Managing Corporate Taxation in Latin American Countries - Brazil (Part II)

2.3. Tax on Services (ISS)

ISS is the municipal tax on services levied on the import and the rendering of services listed in Federal Supplementary Law 116/03.

Said law has fixed the ISS maximum rate at 5% and the minimum rate at 2% (some municipalities adopts lower rates, against the law) and ruled the ISS exemption on exports, defining exports as the rendering of services to non-residents as long as the results of such services are not produced in Brazil.

Such definition has raised serious concerns, as there is no clear criteria to identify what should be understood by "results produced in Brazil". Taxpayers are the service providers. However, in the case of imports of services, the importer is responsible for the calculation and collection of the tax due by the foreign party. The ISS taxable basis is the service price and tax rates vary from municipality to municipality by type of service.

As a general rule, the tax must be paid to the municipality where the establishment performing the service is located. However, there are some exceptions to this rule depending on the type of service. For instance, in case of performance of civil construction, hydraulics or electrical engineering services, the ISS is due to the municipality where the service is provided.

Supplementary Law 116/03 allows the municipalities to determine that the engaging party is liable for the withholding and payment of the ISS in certain cases.

2.4. Contribution for the Social Integration Program (PIS) and Contribution for S ocial Security Funding (COFINS)

PIS and COFINS are federal social security contributions levied on:

(A) revenues earned by legal entities, with few exceptions (e.g. dividends and revenues derived from exports of goods or services are not taxed, in the last case as long as the export revenues are cashed in Brazil) and

(B) imports of goods and services. In such cases, taxable basis are, respectively: (i) customs value of the goods plus ICMS and the same contributions (PIS and COFINS must be included in their own taxable basis) and (ii) amounts paid or credited for imports of services, plus WHT, ISS and the same contributions (PIS and COFINS included in their own taxable basis). The Federal Revenue Service has described how PIS and COFINS shall be calculated in this case.

PIS and COFINS are mainly calculated according to the non-cumulative or cumulative systems, which may coexist on a case by case basis. Exemptions and specific rules apply to certain businesses and certain income on a case-by-case basis.

PIS and COFINS are highly regulated taxes and represent a significant share of the overall Brazilian tax collection. Disputes and controversies are frequent in this field, especially regarding the right to tax credits.

2.4.1. Non-cumulative System

PIS and COFINS are levied on gross revenues of legal entities at rates of 1.65% and 7.6% respectively. Nowadays, financial revenues are subject to a zero percent rate, except for a few cases.

The taxpayer is entitled to tax credits provided by law to offset PIS and COFINS debts, generally corresponding to the rate of each contribution (1.65% and 7.6%), among which we highlight the following:

1. contribution paid on (i) domestic purchases or imports of goods for resale or manufacturing inputs and (ii) services hired by the taxpayer to provide services to its customers and/or for producing goods for sale or renting;

(B) expenses with electric energy, rent of buildings, rent or lease of machines and equipments used for the activities of the taxpayer and transportation costs relating to sales; and

(C) depreciation expenses relating to fixed assets imported or purchased in the domestic market and used in the manufacturing process, for renting or for the rendering of services (alternatively, such credit can be calculated at 1/48 per month of the cost of acquisition of the relevant fixed asset – general rule – or at 1/24 per month of the same cost in certain cases).

As the law restricts tax credits, the PIS and COFINS tax burden is significant.

Generally, legal entities that calculate their corporate taxes (IRPJ and CSLL) based on the actual profit system are subject to PIS and COFINS based on the non-cumulative system. However, the cumulative system is mandatory in some cases, irrespectively of the method chosen for the calculation of the IRPJ and CSLL.

If a company has activities/revenues subject to the cumulative and non-cumulative systems, PIS and COFINS tax credits must be proportioned to the revenues subject to the non-cumulative system.

2.4.2. Cumulative System

In the cumulative system, operational revenues earned by legal entities are taxed at the rates of 0.65% (PIS) and 3% (COFINS). The taxpayer has no tax credits for the contributions paid on imports or relating to domestic purchases and expenses incurred.

Based on paragraph 1 of article 3 of Law 9718/98, non-operational revenues, including financial revenues, should be included on PIS and Cofins taxable basis in the cumulative system. Such provision was revoked by Law 11 941 , issued on May, 2009. This happened in line with decisions rendered by the Federal Supreme Court, which determined that the referred provision was unconstitutional. However, for the period before May, 2009, the right to exclude non-operational revenues from PIS and Cofins taxable basis depends on a judicial decision on the matter for each legal entity.

Generally, legal entities that calculate their corporate taxes (IRPJ and CSLL) based on the deemed profit system are subject to PIS and COFINS according to the cumulative system (in some cases, the cumulative system is mandatory, irrespectively of the method chosen for the calculation of the IRPJ and CSLL – e.g. civil construction until the end of 2010).

2.4.3. Specific PIS and COFINS Rules

Specific rules apply per type of revenue or activity, such as:

(A) financial institutions;

(B) pharmaceutical, automotive, beverage, and tobacco industries;

(C) fuel industry; and

(D) hygiene and cosmetics products.

Among such specific rules, we highlight:

(A) tax centralization rules, by means of which PIS/COFINS are charged only once, from a chosen person of the relevant market chain; and

(B) tax substitution rules, by means of which a person appointed by the law must be liable to calculate and collect PIS/COFINS due by other persons, on past or future transactions (in the latter case based on...