INDIRECT TAXES - JOURNAL ENTRIES

Please find below the journal entries of buy/sell operation, and the respective Financial Statements.

Assumptions:
Brazilian company acquires goods of $ 100.000, and then resell it for $ 200.000. ICMS is taxed at 18% (buy and sell) and PIS/COFINS is 9.25% (buy and sell).

Buy Operation
D - Inventory - $ 72.250
D - ICMS recoverable - $ 18.000
D - PIS/COFINS recoverable - $ 9.250
C - Supplier payable - $ 100.000

Sell Operation
D - Cost of Products (P/L) - $ 72.250
C - Inventory - $ 72.250

D - Customer Receivable - 200.000
C - Gross Revenue (P/L) - 200.000

D - ICMS (P/L) - 36.000
D - PIS/COFINS (P/L) - 18.500
C - ICMS Payable - 36.000
C - PIS/COFINS Payable - 18.500

FINANCIAL STATEMENT

Gross Revenue $ 200.000

ICMS - (36.000)

PIS/COFINS - (18.500)

Net Revenue - 145.500

Cost of Product (72.250)

Gross Profit - 72.250

DIVIDENDS PAYMENTS

Dividends paid to foreign entities or local companies are not subject to WHT in Brazil (before 1995, the dividends were subject to WHT at 15%).

We noticed in the news that sometime Congress representatives mention about the possibility to reintroduce the WHT on dividends payments. However, it has not been formalized into a project law. It seems that they have other priorities...

ROYALTY PAYMENT

Cross border payment of royalties is taxed by:

- WHT: ordinary rate is 15%, but if the beneficiary is established in a low tax jurisdiction the rate is increased to 25%.
- CIDE: Special contribution of 10% on the royalty amount.
- IOF: 0.38% on the amount remitted.

Journal entries are:

Assumptions:
Royalty Amount: BRL 100.000

D - Royalty (P/L) - BRL 100.000
C - Royalty Payable - BRL 85.000
C - WHT Payable - BRL 15.000

D - CIDE Cost (P/L) - BRL 10.000
D - IOF Cost (P/L) - BRL 323

C - CIDE Payable - BRL 10.000
C - IOF Payable - BRL323


Double Tax Treaties may grant some benefits in terms of reduction of WHT. For instance, in case of Japan, the rate may be reduced to 12,5%.

Corporate Tax Deduction.
Under the Corporate Tax Code, the royalty is deductible if meet the maximum rate allowed for remittance. INPI (Intellectual Property Agency) is reponsible to determine the applicable rate for royalties. Usually, Brazilian companies present the royalty agreement to INPI and, after approved, they receive a formal act, stating the applicable rate for royalties. Usually, the rate varies from 1% to 5%.

Royalties duly registered at INPI is not subject to Brazilian transfer pricing rules.

INFORMATION ABOUT BRAZILIAN COMPANIES

Information about Brazilian companies are very restricted (except for public companies).

One alternative to obtain such information is the SERASA report. This report contain information  related to account receivable/payable, shareholders, financial statements.

LOCAL SERVICES - TAX TREATMENT

Local sales are taxed by PIS/COFINS (Federal VAT) and ISS (Service Tax).

PIS/COFINS rate is 9.25% (non-cumulative tax payers) and 3.65% (cumulative taxpayers). ISS rate depends on the municipality regulation (rate may vary from 2% to 5%).

Assumptions:
PIS/COFINS: 9.25%
ISS: 5%
Cost Service+Markup: BRL 100.000

Illustrative Calculation:
Cost Service+Markup: BRL 100.000
PIS/COFINS: BRL 10.787
ISS: BRL 5.830
Gross Service Revenue: BRL 116.618

The journal entries are:

D - PIS/COFINS (P/L) - BRL 10.787
D - ISS (P/L) - BRL 5.830

C - PIS/COFINS payable - BRL 10.787
C - ISS payable - BRL 5.830



D - Account Receivable - BRL 116.618
C - Gross Service Revenue - BRL 116.618

Buyers side - credit:
Buyers can recognize the credit of PIS/COFINS, provided that the services are input of its main activity. For example, if buyer provides marketing services, and then subcontract services associated with marketing, PIS/COFINS are creditable.

ISS is a cumulative tax, and therefore, it is not possible to credit.

