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Brazilian Federal and Regional Taxes

IPI, ICMS, ISS, PIS and COFINS: know more about the Brazilian taxes and how they affect oil and gas transactions

Federal taxes

Federal Value-Added Tax on Industrialized Goods (IPI) 

IPI is paid by manufacturers at the time of sale, either to another manufacturer who will continue the manufacturing process, or to the retailer or final customer. The subsequent manufacturer is allowed credit against its IPI debits, equal to the IPI paid by its suppliers (input/output mechanism). IPI is also levied in the import of goods. Credits may be carried forward to future monthly calculations.

Generally, the IPI calculation basis is the value of the transaction carried out by the taxpayer. IPI calculation basis regarding import transactions corresponds to the value of the goods added of insurance and freight (CIF) plus customs duties (II).

IPI rates vary according to the nature of goods. Basic supplies typically enjoy a zero rate whereas non-essential goods usually have a higher IPI rate, according to the product’s specific code in the Harmonized Tariff Schedule- HTS.

Goods exported from Brazil are exempt from IPI and the corresponding credits accrued can be kept and used to offset other federal taxes.

Furthermore, the sale of crude oil and its derivatives are not subject to IPI taxation.

Social Contribution on Gross Revenues (PIS and COFINS)

PIS and COFINS are federal taxes charged on gross revenues earned by a legal entity and are due on a monthly basis.

The “non-cumulative” regime for the calculation of PIS and COFINS contributions is the standard method of calculation, in which some credits are allowed (calculated upon inputs). Under this regimen, the applicable rates are, respectively, 1.65% and 7.60%.

Federal Decree # 8,426/2015 reintroduced the tax rates of 0.65% for PIS and 4% for COFINS due upon financial revenues for companies subject to the non-cumulative calculation method of such contributions, except for exchange variation.

On the non-cumulative system, the taxpayer is allowed to offset the amount due with specific credits, applying the same rates (1.65% and 7.6%), on expenses related to (non-exhaustive list):

  • Goods acquired for resale;
  • Goods and services used as an input in the rendering of services and to produce other goods for sale, including fuel and lubricants;
  • Real state machines and equipment, rental expenses paid to another legal entity, used in the company activities;
  • Expenses related to commercial leasing transactions;
  • Depreciation of machines, equipment and other assets incorporated to the fixed assets, acquired to be used for production of goods for sale, or to render services;
  • Depreciation of buildings and improvements on its own property or on third parties properties, used in the company activities;
  • Storage of goods and freight due on sales transactions, when the burden is supported by the seller;
  • Electricity consumed in establishments of the company.

On the other hand, companies that have elected the estimated profit method for CIT purposes are subject to the “cumulative” PIS and COFINS regime at the rates of 0.65% and 3% respectively, whereby no credits are allowed. 

PIS/COFINS-Importation

Goods imported into Brazil will be subject to PIS and COFINS-Importation. Provided certain conditions are met, input credits are allowed.

The standard PIS and COFINS combined rate levied on the import of goods is 11.75% (2.1% PIS and 9.65% COFINS). Specific items are subject to exemptions or different PIS/COFINS-importation rates.

Input credits are allowed on such increased rates. PIS and COFINS levied on import of services remain at a combined rate of 11.75%.

As a rule, PIS and COFINS due on the importation of goods must be paid on the date of registration of the Import Declaration. PIS and COFINS due on the importation of services must be paid on the date of payment or remittance abroad.

Services rendered by foreign entities to Brazilian companies are also subject to the PIS and COFINS-Importation at combined rates of 9.65%. 

The calculation basis of the PIS/COFINS-Importation due upon import of services comprises the amount paid, credited, delivered, utilized or remitted abroad, including the amount charged as Withholding Tax (IRRF), Municipal Tax on Services (ISS), and the PIS/COFINS Importation themselves (gross-up method).

State taxes

State tax on goods circulation (ICMS)

ICMS is levied by the Brazilian States on the circulation of merchandise, on rendering of interstate and intermunicipal transportation services and on communications services. In general, ICMS calculation basis is the value of the transaction or service carried out by the taxpayer.

It is a non-cumulative tax and its calculation involves a VAT type-system, whereby, as a rule, the taxpayer is allowed to offset input ICMS against output ICMS. Remaining ICMS credits may be carried forward to future monthly calculations.

