written by Joseph Low. Mr. Low is currently writing a book on the overall process of starting a business in Brazil. Its planned publication time frame is Q1 of 2013. Joseph is a Senior Advisor of Lombard Global, Inc.
With so many small to medium size business ventures now contemplating headquarters and/or support office moves to Brazil, all savvy business persons should know beforehand that it truly “pays” to do one’s tax homework prior to beginning any type of site selection process in Brazil.
One particularly unique tax Brazilian municipalities can levy is the ISS (Imposto Sobre Serviços, service tax), something completely different from other taxes companies face in the country. First, it’s levied on the gross income derived from services provided by any entity headquartered in its jurisdiction. Second, the tax is not creditable, as in the case of VAT taxes. It is the direct cost to the business and very similar to sales taxes in the United States. It is, however, limited to service provided and not on the sale of goods. Two services might be excluded from this unique tax – communication services and transportation services. The ISS tax varies between two and five percent throughout Brazil, depending on the municipality the service provider company is incorporated.
A consultant who sets up a business in São Paulo, for example, has to charge a five percent tax on every invoice they issue. This would be akin to charging a shopper sales tax in addition to the cost of their purchases. There is no way to recoup this cost. The consultant can keep their fees as-is, thereby increasing the total price to clients, or they may lower fees to charge less overall and perhaps stay more competitive vis-à-vis other São Paulo consultants.
The tax strategy of service providers should particularly be focused around location for incorporation. For example, while São Paulo is the place many businesspeople gravitate to, it’s actually smarter to incorporate in the municipalities on the periphery of São Paulo, such as Barueri, Poá, Embu, or Cajamar. Within these cities, the ISS rate varies from two percent to three percent based on the specific municipality. And, in order to attract businesses to their specific cities, many municipalities have provided land concessions for new businesses or have allowed deductions ultimately so significant to the basis of the ISS tax that the actual payment of ISS tax could represent less than one percent of the particular business’s revenues, instead of the standard two to five percent rate traditionally applied to a business’s service revenues.
Again, be sure to know before you go!