Abstract
Brazil does not have a full-fledged national VAT, instead relying on a multitude of federal and sub-national consumption taxes. VAT-type taxation of financial services in Brazil is comprised of federal social contributions (PIS and COFINS) and the local tax on services (ISS). At the federal level, financial institutions are subject to PIS and COFINS levies on gross revenues, with special rules for tax base exclusions and deductions. Since exclusions and deductions for financial institutions are limited, reduced tax rates of 0.65% for PIS and 4% for COFINS apply to gross revenues earned by such taxpayers, adding to a combined rate of 4.65%. Financial revenues earned by entities not qualified as ‘financial institutions’ from July 2015 onwards are generally subject to similar PIS and COFINS levies at a combined rate of 4.65%, in accordance with a controversial change in the federal tax legislation enacted by a decree, which overrode the previous zero-rating rule for such revenues. Inbound financial services are subject to additional PIS and COFINS levies with rates of 1.65% for PIS and 7.6% for COFINS, amounting to a combined rate of 9.25%. Conversely, outbound financial services are not subject to PIS and COFINS levies. Financial services may also be subject to local taxation under the ISS, within the boundaries of a national framework set forth under complementary legislation. ISS rates must not be lower than 2% and are capped at 5%.
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Notes
- 1.
Brazil has one of the most comprehensive, complex and costly tax systems in the world, with multiple taxes levied on consumption, capital, income, property, commodities and services. All levels of government—federal, state and local—have significant taxing powers, with access to major tax bases. This pattern of broad, multi-tier tax assignment is consistent with the fact that Brazilian sub-national governments enjoy significant political power and decision-making autonomy. See Bird (2011, pp. 147–149). See also Schoueri and Barbosa (2012, p. 121) and Rubinstein et al. (2011, p. 649).
- 2.
- 3.
- 4.
See Wiesner (2003, p. 57).
- 5.
The ICMS (Imposto sobre Operações relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação), as currently designed, with its assignment to state governments and its partial reliance on the origin principle, results in heavy tax-induced inefficiencies and equity distortions across the Brazilian federation, as well as creating strong incentives for practices of harmful interstate tax competition. With fairly complex legislation, the ICMS is also significantly costly for state governments to properly administer (even though one could argue that an alternative destination-based full-fledged sub-national VAT would most probably be even more complex and entail much higher administration and enforcement costs). Brazilian taxpayers oftentimes must bear the dramatic compliance burden of multiple state ICMS laws. As an additional caveat, the ICMS bears the distinctive attributes of a hybrid origin/destination VAT: it is contingent on the type of transaction whether it is levied by producing states, in accordance with the so-called ‘origin principle’, by the states where goods or services are consumed (i.e., on a destination basis), or even by both of them (on a mixed origin and destination basis). In any case, the ICMS remains the highest yielding non-social security tax in Brazil.
- 6.
See De Mello (2007, p. 6).
- 7.
Heavy administrative and compliance costs, harmful intergovernmental tax competition practices and large resource inefficiencies have all been adverse—albeit easily predictable—outcomes of the assignment of the tax on the provision of services (ISS) to Brazilian municipalities.
- 8.
For a comparative description of social contributions in various federations, see Anderson (2010, p. 32).
- 9.
According to Article 149 of the 1988 Federal Constitution, as a general rule these levies can only be enacted by the federal government; a narrow concession to states and municipalities was made by the constitutional framers, allowing these governments to collect social contributions from state and municipal public servants, in order to finance their social security programs.
- 10.
In practical terms, Brazilian social contributions mostly resemble ad hoc ‘earmarked’ ability-to-pay taxes, since revenues collected from them must be channeled to expenditure programs of health care, public education, social assistance benefits and social security. Since 1994 successive amendments to the Transitory Constitutional Provisions Act (Ato das Disposições Constitucionais Transitórias—ADCT) have put in force an ‘unearmarking’ mechanism dubbed Desvinculação das Receitas da União (DRU—Federal Revenues Unearmarking), according to which 20% of federal public revenues which otherwise would be constitutionally earmarked can be allocated to fund various expenses by congressional direction (through annual budgetary laws).
