Gringo Talk: The Tax Burden in Brazil – A Brief Orientation

Opinion, by Sam Flowers

RIO DE JANEIRO, BRAZIL – The heavy tax burden is often cited as one of the deterrents to doing business in Brazil. This burden comes in two distinct forms: the actual taxes to pay and the enormous amount of time and effort required to comply with the tax code.

It is impossible to thoroughly address the topic of business taxes in Brazil in a brief article, and I am no expert, but I hope to give you a broad orientation to what to expect and why the burden is so heavy.

Small and medium sized businesses pay many of their taxes based on revenue regardless of the purpose of the tax. This is true even for Income Tax under the options known as “Simples National” and the “Presumed Profit Method.” It seems this is done for the sake of simplicity both in calculating and enforcing collection.

In practice this calculation of taxes based on revenue creates a cumulative or compounding effect where by the time a product reaches the consumer, it has been taxed for the same purpose several times. This is a particular problem with the ICMS tax which is essentially a value added type tax.

Officially the taxes are not intended to be cumulative and the laws provide for some credits to avoid this problem, however, small and medium sized companies in many industries and locations are often excluded from these credits.

The compounding tax effect contributes greatly to the high tax burden for both companies and individuals in Brazil. Another significant contributor is the Income Tax that is paid when a company chooses the Simples National or Presumed Profit Method.

Under these methods, a company pays income tax regardless of whether or not there was true profit since the tax is calculated based on revenue and there are no offsets to address the possibility of losses. Though these seem like unattractive options if you think you may experience losses, they are the most realistic for smaller companies who lack the resources to comply with paper work requirements of the “Real Profit Method.”

To give you a rough idea of the total tax impact on a business, my restaurant has had at times a tax burden as high as twelve percent of revenue; and this is excluding employment taxes. Other than the taxes themselves, the other significant burden is the work involved in tracking and paying everything them.

The regulations are so complex and so dependent on the circumstances of your particular business that you must depend on an accountant to calculate keep track of all the required taxes. A good accountant will do the bulk of the work, but a business owner still must dedicate several hours a week to maintaining and delivering the information the accountant needs to be effective.

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Sam Flowers is an American living in Rio de Janeiro who created and founded the Gringo Café in Ipanema in 2010. A former executive and consultant with twenty years experience in Corporate Strategy, Brand Marketing and Finance, Sam also offers consulting services to foreign businesses and people entering or adapting to Brazil. Contact Sam at [email protected].