Brazil VAT (ICMS) risks

Brazil remains possibly the most complex country in the world from an indirect tax compliance perspective.

There are hundreds of local taxing jurisdictions within Brazil. There are able to levy Brazilian VAT - or ICMS - on local and foreign companies doing business in their territories. Generally, the ICMS rate is between 17% and 19% within each state. It becomes more complex when international businesses start trading goods across state borders. The levy changes to either 7% or 12% depending on where the goods were first despatched from.

To try and cope with the explosive growth of e-commerce, new pan-State administration rules have been implemented. However, many states have failed to fully implement the new rules. ICMS is generally charged at 17% on internet sales. In the case of intra-State sales, the tax should be split and separately reported to the State of despatch and the State of destination. The amount due to each state is not split evenly: in Northern states, 12% goes to the state of despatch, the balance to the state of arrival. In the south of Brazil, 7% goes to the State of despatch, the balance to the state of arrival.

The aim of the new split in revenues was to recognise more fairly the role of the state of arrival. The challenge comes in that the new rules have not been ratified by many states - principally the states of despatch that are set to lose out on the new rules e.g. Sao Paulo and Rio.