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VAT in Brazil is a topic that requires full attention. Unlike many countries, the Brazilian tax burden is complex and requires preparation to deal with it. Therefore, in this article […]
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Understanding VAT in Brazil – The Complete GuidePosted 08/11/2023
VAT in Brazil is a topic that requires full attention. Unlike many countries, the Brazilian tax burden is complex and requires preparation to deal with it.
Therefore, in this article we have separated the most relevant information for you who intend to open a company in Brazil and how you can do it in an easier way, despite the bureaucracy.
The Brazilian tax system
To better understand the Brazilian tax system, it’s important to have an overview of the country in order to do business.
Brazil is a country of continental dimensions, with a population of over 210 million inhabitants. It is a country with great economic potential, but also with challenges – and excessive bureaucracy is one of them.
To do business in Brazil, it is important to be aware of some aspects, such as:
- Regulation: Brazil has complex and extensive tax legislation. It is important to be well-informed about the rules that apply to your business.
- Costs: taxes in Brazil are high, so companies that want to invest here or do business need to be well advised.
- Bureaucracy: the Brazilian tax system is extremely detailed and bureaucratic, which can make it difficult to comply with tax obligations.
This is the complete guide on VAT in Brazil, so you can compare it with your country of origin and better understand how it works in Brazil and what you need to do to have a business here that meets all the demanded requirements. Furthermore, you will see why it is important to count on a company to assist in this process.
The Brazilian tax system is considered one of the most complex in the world. Let’s now look at some reasons for this:
- Federation: Brazil is a federal country, with three spheres of government: Union, states and municipalities. Each sphere has its own tax laws and receives different types of taxes.
- History: the Brazilian tax system was built over centuries, with a combination of laws and regulations from different periods.
What is VAT?
VAT stands for “Value Added Tax”.
It is a consumption tax, calculated on the value added at each stage, i.e. the difference between the purchase price and the sales price.
The tax is very popular all over the world and has been adopted by more than 160 countries. In some countries, such as the UK and France, VAT is the main consumption tax.
In France, for example, it represents the largest part of the state’s revenue, accounting for almost half of the total amount collected each month.
How does VAT work?
VAT is a non-cumulative tax, which means that the tax paid at each stage of the value chain can be deducted from the tax payable at the next stage.
For example, a company that buys a product for R$100 and sells it for R$150 must pay R$30 in VAT when selling it (if the rate is 20%). However, as the company has already paid R$20 in VAT when purchasing the product, it will assume R$10 in VAT as a whole.
We can say that countries that adopt VAT end up having some tax advantages:
- It is a tax with little complexity and therefore speeds up tax calculations.
- It is a neutral tax from a production point of view, which means it does not affect the competitiveness of companies.
- Countries that adopt VAT offer exemptions for some types of businesses, which directly benefits the consumer.
Another advantage for the consumer is that this is the rate that can be claimed back when a foreign visitor comes to the country. By saving purchase invoices, it is possible to claim the amount paid in taxes. It’s worth finding out about this on your next international trip, and check if this applies to the country you will visit. Did you know that?
VAT rates vary from country to country. In Brazil, there is no VAT as such. In this case, the most similar tax is the ICMS rate, which varies in each state. You’ll find important information about it later in this article.
In the UK and France, for example, the VAT rate is 20% on average. Some sectors of the economy tend to have lower rates, but this varies from country to country. In Brazil, the ICMS varies between 7% and 25%.
VAT in Brazil
While VAT is commonly found around Europe and North America and it’s easily calculated, in Brazil the scenario is different and requires attention due to its complexity.
Brazil does not use VAT directly like other countries around the world.
The country, on the other hand, has an extremely complex taxation system, that has been subject to multiple changes during the past years.
This tax system is made up of direct and indirect taxes at the municipal, state and federal levels. A CNPJ – the tax corporate number of any Brazilian business – may have to pay up to 64 different types of taxes, for example.
The tax that most closely resembles VAT is called ICMS, a state tax levied on sales and services and applies to the movement of goods, transportation, communication services and other general supplying of goods. ICMS is a set of indirect taxes with various types.
It is not a cumulative tax, which means the tax is only assessed on the increase in the price of the product in each part of the circulation process.
