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.