Challenges and complexities of the Brazilian tax system
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Challenges and complexities of the Brazilian tax system

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Bruno Santo and Pedro Buffolo of Finocchio & Ustra consider the challenges and complexities of the Brazilian tax system and opportunities for the future.

Brazil has for a long time been the giant to be awakened and the land of vast potential, but unfortunately, this great potential is yet to come to life. Since 2003, Brazil has not been capable of achieving the high standards of economic growth that one would have imagined, when looking back at the articles and news on Brazil between 2003 and 2009.

Goldman Sachs elected Brazil, with China, India and Russia, as one of the great potential economies in the world, in 2003. In 2009, The Economist portrayed Brazil as a land of many opportunities in its 14-page special cover ‘Brazil takes off’.

Tax contributes significantly to the reason why Brazil has not been able to ‘take off’. With approximately 33% tax-to-GDP ratio in 2018, businesses in Brazil struggle both to pay taxes, to comply with the vast and ever-changing compliance rules and to manage the high level of tax litigation Brazil’s tax system imposes. The complexity and unclear rules in Brazil caused litigation to represent around 75% of our GDP in 2019 and the average time for a case to be decided in Brazil is 18 years.

An overview of the current state of corporate taxation in Brazil, determining the main aspects, controversies and potential future developments are discussed in this article.

Corporate income taxation

Corporate income taxation has one of the most stable and straightforward tax legislations but despite this it still has some complexities.

For most companies the method for calculating income tax (which technically is composed of a federal income tax per seImposto de Renda da Pessoa Juridica, or IRPJ, and a special federal social contribution, Contribuição Social sobre o Lucro Líquido or CSLL) is to apply a nominal 34% rate (25% for IRPJ plus 9% for CSLL) over tax adjusted accounting income.

Taxable income is based on the accounting income and adjusted for add-backs and setoffs, which basically can derive from timing differences between accounting rules (which are in line with IFRS) and tax rules, non-allowed expenses or non-taxed revenues/profits.

Brazil allows the deduction of a deemed interest on shareholder’s invested capital (Juros sobre Capital Proprio, loosely translated to interest on net equity) which is deductible for IRPJ and CSLL and is taxed at source on 15% when paid to foreign investors, generating a tax benefit of around 19% (34% less 15% withholding at source).

Brazil also has an attractive research and development (R&D) tax incentive legislation, which comprise a broader approach and not only the development of new products. Tax losses can be utilised to offset future taxable income, but subject to a 30% limit of that income each year. Companies that earn up to BRD 78 million (approximately $14.1 million) can elect to pay income tax based on the presumed profit method, usually having an effective income tax rate of 3.08% for sale of goods and 10.8% for services.

Controversies and litigation regarding income tax occurs in several areas, but major discussions to keep an eye on are related to the right to amortise and deduct from income tax the goodwill paid on the acquisition of companies in Brazil. A hot topic for 2021 is the possibility of not taxing government grants (subvenção para investimento) given in the form of reductions and benefits of the state VAT tax (ICMS).

In terms of potential new legislation there are a few proposals in Congress on the interest on net equity, aiming to eliminate such benefit and also focused on reducing corporate income tax rates (which are somewhat high, at 34%, when compared to other countries) and to impose taxation on dividends, currently not subject to tax in Brazil.

Taxes on goods and revenue

Taxes on goods and revenue is where most of the very complicated and difficult regulations, major litigation and urgent far-reaching reforms are needed.

Just a glimpse on how complex this is, for example, an industry in Brazil is taxed by a state ‘VAT-style’ tax on the sale of goods (ICMS), by federal contributions on revenues (PIS/COFINS) and by an excise tax on industrialised goods (IPI). Commercial businesses (such as retailers, distributors) will pay the same taxes, expect IPI which is only applicable to resale in certain specific situations (such as the local resale of imported products). It is important to mention that such taxes were initially designed to be neutral in terms of their impact on each production stage, allowing tax credits on purchases.


