Of Soccer, Samba, and Taxes: An Overview of Brazil’s Indirect Tax System

By Philippe Stephanny, LL.M., Washington

Editor: Mary Van Leuven, J.D., LL.M.

Foreign Income & Taxpayers

Brazil will be in the global spotlight this summer, when the best soccer teams in the world compete there for the 2014 FIFA World Cup. Besides beaches, dances, and its own world-class soccer team, however, Brazil also has what may be the most complex indirect tax system in the world. For the unwary, investing in Brazil may resemble a trip into the depths of the Amazon rain forest.

Besides a complex direct tax system, Brazil has more than 25 indirect taxes that vary in scope, rates, and exemptions. In addition, similar to the federal and state government structure in the United States, Brazil has one federal district, along with 26 states and almost 5,600 municipalities that share taxing power. Foreign investors-attracted by Brazil's economic growth, the FIFA 2014 World Cup, and the 2016 Summer Olympic Games, which are scheduled to be held in Rio de Janeiro-often express concerns about this complex web of taxes and jurisdictions. The complexity is such that Brazilian taxpayers face some of the highest indirect tax compliance burdens in the world. Tax compliance costs are further increased by ever-changing tax laws.

This item aims to provide an overview of the four major Brazilian indirect taxes that foreign business investors may encounter, including their scope, sourcing, base, rate, and recoverability.


Brazil has more than 25 indirect taxes. The major ones are: (1) federal excise tax on manufactured goods (Imposto Sobre Produtos Industrializados (IPI)); (2) federal social contribution taxes (Programa de Integração Social (PIS) and Contribuição para o Financiamento da Seguridade Social (COFINS)); (3) state-level value-added tax (Imposto Sobre Circulação de Mercadorias e Serviços (ICMS)); and (4) municipal-level service tax (Imposto Sobre Serviços (ISS)).

Brazil's indirect tax system is characterized by the following: (1) Several types of registrations are required for each indirect tax; (2) a single taxable event can simultaneously trigger taxation for different indirect taxes; (3) conflicts are common among states, as each state can structure its state indirect tax system to mirror the federal one; and (4) inconsistency in tax treatment across different tax jurisdictions is common.

Federal Excise Tax on Manufactured Goods (IPI)

IPI is a federal excise tax imposed on the import and manufacture of goods. Brazil's tax law defines manufacturing broadly to include any process that modifies the nature, operation, finishing, presentation, or purpose of a product, or improves a product for consumption. However, export transactions are exempt from IPI.

For domestic transactions, the taxable event occurs when the manufactured product leaves the facility in which it was manufactured. Under Brazilian law, separate facilities are considered to be separate taxpayers for IPI purposes. Consequently, transfers between business units trigger the levy of IPI. The tax base is the value of the transaction carried out by the taxpayer, plus the applicable ICMS (see below). For import transactions, the tax base is the value of the imported product, plus insurance, freight, and the import tax (Imposto de Importação (II)) paid.

The IPI rate for a product is based on its classification under the international Harmonized Commodity Description and Coding System (HS), administered by the World Customs Organization in Brussels. The average IPI rate is 10%, with rates ranging from 0% (for basic supplies and essential goods) to more than 300% (for luxury goods).

Taxpayers, in some cases, are entitled to credit IPI paid on purchases against IPI collected on sales. In practice, when permitted by law, the credit is generally used to offset IPI liability in subsequent transactions. In other words, each taxpayer subtracts its total IPI paid on purchases (input) from its total IPI collected on sales (output). The credit for IPI on purchased goods is generally granted only for the inflow of goods intended to be used in the manufacturing process—general costs are not, in principle, creditable for IPI purposes. Taxpayers are also allowed to credit IPI paid on imported goods, provided that they use the same product, or another product in which the imported product is incorporated, to produce another item subject to IPI. Taxpayers may offset excess IPI credit amounts against future IPI liabilities or other federal tax liabilities.

Federal Social Contribution Taxes (PIS/COFINS)

PIS/COFINS are federal social contribution taxes charged on gross receipts from the sale of goods and services. PIS/COFINS apply also on the import of goods and on payments to nonresidents for services provided to Brazilian taxpayers, but not on the export of goods and services.

PIS/COFINS are charged under either a cumulative system or a noncumulative system. Under the noncumulative system, which applies to all taxpayers except those subject to the cumulative system, taxpayers are allowed a credit for PIS/COFINS paid on purchases used directly in the manufacturing process and for resale. Taxpayers compute PIS/COFINS credits by applying the PIS/COFINS rate on creditable purchases. Federal laws establish the list of purchases that entitle taxpayers to recognize PIS/COFINS credits. The credits apply generally on production inputs and fixed assets. In case of excess credits, taxpayers may use the PIS/COFINS credit against other federal taxes, provided certain requirements are met.