- 11.
Article 195(4) of the 1988 Federal Constitution also assigns to the federal government a residual power to enact new social contributions, through complementary laws, to finance social security programs. Furthermore, the federal government has enacted a social contribution to finance elementary education (the so-called ‘education-salary contribution’—contribuição ao salário-educação), in accordance with Article 212(5) of the 1988 Federal Constitution. It is levied on compensation amounts paid by companies to their employees.
- 12.
Indeed, social contributions nowadays represent the most important revenue source for the federal government, surpassing ability-to-pay taxes for that matter.
- 13.
This phenomenon is an outcome of the fiscal decentralization process driven by the 1988 Constitution, which restructured the Brazilian tax assignment and tax sharing systems, thereby strengthening the autonomy of sub-national levels of government, while maintaining most federal expenditure responsibilities. As a result, the central government had to cope with a significant mismatch between revenue sources and expenditure responsibilities, leading to large federal deficits in the 1990s. As the federal government took every opportunity to tap new sources of non-shared revenue by enacting new social contributions and increasing existing ones, the decentralization process envisioned by the 1988 constitutional framers was counterbalanced to a significant degree. See Rosenn (2005, p. 590), Varsano and Mora (2001, p. 9).
- 14.
As a general rule, domestic companies are taxed on their worldwide income and may need to comply with transfer pricing, thin capitalization and controlled foreign company (CFC) rules when dealing with related companies abroad or with entities resident in tax havens.
- 15.
The presumptive income tax is calculated by applying percentages (i.e., presumptive profit margins) to the gross revenue derived by the company (thus, costs and expenses are ignored under this system). Only companies with annual gross revenue less than BRL 78 million may opt into the presumptive system; furthermore, companies engaged in certain types of activities, such as financial services, are prevented from electing to use this assessment system.
- 16.
The general CSLL tax rate is 9%. Until 2008 the CSLL rate for financial institutions was 8%.
- 17.
The rate increase was first enacted by the federal government through Provisional Measure 675, issued on 21 May 2015.
- 18.
The IOF was enacted by Law 8.894/94. The main decree regulating the IOF is Decree 6.306/07, further amended several times.
- 19.
Programa de Integração Social (PIS), enacted by complementary laws no. 7/70 and 8/70 and further regulated by laws no. 9.718/98 and no. 10.637/02.
- 20.
Contribuição para o Financiamento da Seguridade Social (COFINS), enacted by Complementary Law no. 70/91 and further regulated by laws no. 9.718/98 and no. 10.833/03.
- 21.
- 22.
World Bank (2002, p. 48). As Logue and Vettori (2011, p. 128) assert, a turnover tax ‘leads to purely tax-induced vertical integration of firms within particular industries; and it is obviously inefficient (unless one has a theory for why there should be a tax-induced vertical integration of firms)’.
- 23.
Indeed, a turnover tax can induce cost-cutting that is not profit maximizing from a pre-tax perspective. See Logue and Vettori (2011, p. 128). As these authors contend, ‘so long as the gross receipts rate is greater than the marginal profit on the last dollar spent on business expenses, the taxpayer would maximize her after-tax profit by continuing to cut costs even though such cost-cutting reduces her pre-tax profits’.
- 24.
The ‘non-cumulative’ assessment system is optional for most taxpayers but ruled out for selected industries and activities.
- 25.
Several policy rationales (i.e., the need to support state and local governments), nevertheless, could be raised to argue that this approach entails negative fiscal federalism outcomes, further strengthening the federal government to the detriment of sub-national governments. On the other hand, disallowing such deductions might be perceived as better serving the goal of simplicity of the tax system.
- 26.
