Learn about this federal tax, discover if your business is required to pay it, and understand the calculation process.
Brazil’s tax burden is among the highest in the world. According to the World Bank, 65.3% of corporate profits in the country are allocated to tax payments. Many of these taxes, moreover, are not only burdensome but also complex and bureaucratic, such as COFINS.
This tax levies, provided for in the Federal Constitution, being mandatory, transfer a significant responsibility to corporate tax management, demanding great attention to the fulfillment of legal obligations towards the tax authorities.
The main purpose of COFINS in Brazil is to help finance social security in the country. In this way, it seeks to raise funds that will be used to finance areas such as health, social services, social security and other social assistance programs.
Due to the essential nature of this tax, there is a certain complexity in its calculation, with variations in modality and collection for the company to arrive at the final value of the tax to be paid.
What is COFINS?
The Contribution for the Financing of Social Security (COFINS) is a federal tax established by the Federal Constitution (Article 239).
Its primary purpose is to finance the Brazilian social security system, encompassing areas such as social security, healthcare, and social welfare.
What is PIS?
It is common, when you hear about COFINS, you also hear another acronym: PIS.
PIS stands for Programa de Integração Social or Social Integration Program, a tax collected alongside COFINS.
This often confuses people, who think that PIS and COFINS are the same thing, but in fact, they are two different taxes – although they are paid together. While the funds collected by COFINS are used to invest in social security, PIS is collected to finance employee social integration programs.
How to comply with COFINS payment obligations?
Only micro-enterprises and companies that fall under the Simplified National System (Simples Nacional) regime are not obliged to pay this tax.
Companies who operate under different tax regimes are required to make COFINS payments independently.
Payments must be made by the 25th day of the month following the accounting period.
For example, the COFINS payment for January must be made by February 25th.
If the due date falls on a non-business day, the payment must be made on the previous business day.
COFINS payments are made through a Federal Revenue Collection Receipt (DARF). This document must be filled out with specific information to be validated and then paid.
Read also: FAQ about accounting and tax for international companies in Brazil
What are the consequences of non-payment of COFINS?
Non-payment of COFINS, as well as other due taxes, can lead to severe legal consequences for the company.
Failure to comply with tax obligations may result in a hefty fine of 75% of the due taxes, which can increase to 112.50% if the taxpayer fails to provide the requested information within the specified timeframe following a formal notice.
Who is liable for paying COFINS in Brazil?
COFINS is a contribution that must be paid specifically by legal entities. Only small businesses and microenterprises that are part of the Simplified National Regime (Simples Nacional) are exempt from this obligation over sales and services.
Besides these two tax regimes, there is “Real Profit” and “Presumed Profit”.
When it comes to imports, the Simplified National Regime, the Real Profit and Presumed Profit are due to charges on products and services. They will be mentioned below.
What are the COFINS contribution rates?
Now that you understand what COFINS is and when this tax must be paid, it is important to know the contribution rates and the amount of COFINS tax so that calculations can be performed correctly.
COFINS Rates
COFINS has different rates over sales, services and imports:
| RATES OVER SALES OR SERVICES | ||
| Presumed Profit | Real Profit | |
| COFINS | 3,0% | 7,6% |
| RATES OVER IMPORTS | |||
| COFINS | Simplified National Regime | Presumed Profit | Real Profit |
| Goods | 9,65% | 9,65% | 9,65% |
| Services | 7,6% | 7,6% | 7,6% |
What are the COFINS contribution modalities in Brazil?
The calculation of COFINS also takes into account the contribution modality. In this case, there are two regimes that serve as the basis for this calculation: cumulative and non-cumulative regimes. Below, you will be able to understand a little bit more about them:
Cumulative Regime
Cumulative Regime considers the company’s gross revenue. The income tax base is Presumed Profit. It means the company cannot take credit for expenses or goods that are spent or purchased.
Non-Cumulative Regime
In the non-cumulative regime, the income tax base is the Real Profit. This means that companies that fit into this regime can take credit for certain expenses and specific goods, such as expenses in electricity, rental of equipment or real estate.
How is COFINS in Brazil calculated?
A practical understanding of COFINS calculation requires knowledge of both cumulative and non-cumulative incidence.
Calculation: Cumulative Incidence of COFINS
It is important to remember that the cumulative incidence considers the company’s gross revenue. Therefore, a 3% rate is applied to COFINS. The calculation in this case would be as follows: COFINS = Company’s gross revenue x rate (3%).
Example: Gross revenue: R$ 20,000
COFINS: R$ 20,000 x 3% = R$ 600,00
Calculation: Non-Cumulative COFINS Incidence
The calculation for non-cumulative incidence is slightly more complex as it requires the inclusion of tax expenses (costs and charges).
In this calculation, the company must follow the steps below:
Sales of taxed products: R$ 20,000
Right to credit (products subject to taxes, rent, and others): R$ 5,000
Therefore, we have:
COFINS calculation example
COFINS – sales value: R$ 20,000 x 7.6% = R$ 1,520.00 COFINS – credit on purchases: R$ 5,000 x 7.6% = R$ 380.00
COFINS = R$ 1,520 – R$ 380 = R$ 1,140.00
Particularities of COFINS in Brazil regarding import operations
Companies involved in import operations must pay special attention to the Social Security Financing Contribution. This is because COFINS on imports is governed by Law No. 10.865 of April 30, 2004 and has specific characteristics.
COFINS-Importation taxpayers include: importers, individuals or legal entities that contract services from residents or domiciled abroad, and beneficiaries of the service when the contractor also resides or is domiciled abroad.
According to paragraph 2 of Article 1, the following are also considered subject to COFINS-Importation: national or naturalized goods exported that return to the country, except under the following conditions:
- a) sent on consignment and not sold within the authorized period;
- b) returned due to technical defects for repair or replacement;
- c) due to changes in the import system by the importing country;
- d) due to war or natural disaster; or
- e) due to other factors beyond the exporter’s control.
Keep your accounting organized
Brazil does have a complex tax system and, until the tax reform is approved and fully in force, you need to be very careful when paying Cofins to avoid penalties.
The federal Cofins tax is essential in Brazil’s tax system. It is levied on company turnover to help finance social security.
Its management requires attention to the rules established by the Federal Revenue Service, especially in relation to the tax regime chosen.
In addition, counting on experts on accounting consultancy has emerged as a valuable resource, facilitating the monitoring and execution of tax duties related to Cofins.
The consultancy allows companies to keep up to date with their tax obligations in an efficient and transparent manner, ensuring compliance and tax optimization.
If you are planning to invest in Brazil, the most recommended company to help you is Europartner. For over 15 years, their experts have worked seriously assuring that new business arrive safely in the country.
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