The Brazilian indirect taxes system is complex and has been subject to multiple changes during the past years. 

Indirect Taxes in Brazil The Brazilian indirect tax system comprises three key indirect taxes:

• VAT on Sales and certain Services (ICMS)
• Excise Tax (IPI)
• Service Tax (ISS)
• PIS/PASEP
• Cofins

Which are state, federal, and municipal taxes, respectively.

ICMS

The Tax on the Circulation of Goods and the Provision of Interstate and Intermunicipal Transport and Communication Services (ICMS) is levied on the movement of goods in general and is the responsibility of the state.

It is charged on the most varied taxable products – from food to appliances – that circulate between cities and also on interstate/intercity transport and communication services.

For companies opting for Real Profit, it is possible to use the ICMS non-cumulative regime, which allows the offsetting of credits in the purchase of taxed products.

IPI

The Tax on Industrialized Products (IPI) is a federal tax that is levied on products resulting from any operation defined as industrialization, whether domestic or foreign.

Therefore, any product that undergoes transformation, processing, assembly, packaging or renovation is subject to this tax.

In the same way as ICMS, IPI is subject to a non-cumulative regime, to avoid the “cascade effect” in its collection in the production cycle.

ISS

The Service Tax (ISS) is levied by municipalities and the Federal District on service provision operations of any nature.

The services subject to the tax are listed in Complementary Law No. 116/2003, but the taxation rules and rates are defined by each municipality.

For the ICMS and IPI contracts, the ISS is a cumulative tax, that is, it must be applied to all stages of production and commercialization.

PIS/PASEP

The contribution to the Program for Social Integration and Formation of Public Servant Assets (PIS/PASEP) is a federal tax that aims to promote the integration of employees in the life and development of companies.

The tax was created by Complementary Law No. 7/1970 and goes hand in hand with COFINS.

Its rate is 0.65% or 1.65% (from 12.01.2002 – in the non-cumulative modality – Law 10.637/2002) on gross revenue or 1% on the payroll, in the case of non-profit entities profitable.

COFINS

The Social Contribution for Social Security Financing (COFINS) is a federal tax whose objective is to pay for health, social security and social assistance expenses in the country.

It has the same PIS calculation basis, but the rates are 3% in the cumulative regime and 7.6% in the non-cumulative regime.

Conclusion

The Brazilian tax environment is, in fact, complex and challenging. There are proposals pending in the Federal Congress that promise simplification, with the union of PIS and COFINS under the Contribution on Goods and Services, and ICMS and ISSQN under the Tax on Goods and Services. Tax reform, however, has been moving slowly, largely due to the Brazilian political moment.

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