchange and insurance transactions, or transactions relating to bonds or securities (V); rural property (VI) and large fortunes( VII)” – the last still has to be regulated by law. The country, as of today – 2012 –, has no taxes on large fortunes. The income tax, which is solely federal, is applied on a graduate scale both for companies and individuals. The maximum bracket is of 27,5% for individuals and 15% or 25% for legal entities, depending on their tax structure.
The federal government also has exclusive competence to impose compulsory loans, in case of a national emergence (art. 148, CF) and social contributions, contributions of intervention in the economic order and contributions of interest of categories of employees or employers (art. 149, CF).
Contributions are important, since in many situations an employer may face having to pay several obligatory ones to employees over their salaries or due to their companies’ economic activity.
The last compulsory loans were imposed more than twenty years ago, many people still fighting in courts for their proper restitution. Given the achieved economic stability of the country is hard for new loans to be imposed. Nevertheless, the constitution permission is there and nothing forbids the government to impose new ones by law.
c) State and Municipal Taxes
States and the federal district have competence to produce taxes on: I) transfer by death and donation of any property or rights; II) transactions relating to the circulation of goods and to the rendering of interstate and inter-municipal transportation services and services of communication, even when such transactions and renderings begin abroad and III) ownership of automotive vehicles (article 155, CF).
Transactions related to the circulation of goods and services taxes (ICMS), as taxes over industrialized products (IPI), incur in every changeable event, meaning the circulation of the product from place A to place B, or transformation of the product (i.e. wine in barrel to bottled wine). They are also non-cumulative , meaning there is a compensation for what was due in each operation related to the circulation of products or rendering of services with the amount due in the previous one by the same State, other or the Federal District (article 155, § 2.º, CF).
Several states lead a fiscal war by imposing taxes lower than others and granting benefits for companies wishing to invest in their home turf.
Finally, the municipalities have the competence to institute taxes on: I) urban buildings and urban land property; II) inter vivos transfer, on any account, by onerous acts, of real property, by nature or physical accession, and of real rights to property, except for real security, as well as the assignment of rights to the purchase thereof; III) services of any nature (article 156, CF).
The municipalities get the smaller chunk of the pie in terms of taxes and many are dependable on the federal government, who redistributed a percentage of certain taxes among those federal entities.
The country has also a national tax code (Código Tributário Nacional) that better specifies how taxes, their denominations, types, taxable events, how they shall be applied and in which brackets.
d) Taxation for Foreign Entities – Important Aspects
If a company or individual, national or foreign, wish to send payment abroad, they are subject to the so called withholding income tax (highest bracket 25%). Withholding happens as anticipation for the payment of the tax. In that case, the responsible for paying the tax, is the individual/ entity that generated the payment, not the one who receives it, as it is normally is. Such phenomenon also happens when payment of salaries are due by employers to employees (all monthly social contributions are also due at that moment). As mentioned in previous articles, international treaties to avoid double taxation, may allow for the tax to be taxed only once, normally at the country the money is coming from.
Hence that Brazil and the US do not have a Double Taxation Treaty, but the US government may unilaterally grant credits for a certain percentage of taxes already paid.
All payments produced inside Brazilian territory have to be converted to Brazilian Reais (Superior Court of Justice’s – Superior Tribunal de Justiça – interpretation), as well as any money detained in bank accounts inside the country has to be in the national currency.
If foreign companies wish to remit profits and dividends abroad, they may do so without limitations as long as done after all proper taxes and contributions have being properly paid and profits have been distributed (as mentioned, depending on the company’s statutes or by-laws, the distribution of profits and dividends may be anticipated. Brazil’s fiscal year follow its calendar year beginning in January and finishing in December). Also, as mentioned, given the double taxation rule, remittances abroad are not taxed when leaving the country, since they have been taxed before when of the distribution of profits and dividends.
It is worth mentioning that given the current stability achieved by the country, the government may not impose new Provisional Measures – a sort of government decree that produces effects even before being voted by the National Congress – on “pluriannual plans, budgetary directives, annual budgetary law, additional and supplementary credits; levy or retention of assets, popular savings or any other financial assets” (Article 62 I, d) and II, Federal Constitution).
This is to avoid the drastic last minute measures to fight inflation government took in the 80s, early 90s that scared investors and produced capital flight and more economical instability as a result.
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