See Appeal (REsp) 1330737, ruled by the High Court of Appeals [Superior Tribunal de Justiça (STJ)] on 10 June 2015. The ruling was by a majority, with 7 Justices arguing that ISS levies on service inputs cannot generate deductible credits for PIS and COFINS assessment, since such levies would comprise the gross revenue tax base for the incidence of these social contributions, and 2 Justices dissenting and stating that a given amount cannot simultaneously be a taxable item for both a sub-national tax and a federal tax. Since that case was subject to a system of ‘repetitive appeals’ (recursos repetitivos), the High Court of Appeals ruling will impact other pending cases dealing with the same matter: further appeals to the High Court will only be admitted when lower courts issue rulings dissenting from the precedent set forth in the ruling of that decision in Appeal (REsp) 1330737. According to Brazilian litigation procedures, repetitive appeals deal with the same legal arguments in identical matters of law; when the High Court of Appeals determines that a given set of appeals are to be considered repetitive, their analysis in lower courts remains suspended until the High Court rules on the matter.
- 27.
See Appeals (REs) 240785 and 574706, pending at the Supreme Court [Supremo Tribunal Federal (STF)] docket. Another Appeal (RE 240785) was ruled in favour of the taxpayer in 2014, by a majority decision.
- 28.
Further amended by Normative Ruling RFB 1314, of 28 December 2012 and Normative Ruling RFB 1544 of 26 January 2015.
- 29.
A long and tumultuous constitutional debate has developed on the extension of PIS and COFINS tax bases. Up to 1998, with the enactment of Law 9.718/98 (Art. 3, Para. 1), the tax base had been defined as the sum of gross receipts earned on the rendering of services or the sale of goods, in line with the wording of Art. 195 (which sets forth the constitutional powers for federal social contributions) at that time. The 20th Constitutional Amendment, enacted on 16 December 1998, altered such wording to include ‘gross revenues’ besides gross receipts. Since Law 9.718/98 preceded the constitutional amendment, in 2005 the Supreme Court ruled on Appeal (RE) 346.084-6 that such enlargement of the PIS and COFINS tax bases was unconstitutional and should be repealed. Law 11.941/09 later revoked the contested rule.
- 30.
See RFB 1285 of 13 August 2012.
- 31.
See Appeal (REs) 609096. This case discusses whether PIS and COFINS can be levied on revenues of financial transactions earned by financial institutions, and had its general significance acknowledged by the Supreme Federal Court and as such is a leading case on the matter. Another case, Appeal (RE) 400479, also pending in the Supreme Court docket, deals with PIS and COFINS on gross revenues earned by insurance companies.
- 32.
Limited to the amount effectively corresponding to the write-off and not comprising new revenues.
- 33.
Assets classified for accounting purposes as investments, fixed-assets or intangibles.
- 34.
Only for leasing entities.
- 35.
The restriction applies to transactions with stocks in the spot market and in derivatives markets (futures, options, terms and swaps, among others), excluding hedge transactions.
- 36.
See Normative Ruling RFB 1285 of 13 August 2012, Art. 10.
- 37.
See Normative Ruling RFB 1285 of 13 August 2012, Art. 11.
- 38.
See Normative Ruling RFB 1285 of 13 August 2012, Art. 13.
- 39.
See Normative Ruling RFB 635 of 24 March 2006, especially Art. 15 there of.
- 40.
If such day is not a working day, the tax collection deadline shall be the working day immediately prior to that day.
- 41.
Provided those hedge transactions are taken by the taxpayer as a protection against price or rates fluctuation risks, or when, cumulatively, the purpose of the underlying contract is connected to operational activities of the taxpayer and is aimed at protecting rights or obligations of the company.
- 42.
Brazilian companies can elect to pay or accrue interest on net equity, resulting in deductible interest payments to the payor company. Interest on net equity is calculated by applying a long term interest rate set by the government (TJLP—Taxa de Juros de Longo Prazo) over the company’s equity (i.e., net assets). Interest on equity can only be paid up to half of the amount of (whichever is higher): (i) the entity’s profits of the current year; or (ii) the entity’s accumulated profits (profits of the current year and accumulated profits do not mix together for this purpose). Interest on equity payments is taxable income to the recipient, at a 15% rate.
- 43.
ccording to estimates made by the Federal Tax Agency. See http://idg.receita.fazenda.gov.br/noticias/ascom/2015/abril/nota-explicativa-sobre-o-decreto-no-8-426-2015.