Specific ICMS rules apply to goods for consumption, which do not give rise to ICMS credits, and purchase of assets, which allows an ICMS credit “amortization” in 48 months against debits due in each period.  

The importation of goods into Brazil is also subject to ICMS upon customs clearance. The calculation basis corresponds to the CIF value plus customs expenses and levied on importation (i.e., II, IPI, PIS, COFINS, and ICMS itself - gross-up method).

As a state tax, each Brazilian state sets forth the related rates for transactions in or products imported through its own jurisdiction.

For the circulation of goods within any given Brazilian state, standard ICMS rates may vary from 17% to 20%. The Rio de Janeiro ICMS standard rate is 20% (18% regular tax + 2% Compulsory Contribution to the Poverty Fund), while ICMS due upon regular import transactions in this state is levied at 18% (16% regular tax + 2% Compulsory Contribution to the Poverty Fund).

For the circulation of goods between ICMS taxpayers located in different Brazilian states (“interstate transactions”), the tax legislation established specific ICMS interstate rates (as shown in the chart below):

From To  Rate
South and Southeast Region, except Espírito Santo state South and Southeast Region, except Espírito Santo state 4% (if imported item with similar in Brazil) or 12%
South and Southeast Region, except Espírito Santo state North, Northeast and Mid-West and Espírito Santo state 4% (if imported item with similar in Brazil) or 7%
North, Northeast and Mid-West and Espírito Santo state Any other state 4% (if imported item with similar in Brazil) or 12%
Any state Non-ICMS taxpayer Interstate rate (4%, 7% or 12%, as above)*

*plus the difference between the interstate rate and the buyer state ICMS rate (paid separately to the State of destination).

Different ICMS exemptions and benefits are available in the different Brazilian states.

Transactions related to Oil and Natural Gas

In general, Oil and Gas transactions are taxed by ICMS similarly to other usual transactions. However, some specific issues related to this industry should be taken into account, for instance, special dispositions for manufacturing. 

  • Intrastate (local) operations

Normal taxation applies to these operations, which means that all oil and natural gas sales made by an oil company to refineries will be subject to the ICMS at the rate of 17%, 18% or 20% (internal rate for the state where the buyer is located). Note that the usual rate applicable to the sale of natural gas is twelve per cent (12%), but it may vary from state to state.

On the other hand, exports are normally exempt from ICMS. For instance, suppliers of REPETRO's manufacturing tools are exempt on outflow of raw material and intermediary products, i.e. steel. This is further explained in the REPETRO regime section.

  • Interstate transactions

According to the Constitution, interstate transactions involving petroleum and its derivatives enjoy immunity from ICMS taxation. Regarding natural gas, the usual rate for interstate sales shall apply– either twelve per cent (12%) or seven per cent (7%), the latter applicable to shipments to states located in the nation’s Northern, Northeastern regions and Espírito Santo State.

Additionally, mid and downstream transactions with gas, oil and its byproducts might be subject to the tax substitution system. In short, the tax substitution system involves the calculation and collection of ICMS by one company for the entire supply chain, based on an estimated final price for the product.

Municipal taxes

Municipal tax on services (ISS)

ISS is a municipal cumulative tax levied on the Brazilian service provider for an extensive list of services designated by the Supplementary Law # 116/2003. This tax is assessed on services gross billings on a monthly basis and its rate may vary from 2% to 5%, according to the Municipality and the type of service rendered (the usual rate is 5%). Calculation basis is the price charged for the service including the ISS value (gross-up method).

In general, the service tax is due to the municipality in which the company is established even when the service is rendered in another location. A few exceptions apply (such as construction services, dock services and vessel towage). In such cases, the ISS is collected to the municipality in which the work is performed. To avoid jurisdiction conflicts, some companies open a specific establishment at their work site.

Regarding services performed by overseas companies (import of service), ISS is triggered in the following conditions:

  • The service is performed in Brazil; or
  • The result of the service is verified in Brazil.

Both cases are ISS-taxable. The service’s beneficiary located in Brazil withholds the amount due in favor of the municipality where the work was effectively performed or where the result of the service was verified.

On the other hand, services provided by Brazilian companies to foreign contractors, when the benefits of such services are verified outside Brazilian territory (export of service), are not levied by ISS.

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