(Originally published in the August 16 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Just 45 days after entry into force, the tax portion of Brazil’s General Small Business Act (Complementary Law 123/2006), which created the Super Simples simplified tax regime for small businesses, has become a nightmare for many taxpayers.
Constant changes to regulations, restrictions for use or transfer of tax credits, changes in Congress, postponements of deadline to apply, and so on, have caused many to refer to Super Simples as Super Complicado, or Super Complex.
Under the Super Simples regime, eligible companies are able to pay a single tax in place of:
- corporate income tax;
- IPI (federal excise tax), except on imports of foreign goods;
- the 9 percent CSL (Social Contribution on Net Income);
- COFINS (the Contribution for the Financing of Social Security);
- P.I.S. (the Program for Social Integration contribution);
- social security payroll tax, including social contributions to private social assistance agencies;
- state VAT (ICMS); and
- municipal service tax (ISS).
Among the complaints from taxpayers, experts, and accountants are the actual increase of the overall tax burden and restrictions for the use of tax credits. Below is a summary of the main concerns of companies that intend to apply to Super Simples.
Service Companies
Service companies are among the taxpayers with the highest degrees of complaints and dissatisfaction with Super Simples. Some service activities have been denied eligibility to participate in the tax regime, such as communication and interstate and intermunicipal transportation of passengers. Others have been segregated in different groups, subject to different tax rates.
Notwithstanding, a law project approved last week in Congress would make 90 new service activities eligible for Super Simples, even though no one can assure that President Luiz Inácio Lula da Silva will sign the new law as approved by Congress.
Other small service companies complain that when they apply Super Simples, their overall tax burden will increase from what it was under their former Simples (the revoked simplified tax regime) status.
Tax Credits
Companies under Super Simples also complain they may lose business with the new regime because their sales to large companies would not entitle the buyer to take ICMS tax credits, according to Complementary Law 123/2006. They argue that some large companies are requiring price reductions allegedly to compensate the prohibition to take ICMS credits.
However, states are reluctant to accept changes to this restriction because ICMS credits reduce the ICMS payable by large taxpayers. The possibility to take ICMS credits on purchases from Super Simples companies would reduce the states’ ICMS revenues.
A similar restriction applies to purchasers’ ability to take P.I.S./COFINS credits from sales carried out by companies under Super Simples.
ICMS/ISS Exemptions
Under the former Simples regime, ICMS and ISS were excluded from the simplified regime. Many states and municipalities, however, have granted ICMS and ISS exemptions applicable to small businesses under Simples. Therefore, those Simples companies would not pay ICMS or ISS at all, depending on their location and type of activity.
With Super Simples, which now includes ICMS and ISS, the old ICMS and ISS exemptions were revoked and small companies are now required to pay those two taxes within the Super Simples rates. Some complain that their overall tax burden has increased because of the two new taxes (as compared to former exemptions).
Pending Tax Liabilities
For companies to apply for Super Simples, they cannot have any federal, state, or municipal pending tax liabilities. Complementary Law 123/2006 provides for a special payment schedule of up to 120 monthly installments.
The main problem, however, is that the deadline for application to the payment schedules varies according to the level of government (federal, state, or municipality), and regulations keep changing deadlines, making applications confusing, and causing concern among taxpayers as to whether they are following them correctly.
The extensive and confusing Super Simples regulations are burdensome to small businesses — the same group that the law was supposed to help. As far as the Super Simples rules are concerned, the regime is far from achieving its purposes, at least in these early steps of implementation.
David Roberto R. Soares da Silva