Companies doing business in the country need to have a comprehensive plan, supported by strong processes and effective local advice, to meet a daunting array of tax obligations while optimizing their effective tax rates.
Multiple layers of taxation
Companies doing business in Brazil need to contend with a broad range of different direct and indirect taxes levied by the federal, state and municipal governments. Brazil’s 27 states share the same general state tax framework, but each state has the ability to set its own tax rates, exemptions and base adjustments.
As a result, the same taxable event can give rise to multiple taxation. Depending on the jurisdiction, sales of goods can attract up to three value-added taxes, and imported goods could attract up to four different customs and indirect tax charges. Indirect tax obligations can also arise on transferring goods from state to state.
Lack of international harmonization
Global companies doing business in Brazil face even more complexity due to Brazil’s lack of conformity with other international tax regimes. Brazil is not a member of the Organisation for Economic Cooperation and Development (OECD), and its tax system does not follow international tax principles developed and generally followed by OECD members. For example:
- Brazil’s transfer pricing rules for crossborder related-party transactions are based on fixed profit margins, rather than the OECD’s arm’s length standard, creating difficulties where the company is required to follow OECD principles in order to comply with other tax regimes.
- Unlike many other countries, Brazil’s thin capitalization and controlled foreign company regimes are quite unique, following specific rules that usually differ from concepts used in foreign jurisdictions.
- Brazil does not have an extensive tax treaty network, and it does not follow commonly accepted principles such as those governing the creation of a permanent establishment.
Further, while Brazil has introduced International Financial Reporting Standards, its tax laws have not yet converged.
Additional complexity stems from Brazil’s electronic compliance system for direct and indirect taxes. Under this system, taxpayers are required to prepare and electronically file tax returns, accounting information and supporting documentation (e.g. invoices), monthly and/or annually, depending on the particular tax. This system not only increases the compliance burden on businesses, it also provides the tax authorities with more information to cross-check taxpayer data and compliance. Levels of audit activity, tax assessments and disputes have increased significantly as a result.
Tax simplification on the horizon?
Brazil’s federal government recognizes the need for tax simplification but faces a difficult task in introducing meaningful reforms. For example, the central government is attempting to bring the states together to negotiate a common, nationwide VAT. Doing so would be extremely difficult, given the political debate and compromise among the multiple layers of government that would be required to harmonize the many sales, gross revenue and service taxes that are now in place.
Cutting through Brazilian tax complexity
For companies seeking to untangle the complexity of their Brazilian tax affairs, the best approach starts with the engagement of local professional advisors. Advisors who have in-depth knowledge of the tax system and familiarity with tax authority personnel can help you avoid missteps and optimize your local after-tax returns. This advice should extend beyond tax to business and legal issues, for example, to help you decide on the optimal choice of entity, improve your supply chain and address the implications of local bylaws.
For multinational companies, it is also advisable to choose local advisors in Brazil that have the support of a strong global network. They can help ensure your tax affairs are in good shape in each of your business locations while ensuring your global tax obligations are managed with coordination and efficiency.
Understanding local tax rules is important, but understanding how the tax authorities apply the law in practice – the reasoning that underlies their assessments and behavior – is even more critical. Look for advisors who are versed in local tax laws, have strong working relationships with the tax authorities, and familiarity with the ins and outs of the tax administration.
Above all, foreign investors should not let the complexity of Brazil’s tax system scare them away from participating in the country’s rapidly growing economy. With the help of local advisors, embedded in a global network, who know the ropes and how to get things done, foreign companies can take advantage of the tremendous opportunities that Brazil has to offer – with a minimum of tax surprises.
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