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

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.

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.