- 44.
For instance, payment processing companies and loyalty points programs.
- 45.
On August 17, 2016 Justice Rosa Weber of the Supreme Court denied a petition to hear a case challenging the new PIS and Cofins levies on financial revenues earned by institutions that do not qualify as ‘financial institutions’, arguing that such matter would present an issue of legality but not of constitutionality. See Extraordinary Appeal (RE) 981.760. Such ruling, a monocratic decision, can be overturned.
- 46.
See Special Appeal (REsp) 1586950 at the High Court of Appeals [Superior Tribunal de Justiça (STJ)] docket. Recent monocratic rulings by High Court of Appeals [Superior Tribunal de Justiça (STJ)] Justices have favoured the government, by stating that the new PIS and Cofins levies on financial revenues earned by institutions that do not qualify as ‘financial institutions’ are consistent with the rule of legality and/or should rather be challenged under constitutional premises in the Supreme Court. See Special Appeals (REsps) 1591434, 1618826, 1612338, 1596524, 1631116, 1602129, 1621259, 1605109 and 1601128. Such ruling, a monocratic decision, can be overturned Taxpayers have seen mixed results in recent decisions by intermediate appellate courts on the matter. The Federal Intermediary Appellate Court of the 4th Region [Tribunal Regional Federal da 4ª Região (TRF4)] ruled in favour of the government on June 10, 2016, in Appeal 5008805-14.2015.4.04.7102. Preliminary injunctions favouring taxpayers were ordered by lower federal courts in Rio de Janeiro and Sao Paulo.
- 47.
Such provision amended Art. 3(V) of Law 10.637/02 and Art. 3(V) of Law 10.833/02, both of which at first allowed for such credits to be taken by taxpayers.
- 48.
See news coverage on that issue at http://www.valor.com.br/legislacao/4629745/decisao-autoriza-uso-de-creditos-de-pis-e-cofins-sobre-despesas.
- 49.
In the ‘non-cumulative’ assessment regime, taxpayers are allowed to offset PIS and COFINS collected on imports against PIS and COFINS levied on their gross receipts.
- 50.
As currently drafted, this annex lists 40 types of taxable services, with various sub-types for each of them, encompassing more than 150 activities.
- 51.
Precedents for this position are: High Court of Appeals [Superior Tribunal de Justiça (STJ)]: Reference: AgRg no Agravo de Instrumento no. 1.315.058/MG—Trial Date: 7 October 2010; Superior Court of Justice (STJ): Reference: Resp 728.126/PR—Trial Date: 24 May 2005.
- 52.
Precedents: Supreme Court: Reference: RE 100.858/PE—Trial Date: 12 November 1985; High Court of Appeals [Superior Tribunal de Justiça (STJ)]: Reference: Resp 30.360-0/SP—Trial Date: 21 September 1994; STF: Reference: Resp 755918/RJ—Trial Date: 28 June 2005.
Precedents: High Court of Appeals [Superior Tribunal de Justiça (STJ)]: Reference: AgRg no Agravo de Instrumento no. 1.315.058/MG—Trial Date: 7 October 2010; High Court of Appeals [Superior Tribunal de Justiça (STJ)]: Reference: Resp 728.126/PR—Trial Date: 24 May 2005.
- 53.
The minimum 2% tax rate does not apply to civil construction services performed by general contractors, demolition services and refurbishment and conservation services for private or public buildings, roads, harbours and bridges.
- 54.
In many metropolitan regions across the country service providers have often evaded the higher ISS levies of large cities by registering in neighbouring municipalities with lower tax rates. The aforementioned provisions, however, are unlikely to have a significant impact on harmful inter-municipal tax practices in the long term, as empirical evidence suggests. In 2009, according to official data collected by the National Bureau of Geography and Statistics [Instituto Nacional de Geografia e Estatística (IBGE)], 889 of Brazil’s 5565 municipalities continued to grant ISS exemptions or tax holidays for such investment attraction purposes. Most of these 889 municipalities are small jurisdictions, with less than 50,000 inhabitants: See Instituto Brasileiro de Geografia e Estatística (2010, Table 33).