Under the cumulative system, PIS/COFINS is charged at every stage of a production line, so that the taxes have a cascading effect. Companies with taxable transactions subject to both systems are required to calculate PIS/COFINS separately for each system. The cumulative system is mandatory for (1) companies subject to the deemed (or presumed) profit system, rather than actual profit system, when computing corporate income taxes; (2) companies listed by the law; (3) financial institutions (specific COFINS rate of 4%); and (4) revenues from activities listed in the legislation, such as telecommunication, radio, and television broadcasting services.

The standard rate for PIS/COFINS combined is 9.25% (1.65% and 7.6%, respectively) under the noncumulative system. Under the cumulative regime, the standard combined rate is 3.65% (0.65% and 3%, respectively).

State Value-Added Tax (ICMS)

ICMS is a state value-added tax that is regulated by a federal law with which states are required to comply. Anything that is not regulated by the federal law is governed by state laws.

ICMS is due on the import of products and on the physical movement of goods, including electricity. ICMS also applies on interstate and intermunicipal transportation services and communications services. In addition, ICMS applies on product resales in the domestic market and when products are physically removed from a manufacturing facility. Similar to IPI, each facility of a company is considered as a separate ICMS taxpayer.

The ICMS tax base is the sum of the value of the goods or services sold as well as insurance, conditional discounts, and freight if they are charged separately and provided by the seller or on its behalf. Furthermore, IPI must be added to the ICMS tax base for sales to final consumers or when it involves a product that will not be further manufactured or resold (e.g., fixed assets).

Because ICMS is a state tax, intrastate and interstate transactions are subject to different provisions. For imports and intrastate transactions, three standard tax rates apply, depending on the state in which the transaction occurs: 19% in the state of Rio de Janeiro; 18% in the states of São Paulo, Paraná, and Minas Gerais; and 17% in the remaining states. For interstate transactions, to create economic incentives for the least-developed Brazilian regions, ICMS rates vary based on the state of origin. A 7% levy is imposed when taxpayers sell goods from states in the south and southeast, except the state of Espírito Santo, to taxpayers located in the less-developed north, northeast, and central-west, as well as Espírito Santo. All other interstate transactions are subject to a 12% interstate rate. However, since Jan. 1, 2013, interstate transactions involving certain goods imported into Brazil are subject to a specific interstate rate of 4% regardless of the Brazilian state of importation. In interstate transactions, the tax is remitted to the state of origin and not to the state of destination.

Furthermore, a taxpayer acquiring fixed assets and consumable goods in an interstate transaction must also pay the differential rate between the interstate rate and the rate applicable in the state where the taxpayer is established. For instance, a São Paulo taxpayer acquiring consumable goods from another state is required to pay 18% ICMS on the acquisition—12% on the interstate transaction and 6% on the difference between the interstate rate and São Paulo's rate.

Taxpayers are allowed to credit ICMS incurred on purchases against the ICMS collected on sales. Generally, ICMS credits are granted on the purchase of raw materials and fixed assets but not on consumption materials. ICMS credits are granted by the state in which the company is established. Consequently, in interstate transactions, a taxpayer receives ICMS credits for interstate purchases by the state in which it is established, even though the tax on the interstate transaction is paid to the state of origin.

Because companies with a net exporting activity do not have taxable operations, they face the challenge of recovering ICMS credits. Theoretically, these companies can transfer their ICMS credits to another facility located in the state or to a third party. However, the procedure for transferring credits to third parties can be extremely bureaucratic. For non-ICMS-registered purchasers, ICMS may not be recovered and, thus, becomes a final cost.

Municipal Service Tax (ISS)

ISS is a municipal tax imposed on revenues derived from providing services, except communication and intermunicipal and interstate transportation services (which are subject to ICMS). The main aspects of ISS are regulated by a federal law that establishes a list of services that can be taxed by municipalities. Each municipality determines its own list of taxable services. Like the other major indirect taxes, ISS does not apply to the export of services. When a service also includes a sale of goods, ISS applies to the total price of the transaction, except where a specific provision determines that ICMS applies on the value of the products sold.

The ISS rate is between 2% and 5%, depending on the municipality where the service provider is located. However, for certain specific services relating to immovable property, ISS is sourced to the municipality where the service is provided. Unlike the other indirect taxes, the ISS law does not allow credits for ISS paid on purchases.


To succeed in the Brazilian market, foreign investors must be aware of the indirect taxes and the pitfalls they may create. Any potential investment in Brazil should be analyzed and reviewed from all angles and for all possible taxes. As in soccer, it is impossible to win a game without knowing the opponent and adapting to its strategy.


Mary Van Leuven is senior manager, Washington National Tax, at KPMG LLP in Washington.

For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or mvanleuven@kpmg.com.

Unless otherwise noted, contributors are members of or associated with KPMG LLP. The information contained in this item is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This item represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

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