The Brazilian taxation system – a word to Israeli companies on Import/Export operations
In the current year, Brazil, one of the largest world economies, is facing a political and economical crisis, motivated at the same time by an ideological power dispute between the left and the right, and also levered by corruption scandals and some mistakes in the economic arena brought out by the leftist governmental party – albeit some relevant progress in social causes has unquestionably been made.
In that context, still with the impeachment of the elected president to be decided by the senate, the interim president is making efforts to control the economy and to put Brazil back on track.
With the hope that this temporary crisis will be overcome, in matters of foreign investments, Brazil cannot be ignored due to its great market of 200 million people, it’s amazing area of over 8 million 500 thousand square kilometers, GDP around 2,246 trillion US dollars, and import and export needs that match the Israeli market, as to say, Brazil majorly exports commodities, while imports some of the goods and services that are offered extensively by the Israeli market: medicines and phamaceuticals, electronic products, integrated circuits, vehicle parts, motors for aviation, weapons, telephones, technology services (start up companies services’), agricultural technology, et Alii.
Even though the Brazilian market is in fact attractive, Israeli companies willing to do business in Brazil must organize themselves in many aspects, be it to launch the correct business structure, choose trustworthy partners, learn to deal with some bureaucracy and customs, and to obtain the correct legal advice on tax issues and others.
In fact, taxes in Brazil represent around 35% of the GDP, which is a slightly lower tax burden than that of developed countries as Denmark, Finland, France, Germany, and over the average of 26% of the G20 group – while in Israel the tax burden corresponds to 31% of the GDP. It must be said that indirect taxation represents around 40% of the GDP, direct taxation represents 28% (capital and income) and contributions to social security are another important part, which points to a regressive rather than progressive tax system.
Differently than Israel, Brazil is a federative state of three levels, which means there are different levels of legislation that can vary from one matter to the other. Whilst some legislation can only be produced by the central government – as criminal law, commercial, electoral, labour, telecommunications, postal services, mining, nationality rights, and others – which means there is a large level of centralization, in tax matters the current Constitution of 1988 establishes that the central government, states (that are 26 in total) and municipalities (5.570 in total) all have the power to legislate in tax matters, which brings more complexity to the system by the concurrence of multi-levelled legislation. It is true, though, that the central government must establish certain guidelines in tax matters through the adoption of a ‘complimentary statute’, to be approved by a qualified quorum in the national congress, that must therefore be followed by the federal, state and municipal legislators, which provides the system with some degree of standardization, although not completely, thus certain specificities remain between the local legislations.
Apart from the complexities of the three level federative system that can, in fact, create many challenging situations - as, for instance, when two or more federative units pursue to charge the same taxable event, which could lead to a legal battle in the Judiciary -, it can also be said that in Brazil there are five kinds of taxes or tributes (governmental levies), which are the following: taxes, fees, special assessments, compulsory loans and special contributions. These taxes differ one from the other according to the characteristics of the taxable event and the budgetary destination of the revenue.
The most relevant levies for companies that intend to do business in Brazil are mainly the taxes, special contributions and some fees. Among the taxes, the Constitution explicitly establishes which ones are within the competence of each federal unit. Thus, the central government has power to create: II (Import tax), IE (Export Tax), IPI (Excise tax; or ‘federal VAT’), IR (Income Tax), IOF (Tax over financial operations; credit, exchange and insurance), ITR (Tax over rural property), IGF (Tax over great fortunes; not yet created), and other residual taxes. The States can create IPVA (Tax over property of vehicles), ITCD (Tax over inheritance), and the well known ICMS (State VAT). The municipalities have the competence to create IPTU (Tax on urban real estate property), ITBI (Tax on transfer of real estate) and ISS (Tax on services; or ‘municipal VAT’). Apart from all theses taxes we must not forget that there are other levies that companies are subject to, just to mention some relevant special contributions: PIS and COFINS (contributions over gross revenue), CSLL (Contribution over profit), Social contribution over labour paycheck, among others.
In this sense, depending on which is the company’s major activity, it might be subject to different taxes. In matters of consumption taxes, for instance, a company that exports immaterial services from Israel to Brazil (for instance, web services, virtual internet services, etc.), will be probably subject to the municipal service tax (ISS), and not the state VAT (ICMS), upon import; differently, if there is a sales operation of merchandise practised between an Israeli company and a Brazilian company or the final consumer, the tax to be paid will be the state VAT (ICMS) and not the municipal service tax (ISS) – some rules may be applied to determine which tax must be imposed if it is the case of a hybrid service/sales operation. It must be said that the rates of the state VAT vary from one state to the other, which means the product might be taxed differently depending on which is the chosen importing state. If the product goes through some kind of industrialization, even if it has undergone the process abroad, the federal excise tax (IPI) will also be charged upon import, according to the jurisprudence of the Superior Court of Justice.
It must also be highlighted that the following sales operations in Brazil will also be subject to the state VAT with differences in rates from one state to the other, subject to an accounting system of ‘sharing of the revenue’ between the state of origin and the state of destiny of the product. Recently, precisely in mid 2015, the Constitution has been amended to establish that even in sales directed to the final consumer, a difference between rates must be calculated in order to share the revenue between the state of origin and state of destiny of the product, which can have a new and relevant impact on e-commerce operations.
Apart from consumption taxes, importing services or products into Brazil will subject the operations to Import Tax (II), Contributions over gross revenue (PIS/COFINS), IOF (Tax over the exchange of currency operations), some fees (merchant marine renewal tax - AFRMM), customs charges (even though the free trade agreement established between Israel and the Mercosur has provisions to alleviate the charge), storage expenses, custom brokers, etc.
Thus, given the complexity of the Brazilian tax system, especially considering it is a federal state of three levels of legislation with varied taxes that are levied on different taxable events, Israeli companies willing to do business in Brazil must take this into account, and evaluate if import/export is the best solution in monetary terms, or if producing in Brazil or establishing a subsidiary company might be more profitable - even though other tax matters will come into play, as transfer prices, which are closely observed by the Brazilian tax authorities in order to avoid income tax evasion.
Thus, legal advice and tax planning should not be overlooked in order to navigate in the huge and promising Brazilian market, to avoid unexpected situations and to grasp the most of this huge and amazing market. Mutual collaboration will only benefit both sides, politically and economically. Bem-vindos, bruchim habaim!
Note about the Author: Visiting Scholar at Tel Aviv University, Tax Law Professor at Faculdades Milton Campos and Escola Superior Dom Helder Camara - Brazil. Partner at Kraft Advogados Associados. firstname.lastname@example.org