In its case, although a federal law should be followed, each state issues its own legislation, which differs greatly from the federal level and increases the complexity of operations.
This tax is paid by private individuals and legal entities that commercialize goods and by those who import products.
The calculation basis for most Brazilian taxes is based on the gross value, not the net. In other words, the calculation is made based on the total value of the product or service, before discounts or deductions.
This calculation basis differs from other countries. For example, the French tax system’s calculations are made on a net basis, where discounts or deductions are considered.
Another important difference is the way some taxes are levied. While all these taxes are levied monthly, in Europe several of them are levied annually, such as Income Tax.
A brief summary of some Brazilian indirect taxes
The Brazilian tax system has several indirect taxes.
Indirect taxes are charged to the final consumer and passed throughout the value chain. They behave as VAT. The basis for calculating indirect taxes is turnover, or the total value of sales, regardless of profit from the company.
Direct taxes, on the other hand, are those charged directly to the taxpayer, or the individual or legal entity required to pay. The basis for calculating direct taxes can be income, wealth, profit or consumption.
Here are some indirect taxes in the Brazilian taxation system listed below:
ICMS – Tax on circulation of goods and services
The tax that resembles VAT around Europe and North America and it’s charged over goods, transportation and communication services.
PIS/COFINS – Social Integration Program / Social Contribution on Billing.
Pis and COFINS are a federal social contribution levied on gross revenue. They intend to finance health, welfare and social assistance policies in Brazil. This is the second largest source of tax collection in the country.
IPI – Tax on industrialized products
IPI is a federal tax that applies to all national and foreign products that have been industrialized. It is paid by all of those who own industries and by those who import industrialized goods to Brazil.
ISS – Tax on Services
The ISS, is a municipal tax levied on the provision of services by businesses and self-employed individuals. It is one of the main municipal taxes, accounting for a significant portion of the revenue of Brazilian municipalities.
VAT in Brazil x VAT around the world
While taxes in Brazil are paid monthly in a general basis, most taxes in Europe are paid annually. This is valid for most taxes. There are some exceptions, but they won’t be considered for this analysis.
|VAT in Brazil||VAT in Europe and North America|
|Compound by several taxes||Simple tax|
|Complex calculation –
it varies from 7% to 25%
|Simple calculation basis –
20% fee on average
|Charged monthly||Charged often annually|
|No reimbursement allowed||Reimbursement available for foreigners|
Taxation of services and products
The big particularity in Brazil is that taxes on goods and services change accordingly to the company’s activity, nature, size and tax regime adopted. It explains why there cannot be a unique VAT tax.
Nature of the activity
The nature of the company’s activity determines which taxes are applicable. For example, a company that provides health services is taxed by ISS, while a company that sells products is taxed by ICMS and IPI.
Services are generally taxed on the turnover, while products are taxed on the total value of the goods or on the turnover. In addition, services are generally only taxed at the service provision stage, while products can be taxed at several stages, such as production, distribution and sale.
Size of the company
The size of the company can also influence the applicable taxes. For example, small businesses may be eligible for simplified tax regimes, such as the Simples Nacional, which reduces the number of taxes to be paid.
The tax regime adopted by the company also determines which taxes are applicable. For example, companies that opt for the real profit are taxed by IRPJ, while companies that opt for the presumed profit are taxed by IRPJ based on an estimated profit depending on the turnover.
How to open a company in Brazil?
Brazil is a country with a large consumer market, a young population and significant growth potential. However, it also faces challenges, such as bureaucracy and a high tax burden.
Opening a business in Brazil is a great opportunity, and the best and easiest way to turn a bureaucratic process into an optimized and more simple one is to count on a consulting company.
Europartner is specialized in accounting and consulting for companies that want to open their business in Brazil.
Founded in 2009, the team is European and Brazilian and the cultural diversity is a great advantage allied with the technical expertise that is needed to perform a remarkable job.
All the accounting, tax and legal consulting business needs, Europartner is ready to help and can enable you to otimize the brazilian tax burden in a significant way. Whether the company is a small, mid-sized, or a multinational corporation, the best staff will always be at disposal.
There are over 200 accounting, tax management and financial management clients in their portfolio – and they would be glad to help you too to expand the business and reach more customers in the Brazilian market.
Author's post: Europartner Accounting