Choosing the right tax regime in Brazil

As in most countries, in Brazil the taxation regime chosen for your company will directly infer on the accessory obligations that must be fulfilled. It is in accordance with the rules and laws of the tax regime that the company will file its returns and pay its taxes. And it is also according to them that they have legal advantages, such as tax deduction for tax credits.

In Brazil, income tax regimes are divided into SIMPLES, Presumed Profit and Real Profit. To find out which option is best for your business, read on.

The main existing regimes in Brazil

SIMPLES

The simplified regime brings together most Brazilian companies, being the least bureaucratic and, for most of them, also the most economical. Its only ancillary obligation is the Declaration of Socioeconomic and Tax Information (Defis), delivered once a year.

As for the tax percentages, these vary according to the company’s activity and its accumulated revenue in the last 12 months.

Presumed profit

This tax regime establishes estimated profitability percentages, according to the company’s field of activity. For example, while the presumption for a trade is 8% of its revenue, for a service provider it is 32%. In general, the estimated percentage is the same for Income Tax and Social Contribution. After applying the percentage, the calculation is made from the combined rate of up to 24% for both tax types together.

The other taxes under the regime are PIS and Cofins, which are paid monthly and on the gross revenue of each period with percentages of 0.65% and 3% respectively. In addition, service providers pay the Services Tax (ISS) to municipalities and businesses on a monthly basis, and industries pay ICMS and IPI to the states.

The declarations and their periodicity are as follows:

EFD — ICMS and IPI monthly Digital Tax Bookkeepng for businesses and industries;

Monthly Pis and Cofins EFD for all companies;

monthly statement regarding services rendered and their taxes for providers;

ECD — Annual Digital Accounting Bookkeeping for all eligible companies;

ECF — Annual Fiscal Accounting Bookkeeping for all companies in the regime.

Real profit

This regime establishes the taxation of income earned throughout the calendar year. There is also the option for quarterly calculation, although this is an option little used, due to related issues. The rates are the same as those applied to the Presumed Profit.

The other taxes are the same calculated and paid individually in Presumed, in monthly periods and on gross revenue. However, in this case, the PIS and Cofins rates are respectively 7.6% and 1.65%.

The importance of choosing the ideal tax regime

When the tax regime is not suitable for the company, it can end up with more bureaucracy than is really necessary for its size and activities.

For example, a business that meets the criteria for the option for SIMPLES has to deal with many more ancillary obligations, unnecessary, if it chooses the Presumed Profit. And if such a choice is not justified, as in a possible tax savings, there is only a loss in the increase of accounting and tax processes.

Furthermore, wrongly framing the company can take money out of its box under an inadequate tax burden.

Activities

It is first necessary to know which regimes accept the company’s tax regime for its activities. Making an option that is not allowed is a serious mistake and with foreseen penalties.

Profit margin

When the company’s profit margin is low, especially in sectors such as commerce and industry — which generate a lot of expenses — Actual or Presumed Profit can be better than SIMPLES.

The simplified regime taxes gross sales, while the others only taxes the net profit or its presumption in tariffs. Therefore, hypothetically, if the profit is above the presumption ranges, it ends up not being fully taxed by the Presumed. And if it’s below, you can design a smaller calculation basis for tax calculation.

Revenues

Generating revenue of up to R$4.8 million per year, it is possible to opt for SIMPLES. Above that, the simplified regime is no longer an option. Even if the annual revenue is below the mentioned limit, SIMPLES may not be a good choice, because its rates are progressive: the more revenue, the higher the tax percentage.

Therefore, when considering this criterion, it is important to relate it to the ranges in the annex consistent with the activities carried out and also with their profit margin.

Indirect expenses and tax credits

Presumed and Actual Profit may end up generating similar tax burdens. Therefore, to make a better differentiation, it is necessary to list other consequential factors of the regime.

Under the Real profit regime, more ancillary obligations are required. On the other hand, the regime allows credits to be acquired to be deducted from Pis and Cofins payments. The Presumed does not allow the acquisition of such tax credits, but requires less delivery of statements and less burden on the company’s back office.

Due to all these different issues, the necessary care and the need for multifactor analysis, the ideal option for choosing the most appropriate tax regime is to have an accounting consultancy for the task. In addition to nothing out of the planning, a specialized consultancy helps the business in following up on the legislation.

To ensure the best choice for your company, and keep your Brazilian activity in full compliance with the country’s tax legislation, count on Gescon’s experts. Our professionals have extensive experience in taxation and regulatory compliance, and can guarantee the assertiveness your business needs to achieve great results in Brazil.

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