At a very high level IPI, ICMS and PIS/COFINS are calculated in line with what has become known in Brazil as the ‘non-cumulative’ system. The ‘non-cumulative’ system allows taxpayers to recognise tax credits on purchases of inputs which are utilised to offset tax due calculated on sales and revenue.

Thus, the effective tax paid is a result of the tax due on sales (i.e. applying the tax rates to the sales value of products and revenues) less the tax credits (i.e. recognised on purchases of certain inputs).

Rates vary widely among different products and segments of the economy, for instance PIS/COFINS as a rule of thumb is charged at 9.25% and ICMS is 18% on an internal sale (made locally in the same state) and could be 12% or 7% or 4% on interstate sales.

However, a wide range of different specific taxation rules apply, such as the ICMS-Substituição Tributária and the PIS/COFINS-Monofásico which concentrate taxation of the all production and distribution stages at the level of the industry, having them prepay the tax for the whole chain. For example, a pharmaceutical company would pay 12% as PIS/COFINS-Monofásico; a car and vehicle manufacturer would pay 11.6%; and for personal care products 12.5% is paid.

Businesses that elect the presumed profit method for income tax purposes are subject to PIS/COFINS in a cumulative manner, not allowing tax credits, yet at a lower rate (3.65% on gross revenues). IPI is generally defined according to the product and is a selective tax, in the sense that rates vary from 0% to 300% depending on the product, usually between 10% and 15%.


The legal concept of which purchases and/or expenses can be considered as ‘inputs’ is highly debated in Brazil, a wide variety of interpretations of the ICMS and PIS/COFINS legislation take place in administrative and judicial discussions on the matter.

It is accurate to say that this is the major topic that taxpayers and the tax authorities have battled over for at least 10 years. Conceptually, ICMS credits are linked to the product and the production process, since it is a tax on production that is meant to burden the sales price (not gross revenues).

On the other hand, PIS/COFINS tax credits are less connected to the product and the production process, which leads to a more extensive creditable base, comprising services, other costs and expenses. The right to recognise PIS/COFINS credits is much linked to how essential and relevant the expenses/costs are to the company’s core activities.

Lack of clear guidelines

The lack of clear guidelines is a significant problem, since it leads to having a case-by-case analysis and gives rise to many different interpretations (clearly, taxpayers attempting to widen the concept on what they can recognise tax credits and the tax authorities trying to narrow the concept, not allowing the recognition of the tax credits).

In 2018 the Brazilian Superior Court of Justice ruled in favour of a broader approach regarding the items that grant PIS/COFINS tax credits, but not surprisingly the result of this decision gave rise to many new discussions on how the concept set forth by the judges of the Superior Court should be applied in practice across the sectors.

A major case in Brazil is the decision passed by the Supreme Court regarding the inclusion of ICMS in the PIS/COFINS tax base (ICMS and PIS/COFINS have tax inclusive basis). Many would say this is one of the most important tax cases in history with a potential impact on the federal government budget of up to BRL 250 billion, although it was decided in favour of the taxpayers (i.e. that it is unconstitutional for the ICMS to be included in the PIS/COFINS tax basis). Important aspects of the practical implementation of the decision are still pending definition.

Tax reform proposals

Given this scenario, tax reform proposals are currently being discussed in the Brazilian Congress in order to have a complete overhaul of the tax system, aimed at implementing a system that is more business friendly, less complex and having a unified format to tax goods and services.

Two proposals for constitutional amendments (PECs) and a Bill of Law (CBS) are being analysed by a joint Legislative Commission. PEC 110 is a proposal made by the Senate and PEC 45 is a proposal made by the House of Representatives. It was expected that in 2020 Congressmen would have voted and passed the tax reform, however this has been postponed to 2021 and it is still difficult to be sure that any proposition will effectively be passed into law this year.

Provision of services

Provision of services, in addition to tax on income, is subject to indirect taxation by the PIS/COFINS (either at 9.25% or 3.65%) and a local (municipal) service tax known as ISSQN with rates that range from 2% to 5% according to the nature of each service and local municipality legislation.

