7 tips not to get lost in Brazilian taxation

Paying attention to some important points can help entrepreneurs and investors interested in operating in Brazil

By Estela Cangerana

Indeed, Brazil is a country with a quite complex and unique tax system. But it is also one of the ten largest economies in the world, with a consumer market of over 200 million people and room for competition in various sectors. Additionally, efforts are being made to improve business environment, which has even reflected the country’s ranking in the World Bank’s Doing Business global ranking.

Brazil increased 16 points from 2018 to 2019, reaching the 109th position amongst 190 nations, with significant advances in items such as business start-ups and international trade. Although that is not yet a good rating, it is the best ever achieved by the country. It is expected that, by the 2020 edition, it will be even more positive, reaching 50th place in 2022 (Brazilian government’s current goal).

“In fact, Brazil is one of the most complicated countries in the world as regards tax matters, but that does not make it impossible to do good business. The important thing is to measure the return you can have on each investment,” says accountant Arnaud Bleuez, partner at consulting firm BPC Partners and author of the book “Brazilian Taxes for Legal Entities: what you need to know”. For those interested in the Brazilian market, the expert listed some basic tips to plan well for the country’s system:

1) Keep complexity in mind.
“Brazil has created its own tax system, different from other countries, and some things may be difficult for a foreigner to understand,” he explains. He points out that it is important to be aware of the almost 6,000 actors in the Brazilian tax scenario, including the federal level, the 27 states and more than 5,500 municipalities. “This could mean, for example, 27 different tax rates for the same product.” Therefore, it is critical to be well-informed about what applies to your specific case.

2) Choose well your tax regime.
In Brazil, there are two possible regimes for international companies: taxable income or presumptive income, and the choice for each one is made every year. “It is a very important decision because it has the potential impact of losing or making money at the end of the fiscal year,” says the expert. The taxable income scheme (revenue minus net income payment expenses) is known outside Brazil. But in the presumptive income, the tax base does not refer to the net profit ascertained at the end, but to a percentage of the gross revenue. “If the profitability is very good, the presumptive income regime is the best option”, he explains.

3) Pay attention to the type of activity to be performed.
Industry, sales or services – taxation is distinct for each of the three branches, with specific obligations.

4) Research on possible differences within your product specificity.
Bleuez warns that taxation does not change only due to the state or the branch of business; there may be differences according to the type of product. Obligations such as IPI (Excise Tax – on Manufactured Products) or ICMS (State Goods and Services Tax) may vary by commodity classification. “Still and sparkling water, for example, are subject to different taxes, as do the various types of cheese,” he notes.

5) Know the difference of speaking in gross or net numbers.
This is a fundamental difference that impacts the outcome. In Brazil, the values are informed with taxes embedded, while in the rest of the world they are net (without taxes). That is, if the total value is 120 and the tax rate is 20%, that means that abroad the calculation will be 100 + 20% = 120, and in Brazil it will be 120 – 20% = 96. Therefore, abroad the price without tax will be 100 and in Brazil, 96.

6) Learn to live with instabilities.
“You have to be prepared for changes in the rules. If today is one way, tomorrow may be another completely different.” Again, one must always be aware of possible changes and be well-informed before doing anything.

7) Count on the support of a specialist in Brazil.
It is not just for convenience, but a real necessity. The complexity and instability of Brazilian taxation calls for the action of an experienced professional in the market, who is able to explain the local peculiarities to the parent company, as well as advise on the best tax planning strategies.