Navigating the tax compliance labyrinth of Brazil
- Sales and Use Tax
- September 27, 2016 | Rodrigo Zerlotti
With a population of more than 200 million, Brazil boasts the largest economy in Latin America and the 9th largest in the world. Yet Brazil has one of the most complex indirect tax regimes on the planet. Domestic businesses with 10 to 50 employees typically spend an astounding 2,600 hours complying with Brazil’s tax code each year — more than eight times longer than is usually spent on tax compliance in the United States or European Union. For many global companies, the complicated Brazilian tax system is a serious impediment to doing business, but the potential rewards provide compelling incentives to overcome these obstacles.
Brazil tax in a nutshell
Brazil is a Federal Republic with 26 states, a Federal District (similar to the U.S. District of Columbia), more than 5,500 municipalities, and a number of special tax regions. Tax legislation changes occur at the federal, state, and municipal levels — often astonishingly rapidly. While keeping up with constantly changing rates, rules, and regulations, a single business may also have to file multiple returns on a monthly basis.
The federal government handles taxes that apply to both goods and services, such as income tax, social security taxes, and import and manufacturing taxes; the most common indirect taxes at the federal level are COFINS, CSLL, II, IPI, IR, and PIS. States apply a value-added tax to physical goods (ICMS and ICMS-ST), and municipalities govern services taxes (ISS). As always with tax, there are exceptions. For example, communications, electricity and certain transportation services are regulated and taxed by states rather than cities.
Any foreign company wishing to do business in Brazil must form a permanent establishment there and register with the tax authorities. There is no minimum threshold — registration is mandatory for any business moving taxable supplies in the country. Every company must obtain a Federal Tax ID; additional state and local tax IDs depend directly on business activity.
Once established, businesses must begin the onerous task of complying with Brazil’s notoriously complex tax laws, what one beleaguered tax attorney calls “a surreal, punishing experience” (New York Times).
But how can a business comply with tax laws if it doesn’t know what they are? Federal, state, and municipal tax laws change constantly: old laws are emended, new laws created, rates and forms changed regularly. Businesses must be adaptable, agile, and above all vigilant to survive in this system. Even keeping various due dates straight is a challenge. Fortunately, automated end-to-end tax compliance solutions track changes in rates, rules and regulations, ensuring the most up-to-date information is used.
Tax compliance in Brazil culminates with three interrelated processes:
- Period-end processing (gathering all tax data from transactions and other sources)
- Remitting payment
- Submitting electronic files (SPED)
Doing business in a digital world
Brazil leads the world in electronic tax compliance. Since 2008, a growing number of companies doing business in Brazil are required to upload digital records of every transaction to the Public System of Digital Accounting (Sistema Público de Escrituração Digital, or SPED), which is being rolled out in waves. Among the first and most advanced systems of its kind, it is hoped that SPED will increase transparency and make tax evasion more difficult.
A key step in registering as a business in Brazil is obtaining authorization to issue a Nota Fiscal, an official document that proves the existence of each commercial transaction. It has three main purposes:
- Financial. It represents the financial transaction as an invoice recognizing revenue and accounts receivable
- Movement of Goods. It allows goods to be transported from A to B, even if they are not being sold
- Fiscal. It serves as a control for taxes
For each transaction, a Nota Fiscal must be approved by the appropriate tax authority. SPED integrates the three different levels of taxation (federal, state, and municipal). SEFAZ, a multi-state system for invoice approval, currently oversees product invoices (NFE), while city tax authorities oversee service invoices (NFS).
The Federal Revenue Bureau (RFB) employs an army of agents (more than 10,000!) to combat tax evasion. Tax sting operations sometimes feature cool names (“Black Panther”), helicopters and gun-wielding agents, but those flashy maneuvers pale beside the power of electronic tax compliance.
SPED has “revolutionized the relationship between tax authorities and taxpayers.” The digital system provides tax authorities with immediate access to business transactions — they’re alerted when an electronic invoice is remitted in real time. More than 1,000 auditors have been trained to use electronic surveillance tools. Response to mistakes or fraud can be immediate and punishing, from fines for failure to deliver electronic documents to the freezing of bank accounts. Brazilians are some of the best tax collectors in the world (Reuters). It’s worth getting tax right. Fortunately, Avalara’s automated tax compliance solutions make that possible without devoting thousands of hours to the task.
Surviving and thriving
Despite myriad tax compliance challenges in Brazil, companies can find great success in this market. How? First, it pays to understand the tax system before beginning to trade in Brazil. Having an awareness of the various tax obligations and the correct process for documenting financial transactions is key. But relying on human knowledge and manual compliance alone is risky and incredibly time consuming. The heart of Brazilian tax regulation is built on technology, which can also help businesses save time, cut risk and take advantage of this rapidly growing economy. Thanks to Avalara’s suite of tax automation products and services, companies can enter the Brazilian market without having to spend inordinate amounts of time and resources on tax. From calculation and data validation to filing and remittance, Avalara has your business covered when it comes to indirect tax in Brazil. Learn more about Avalara’s products here. Don’t let tax be the reason preventing your expansion into this growing market.