ISSQN is also a cumulative tax, without the tax credit system and rates are simply applied over gross service revenues. ISSQN has been at the center of important disputes between taxpayers and tax authorities regarding if licensing of software should be subject to ISSQN (as a ‘service’) or ICMS (as an intangible good).

Imports and exports

Imports and exports are also subject to taxation. Import of goods is subject to ICMS, IPI, PIS/COFINS paid upon customs clearance and services are subject to a complex taxation that can reach more than 40% of the price paid abroad and is comprised of a withholding income tax at 15% to 25%;; a special contribution (CIDE) at 10%; PIS/COFINS at 9.25%; ISSQN from 2% to 5%; and a financial transactions tax on the foreign exchange transaction (IOF/Câmbio) at 0.38%.

As expected, there are huge disputes on how to calculate and pay these taxes. Exports on the one hand benefit from exemption of indirect taxation (no ICMS, IPI, PIS/COFINS due on export of goods and services from Brazil, which on the other hand demands a strategy to get tax refunds for the tax credits).

Inflow and outflow of funds and capital

The inflow and outflow of funds and capital to and from Brazil attract a wide range of issues when it comes to tax.

Injection of equity is usually subject to IOF/Câmbio at 0.38% while inter-company debt IOF/Cambio is due at 6.38% (for loans with maturity date lower than 180 days) or 0% for loans with maturity higher than 180 days. Dividends flow in a tax-exempt manner to foreign and local investors, interest is in general deductible for corporate income tax (34%) and tax at source (Withholding tax 15%) when paid, subject to thin capitalisation rules and transfer pricing rules for inter-company transactions.

Corporate reorganisations

Corporate reorganisations and restructurings in Brazil tend to be tax neutral but after Law 12,973/14 additional controls are needed when, due to IFRS accounting, fair market value is utilised for the transaction rather than book value.

Digitalisation and automation

Tax digitalisation and automation are at the top of the agenda for almost all taxpayers.

Tax authorities in Brazil have highly digitalised reporting systems that companies have to comply with. Simple mistakes in these reporting systems can lead to heavy fines. The main challenges are in relation to bridging the gap between tax reporting, enterprise resource planning (ERP) systems and accounting. Automation is becoming essential to help taxpayers reduce the manual workload, increase precision and enhance compliance standards.

In summary

Even with the challenges the Brazilian tax system presents, the trade-offs for companies that can effectively manage the challenges are positive and the future holds many opportunities.

There are increased opportunities for co-operative tax compliance to reduce uncertainty and litigation. Digital transformation and automation will help companies reduce hours invested in reporting and tax compliance and increase the time devoted to helping the government to design new legislation and to look at tax planning and strategies in-depth.

Click here to read this article in Portuguese

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Bruno Santo



Finocchio & Ustra

T: +55 19 3252 6176


Bruno Santo is a partner at Finocchio & Ustra. He advises on tax planning, international taxation, and domestic corporate taxation.

Bruno’s experience in international consulting and specific knowledge of accounting and corporate finance shaped his approach to tax projects in the most diverse segments, such as private equity, pharmaceutical, food, technology, agribusiness, and the planning of individual wealth.

Bruno has a law degree from the Pontifical Catholic University of Campinas, São Paulo. He is a member of the Brazilian Bar Association.

Pedro Buffolo



Finocchio & Ustra

T: +55 19 3252 6176


Pedro Buffolo is a partner at Finocchio & Ustra. He advises on tax planning, domestic corporate taxation, and tax compliance.

Pedro’s experience is in projects related to direct and indirect taxes, R&D tax benefits, transfer prices, compliance in pharmaceutical, veterinary, metallurgical, agronomy, automotive, fuel, food, transportation, technology and services industries.

Pedro has an accouting degree from the Pontifical Catholic University of Campinas, São Paulo. He is a member of the Regional Accounting Council of the State of São Paulo.

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