Month: August 2020

Brazilian Tax Reform – Is This Time for Real?

The Brazilian tax system is largely considered one of the most cumbersome and complex systems in the world.  While there have been rumors of reforming the system over the years it appears the latest effort may have some momentum.  On July 21st, Paulo Guedes, Brazilian Minister of Economy, presented a draft bill (Bill No. 3,8877/220) encompassing the unification of federal taxes by creating a federal VAT, known as “Social Contribution on Goods and Services – CBS.  CBS will effectively eliminate both PIS and COFINS, which are Social Security Contribution assessed on gross revenues.  The proposed bill will be discussed and voted on by both legislative houses and if approved will be effective within six months of approval.

This bill is the first, in a phased approach to introducing wider tax reforms.  Other bill under consideration by the federal government include income tax reform, adjustments to the Excise Tax (IPI), reduction of social security taxes due on payroll and introduction of a new tax on digital payments. 

This article will take a brief look at CBS. 

What is CBS?

CBS is levied on imports and local sales of both goods and services, while export transactions would be exempt.  The bill proposes to treat the assignment and licensing of rights, including intangibles, as falling within the definition of imported services, thus subject to CBS.  As opposed to PIS and COFINS, which applies to non-operating revenue, CBS will only apply to revenues from operations.

It is intended to simplify tax on consumption and eliminate the different taxes and special tax regimes for various sectors of the economy, while promoting tax equity and savings to taxpayers.  The biggest benefit may be a reduction in the time companies spend on tax compliance and reduce never ending legal discussions currently taking place regarding the PIS/COFINS system.

Under the proposed bill, some notable special tax regimes will remain in place, including SIMPLES NACIONAL (for micro and small businesses), the Manaus Free Trade Zone exemption, and the exemption for basic food items.

What Is the CBS Tax Rate?

The Brazilian tax rate under the Tax Reform Bill will increase to 12% from the current regular tax rates for PIS and COFINS of 9.25%.  The calculation of the tax base is computed as follows: Gross Revenues excluding amount of ICMS (State VAT), ISS (Municipal Tax) and unconditional discounts.  The gross-up calculation would no longer be available.

Are Tax Credits Available in Calculating CBS?

In calculating CBS taxpayers will be allowed credits, comparable to the noncumulative system of PIS and COFINS, however without the restrictions currently applicable in the PIS/COFINS law.  Under the proposed methodology of calculating CBS, each part of the supply chain may consider credits over the amount paid by the supplier and detailed on an invoice, thus CBS effectively applies to the value added to a product or service provided by the taxpayer.

Other credits such as depreciation and rent expense, among other expense items are not permitted.  Any depreciation of assets placed in service prior to CBS coming into force will be allowed.

The Tax Reform Bill will permit taxpayers to accumulate credits during the quarter in an effort to compensate them with other federal taxes at the end of the quarter.  The five year Statute of Limitations would remain in effect and the value of the credits will not be subject to monetary restatement.

Credits made available by product purchases from companies subject to SIMPLES NACIONAL and from the Manaus Free Trade Zone will be available for use.  However, some products subject to a single level of taxation would not be creditable.  Items such as fuel, natural gas and cigarettes would be required to follow specific CBS calculation methods.

Relief for Tax Professionals?

In what can only be considered good news for tax professionals, the bill aims to significantly reduce the complexity currently involved in preparing tax returns.

What is the Impact on Digital Platforms?

Those digital platforms, acting as intermediaries will be responsible for the collection of CBS levied on the transactions completed through them in the event the seller does not issue an electronic invoice.

The impact will be felt by both digital platforms located abroad and the importer of the goods and services performed by individuals into Brazil.  The parties to the import transaction will be responsible for the payment of CBS.  In addition, the owner of the digital platform will need to register with the Brazilian federal tax administration to fulfill the related tax obligations.

Closing Thoughts

is this effort of tax reform in Brazil real?  The answer will become clearer over the next couple of months.  For U.S. companies with operations in Brazil, it is prudent to closely monitor these developments and plan accordingly.

Implementing a Tax Efficient Supply Chain Management Platform to Address Global Business and Tax Disrupters Impact on Operational Structures and Supply Chains

Global business and tax disrupters, such as COVID-19, Trade Wars, and changes to global tax laws are requiring MNEs to evaluate the impact of such disrupters on both their organizational structures and supply chains.

The main objective of global supply chain management is to achieve the greatest value possible at the lowest cost possible.  It is important to remember tax represents 20% of the costs incurred in the global supply chain.  Tax, in some form, is imbedded in virtually every transaction.   To fully appreciate the planning opportunities available by implementing a Tax Efficient Supply Chaim Management Platform (TESCMP), one must first appreciate the components of a globally integrated supply chain.  The globally integrated supply chain starts with Global Suppliers and ends with Global Customers, in between is the processes of Global Logistics, Purchasing, Operations and Market Channels. 

Global Logistics –  Is the part of global supply chain management that plans, implements and controls the efficient and effective forward and reverse flow and storage of goods, services, and related information between the worldwide point of origin and the worldwide point of consumption to meet global customer’s requirements.

Global Purchasing –  Tales place in the inbound or upstream portion of the global supply chain, it involves buying something (such as raw materials, component parts, work in process, products or services), and it should be strategically and tactically integrated with the elements of the production cycle for MNEs.

Global Operations – is the mechanism utilized by an enterprise to implement the MNE’s corporate strategy and facilitate the enterprise being market driven.  It involves the worldwide management of make-or-by decisions in global supply chains, global production and manufacturing, competitive priorities in such supply chains, total cost analyses in global supply chains, process-based quality standards, guidelines within the supply chain operations reference model, and decisions on the usage of operational providers within the realm of global operations across the supply chain.

Global Market Channels – involves the part of the global supply chain management that includes all activities related to sales, service, and the development of relationships, preferably long-term relationships with customers.  A critical component of market channels is the last mile of the supply chain.

Organizations face increasing pressure to avoid future disruption while reducing costs within the supply chain.  These pressures permeate though out each part of the supply chain.  Some of the more common items include:

  • Jurisdictional selection and physical location of the MNE’s logistics, purchasing, and operations;
  • Choice of suppliers and their physical location, focusing on manufacturing and distribution locations;
  • Examine when, within the supply chain, goods are branded and therefore value is added.  This exercise determines the situs of taxability and the value of goods for both income and property tax purposes.
  • The ability to attach value to certain intellectual property may impact customs and duties charged on the importation of goods.

Implementing TESCMP

TESCMP is an approach of overlaying tax strategies, transfer pricing, global mobility, indirect taxes and trade and customs to a company’s business processes.  The first step in implementing TESCMP is to map transactions flows and sort the activities within each process as high value versus routine functions. High-value functions drive companies’ strategic decisions; they determine what products to produce, which markets to enter and how best to execute the corporate strategy. High-value functions entail risk and should concomitantly earn higher returns.

It is people, however, who execute functions and manage risks. By redeploying decision-makers — and the functions and risks that they manage – to centralized and possibly tax-favored jurisdictions, companies may realize material operational and tax benefits through efficiencies and by earning a greater proportion of their profits in a tax-efficient location. Routine activities, deriving a smaller amount of taxable profits, might remain in higher-tax jurisdictions or re-locate elsewhere as business needs dictate. In an environment of hyper change where supply chains need to be nimble in order to avoid disruption, it is important to remember tax represents 20% of the costs incurred, thus planning for this cost is important to drive both operational and financial success.

Scroll to top