Originally published in the March 28 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanaysts.com)
Software and information technology (IT) companies in Brazil soon may see a change in how they are taxed. During the past few weeks, Brazil’s executive branch has been working on the final details of a provisional measure that would shift taxation from payroll to gross income.
Negotiations are under way between the Federal Revenue Department and the ministries of Development, Industry and Commerce; Science and Technology; Labor; and Social Security.
At least 60 percent of software and IT companies’ costs are related to payroll, with some companies claiming a more accurate figure is 80 percent. And because of Brazil’s burdensome payroll taxation (which includes labor and social security charges and entitlements), software and IT companies often fall behind in international competition.
Authorities involved in drafting the new measures have not released details about which taxes would be changed for software and IT companies, but the measure likely will affect the 5.8 percent payroll tax paid to social assistance entities; the 20 percent payroll tax paid to social security; and the labor accident insurance tax (SAT), a variable (1 percent to 3 percent) tax on payroll.
Minister of Development Luiz Furlan said last week that the executive branch may even consider eliminating the levy of P.I.S. (Program for Social Integration contribution), COFINS (Contribution for the Financing of Social Security), the 10 percent royalty tax (CIDE), and the local service tax (ISS) for software and IT companies. He said he expects the new tax package for those sectors to be in place by the end of June.
The tax shift from payroll to gross income is not new in Brazil. Since 2001, the social security taxation of some agribusinesses has shifted from payroll — at rates as high as 28.8 percent — to a 2.85 percent rate on the sales of their products. If the tax reductions are ultimately adopted for software and IT businesses, other labor-intensive businesses, such as telemarketing, may seek similar tax treatment.
David Roberto R. Soares da Silva