How much cheaper are Brazilian imports after the Supreme Court tax ruling

NOTE: You may also want to see How to calculate Brazilian Import Costs

I was about to write a post commenting the recent decision of Brazilian Supreme Court, which altered the calculation of one of the taxes over imports. 

But I have read the article below, written beautifully by Mr. Arnaldo Bleuez, with whom I have been working lately, and decided to post it here unabridged. 

Mr. Bleuez is  British Chartered Accountant and alumnus of PricewaterhouseCoopers, is currently a partner at Bleuez  & Partners consulting, dealing on Finance, Taxes, and Business Opportunities. His accountancy firm is based in Brazil.

You may reach him at arnaud@bleuezconsulting.com.   More detailed contact info at the end of the post. 

I should add that the decision is not valid for everyone (it is not erga omnes). Each importer must look for the courts in order to have the calculation of PIS/COFINS reevaluated for its own imports

The article below focus exclusively on the impact of the elimination of the State Tax (ICMS) from the calculation of PIS COFINS over imports. The total tax reduction would be slightly larger than the one indicated at the end, due to some other adjustments in the calculation that were also included in the ruling.

The impact of the STF decision on excluding ICMS

from the base of calcuation of PIS and COFINS for exports to Brazil

INTRODUCTION

On 20^th March 2013, the STF (Supremo Tribunal Federal) has decided that the inclusion of ICMS within the base of calculation of PIS and COFINS for exports to Brazil is unconstitutional. As a consequence, exporters to Brazil may expect a decrease of the tax burden.

That sounds good, but we still need to know how relevant is this decision for exporters to Brazil?

This demonstration intends to explain to our clients and prospects how this change will impact the overall tax burden.

NUMBERED DEMONSTRATION

Let’s start with a calculation of the overall tax burden for an exporter to Brazil. It’s complex.

Here is an illustration with an example of a pharmaceutical product:

Importation of a laboratory / pharmaceutical product (NCM code: 3926.90.40) into Brazil:

customs value:            100

currency:                     Euro

rate of ICMS:             17%

TEC (or II):                            18%

IPI:                             10%    

PIS:                            1.65%

Cofins:                        7.6%

II (Tax on Imports, ‘Imposto sobre Importaçao’)

IPI (Tax on industrialized products, ‘Imposto so bre Produtos Industrializados’)

PIS & COFINS: social contributions

Result of this simulation in Euros:

The basis for the calculation of the II is the customs value.

II: 18% * 100 = 18

The basis of calculation of the IPI is the customs value, plus the II.

IPI: 10% * (100 +18) = 11.8

PIS and COFINS are calculated based on: VD, ICMS, PIS and COFINS! To calculate PIS and COFINS, it is first necessary to calculate the ICMS.

ICMS is calculated on the basis of VD + II + IPI + ICMS + other (in this example, other = 0):

ICMS = 17% (100 + 18 + 11.8 + ICMS + 0)

ICMS = 17% (129.8 + ICMS)

ICMS = ICMS 21.96 + 0.17

ICMS 0.83 = 21.96

ICMS = 26.46

PIS:                 1.65% * (100 +26.46 + COFINS + PIS) = 2.30

COFINS:        7.6% * (100 +26.46 + COFINS + PIS) = 10.6

List of calculation above

II                     18%

IPI                  11.8%

ICMS              26.46%

PIS                  2.3%

COFINS         10.6%

TOTAL         69.16%

This calculation above does not take into account related expenses (freight, insurance, etc..).

As a consequence of the decision taken by the STF, ICMS (26.46 in our example) must be taken away from the basis of calculation of PIS and COFINS. Let’s see the impact :

PIS:                 1.65% * 26.46            = 0.44% to be taken away from PIS

COFINS:        7.6% * 26.46              = 2.01% to be taken away from COFINS

List of calculation above

II                     18%

IPI                  11.8%

ICMS              26.46%

PIS                  1.86% (2.3 – 0.44)

COFINS         8.59% (10.6-2.01)

TOTAL         66.71%

CONCLUSION

Following the SFT decision, one can expect a decrease of 2.45% on the tax burden (69.16 – 66.71).

This 2.45% result is correct for a 17% ICMS. It will different if your rate of ICMS is different.

This is good news for all companies exporting to Brazil and subject to ICMS.

The Federal Government still needs to comment on this decision and apply this it. There are also some doubts about the possibility of asking for a reimbursement of the excess of PIS and COFINS paid by exporters during the previous years.

------------------------------------------

Arnaud BLEUEZ

Chartered Accountant - Partner

11 9 5610 5550

arnaud@bleuezconsulting.com

Skype : arnaud.bleuez