Originally published in the January 30 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Corporate taxpayers in Brazil have until either January 31 or February 28 to elect their income tax calculation method for 2008. There are three options available (subject to specific limitations): the actual income tax regime (lucro real), the presumed income tax regime (lucro presumido), and the new simplified tax regime (Super Simples). The election must be made at the time of the first income tax payment for 2008, which is February 28 for those electing lucro real or lucro presumido. For smaller companies eligible for Super Simples, the deadline is January 31.
The election is important not only because of its actual tax impact on corporate taxpayers, but also because taxpayers cannot change the calculation method during the year. Once an election has been made for 2008, another election will not be available until 2009. A bad decision in electing the calculation method will likely result in increased tax payments during the entire year, with adverse consequences to shareholders — that is, fewer profits available for dividend payments.
Furthermore, the election also affects other tax payments, such as the 9 percent Social Contribution on Net Income (CSL) and the applicable rate and credit system under the Program for Social Integration (P.I.S.) and Contribution for the Financing of Social Security (COFINS) regimes.
- The Super Simples Method
For those electing the Super Simples regime, which entered into force in mid-2007, the election also will affect the federal excise tax (IPI); the social security payroll tax, including social contributions to private social assistance agencies; the state VAT (ICMS); and the municipal service tax (ISS). All those taxes, together with the corporate income tax, CSL, P.I.S., and COFINS, may be rolled into a single tax for Super Simples taxpayers. The regime is aimed at small and very small companies with maximum annual gross income of BRL 2.4 million (approximately $1.34 million).
It is important to note that taxpayers that elect Super Simples cannot have any pending tax issues before federal, state, or municipal tax authorities as of January 31; otherwise, the taxpayer will be limited to either the lucro real or lucro presumido method.
- The Lucro Real Method
Under the lucro real method, taxpayers pay income tax in advance as a percentage of their monthly gross receipts during the calendar year. At the end of the year, they are required to prepare a balance sheet in which all expenses and income, including the net operating losses of previous years, are computed, and the actual taxable income is determined and taxed. The estimated monthly tax payments also are computed to offset the actual income tax due. Any overpayment is refundable, and taxpayers can suspend or reduce their estimated monthly payments by showing, through the balance sheet, that the payments they have made exceed the tax due.
Alternatively, taxpayers under lucro real may elect a quarterly (instead of annual) regime. Under the quarterly regime, all expenses, income, and losses are computed on a quarterly basis, and each quarter is treated as a separate, independent fiscal period. However, this regime is used by very few taxpayers with specific business cycles, as one of its disadvantages is that the operating losses of one quarter can be used to offset only up to 30 percent of the taxable income of the following quarter. Under the annual lucro real method, all losses incurred during the year are computed without limitation.
Some taxpayers are required by law to calculate income tax according to lucro real rules. These include financial institutions in general, insurance companies, and those enjoying special income tax exemptions or reductions.
- The Lucro Presumido Method
Under the lucro presumido regime, taxpayers calculate income tax on a percentage of gross revenues for the entire 12 months of the year (although payments are made quarterly). At the end of the year, no adjustment is made even if actual profits exceed the presumed profit used to calculate the income tax. To be eligible for this method, taxpayers’ annual gross revenues in the preceding year cannot exceed BRL 48 million (approximately $26.8 million).
- Other Considerations
In electing the best method, taxpayers must also take into consideration how the elected method will affect other taxes. Taxpayers under lucro real are subject to P.I.S. and COFINS at higher rates (1.65 percent and 7.6 percent, respectively), although some tax credits are available. Taxpayers under lucro presumido are subject to P.I.S. and COFINS at lower rates (0.65 percent and 3 percent, respectively), but no tax credits allowed.
There is no standard answer for determining which method is best. Taxpayers are advised to consult with their accountants and tax advisers and to hypothetically structure their payments under each regime to evaluate their opportunities for tax minimization in 2008.
David Roberto R. Soares da Silva