- 55.
- 56.
As exceptions to this rule, 22 types of services are defined under the clauses of Article 3 as taxable by the jurisdiction where such services are effectively rendered.
- 57.
See Torres (2007, pp. 357–358).
- 58.
In a hearing held at the 1988 Constitutional Assembly, a proposal to merge the ISS with the state-levied ICM (the predecessor the current ICMS) faced strong opposition from local government representatives, who claimed that municipalities had a ‘historical right’ to tax services: see Schoueri et al. (1998, p. 88).
- 59.
According to Article 2(III) of Complementary Law 87/96, the ICMS can potentially be levied on any type of communication service provided for valuable consideration, regardless of media, including those of generation, broadcast, reception, transmission, retransmission, replication and magnification. This assignment of communication services taxation to state governments has been an innovation of the 1988 Federal Constitution, since the previous constitution provided, in its Article 21(VII), that such services were taxable by the federal government or by the municipalities (in the latter scenario, when communication services had a strictly local character: see Schoueri and Barbosa (2012).
- 60.
Article 2(II) of Complementary Law 87/96 clarifies that intrastate and interstate transportation services taxable by the ICMS comprise air transportation services.
- 61.
Precedents: Supreme Court of Justice (STF): Reference: RE 116121/SP—Trial Date: 11 October 2000; High Court of Appeals [Superior Tribunal de Justiça (STJ)]: Reference: Resp 912388/SC—Trial Date: 18 December 2007.
- 62.
This Annex of Complementary Law 116/03 provides for some exceptions, which may be subject to both the ISS (regarding the service provision) and ICMS (regarding the goods supplied in connection with such service). These exceptions generally refer to civil and public construction services, engine reconditioning, catering and event planning, maintenance and conservation of machinery and equipment of any kind.
- 63.
As foreseen under Article 4, such facility is deemed to be located where the service provider carries out its business activities, permanently or temporarily.
- 64.
Central Bank Resolution 2.009, under the sole paragraph of Article 2 of Section II, authorizes financial institutions to adopt centralized accounting methods to encompass transactions performed by all branches located in a given municipality.
- 65.
Article 8-A of Complementary Law 116/03 and Transitory Constitutional Provisions Act (ADCT), Art. 88.
- 66.
Complementary Law 116/03, Art. 8.
- 67.
As a general rule, no deductions are allowed.
- 68.
See Ruling (REsp) 1212026/MG, second chamber, High Court of Appeals (STJ), Justice Herman Benjamin, 8 February 2011. The case dealt with cheque books handed for free to clients by a bank.
- 69.
See the following Private Letter Rulings (Soluções de Consulta), among others, issued by São Paulo’s Tax Administration: no. 26, of 26 July 2010; no. 11, of 21 March 2012; and no. 3, of 24 February 2015.
- 70.
Conversely, services performed in Brazil, or that ensue local results, are not exempt from the ISS, regardless of whether payment for the services has been made by a non-resident party.
- 71.
Private letter ruling (Solução de Consulta) SF/DEJUG 15 of 2014.
- 72.
Ordinary Appeal in Administrative Procedure n. 2014-0.335.315-4, ruled on 15 July 2015; and Ordinary Appeal in Administrative Procedure n. 2012-0.316.895-7, ruled on 15 March 2013.
- 73.
Appeal n. 0057880-68.2012.8.26.0053, ruled on 22 May 2014.
- 74.
See CMN Regulation 3954/11.
- 75.
Special Appeal (REsp) 874.997, ruled on 8 April 2008. The case dealt with Complementary Law 56/87, later revoked by Complementary Law 116/03.
- 76.
Private Letter Ruling (Solução de Consulta) SF/DEJUG 7, of 7 March 2012.
- 77.
Extraordinary Appeal (RE) 601392, ruled on 28 February 2013.
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Rubinstein, F. (2017). Loan Intermediary Services: Brazil. In: van Brederode, R., Krever, R. (eds) VAT and Financial Services. Springer, Singapore. https://doi.org/10.1007/978-981-10-3465-7_5
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