LOCAL SALES - TAX TREATMENT

The taxation applicable on local sales depends on some variable such as:

- type of product
- buyer/seller location
- type of industry
- application of tax incentives
- if buyer is end-consumer

In an ordinary scenario, the tax treatment is the following:

Assumptions


Buyer Location: São Paulo
Seller Location: São Paulo
Industry: Equipment Manufacturer
No tax incentives
Buyer is not end-consumer
Product: Equipment
Cost + Markup: BRL 100.000
PIS/COFINS: 9.25% (applicable for non-cumulative tax payers).
ICMS: 18% (applicable for intrastate sales)
IPI: 15% (depends on Hscode - common rate 10% to 20%)

Illustrative Calculation


Cost + Markup: BRL 100.000
PIS/COFINS: 12.714
ICMS: 24.742
IPI: 20.618
Gross Sales: 158.075

Formula:
PIS/COFINS: [ CIF+Markup / ( 1 - ICMS% - PIS/COFINS%) ] x PIS/COFINS%

ICMS: [ CIF+Markup / ( 1 - ICMS% - PIS/COFINS%) ] x ICMS%
IPI: [ CIF+Markup / ( 1 - ICMS% - PIS/COFINS%) ] x IPI%


The journal entries are:

D - PIS/COFINS (P/L) - BRL 12.714
D - ICMS (P/L) - BRL 24.742
D - IPI (P/L) - BRL 20.618

C - PIS/COFINS payable - BRL 12.714
C - ICMS payable - BRL 24.742
C - IPI payable - BRL 20.618


D - Account Receivable - BRL 158.075
C - Gross Revenue - BRL 158.075

Buyers - Credit:


Buyers can credit the PIS/COFINS, ICMS and IPI upon acquisition.

FOREIGN CORPORATE CAPITAL

Usually, foreign investors invest in Brazil by means of Equity. Brazilian tax law imposes the taxation of IOF (Taxes on Financial Operation), in case of foreign investors invest in foreign currency (99.9% invest in foreign currency, since it is hard to find out Brazilian Reais in overseas).

The tax rate applicable is 0.38% upon the amount invested.

Thus, in case of foreign investor invests USD 100.000 in a Brazilian company, the following should be the entries:

On the date of capital injection, the exchange rate is USD 1.00:1.85 BRL.

D - Cash - BRL - 185.000

C - Corporate Capital - BRL 185.000

D - IOF Cost (P/L) - BRL 703

C - Cash - BRL 703

Brazilian Central Bank requires the registration of foreign investments in the electronic system RDE-IED. The registration is simple and it could be concluded in 30 minutes through the internet.

LABOR - NEWSLETTER - Article 6 Amendment

Article 6 - Amendment Labor Code ("CLT") - Under the recent amendment on article 6 of Labor Code, we noticed tha remote work (home office, for instance), is characterized as the work performed in employer establishment.

SERVICE IMPORTATION - TAX TREATMENT

Brazilian tax rules impose a high taxation upon cross-border payment of service fees. Please find below the applicable taxes:

• Withholding Tax: Common rate is 15%, unless the beneficiary is established in a low tax jurisdiction (in this case, the rate is increased to 25%). Depends on the jurisdiction of the beneficiary, WHT could be compensated.
• ISS - Service Tax Withhold: The rate depends on the municipality which the payer is located and the nature of the services. Rates may vary from 2% to 5% - commonly the rate is 5%. Same as Withholding Tax, ISS is also withheld from the payment, however hardly it would be compensated in foreign juridiction, due to its tax nature.
• PIS/COFINS - Federal VAT: Applicable rate is 9.25%. There are a specific formula provided by Tax Authorities (please find it below). PIS/COFINS could be credited by Brazilian taxpayer, provided that the service is a direct input of the company's main activity, and the taxpayer adopts the non-cumulative regime.
• CIDE Special Contribution - taxed at 10%. This tax is assumed by Brazilian taxpayer as a cost.
• IOF - Financial Tax: 0.38% upon the amount remitted. It is also assumed by Brazilian taxpayer. 

Please find below the applicable formulas:

WHT: [ Fee x WHT% ]

ISS: [ Fee x ISS% ]

Net Amount to be paid: [ Fee – WHT – ISS ]

PIS/COFINS: [(Fee + ISS)/(1 – PIS/COFINS%)] x PIS/COFINS%

CIDE: [ Fee x CIDE% ]

IOF: [ Net Amount to be paid x IOF% ]

So, taking into account that Brazilian taxpayer should pay $ 1.000 as a service fee (amount showed in the invoice issued by foreigner), to a company located in a non-low tax, and ISS rate at 5%; they have the following scenario:

Amount remitted: $ 800

Amount taxes withheld: $ 200 (WHT - $ 150 and ISS - $ 50)

Amount taxes assumed: $ 100 (CIDE), $ 92.5 (PIS/COFINS), $ 3.8 (IOF)

Assuming that PIS/COFINS are not creditable, they will register into accounting books as:

D - Service Cost (P/L) - $ 1.000

C - Cash - Service Fee Remittance - $ 800

C - Cash - WHT payment - $ 150

C - Cash - ISS payment - $ 50

D - PIS/COFINS Cost (P/L) - $ 92.5

D - CIDE Cost (P/L) - $ 100

D - IOF Cost (P/L) - $ 3.8

C - Cash - Taxes Payment - $ 196.3

So, for a foreigner perspective, to receive $ 800 in cash, Brazilian company should pay $ 1.196.3 as a fee remitted plus taxes.