ICMS – Tax on distribution of goods and services – State VAT
ICMS, short for Imposto sobre operações relativas à circulação de mercadorias e sobre prestações de serviços de transporte interestadual e intermunicipal e de comunicação in Portuguese, is imposed by state governments on distribution of goods and specific services such as transportation and communication.
It is a Value-added tax, mostly it is owed by manufacturers and wholesale and retail companies. In general, ICMS is a non-cumulative tax. Therefore, it is allowed to consider the tax on the purchase invoices as input tax and the sum can be deducted from ICMS liability.
Each State has its own ICMS tax law. In Brazil there is a constant fight among the states to increase the amount that each state receives on transactions subjected of ICMS, so each state wants to claim the tax for itself. The issue happens when one single transaction begins in state X and finishes in state Z as both states want to collect the tax.
Imposed on
Different from what happens with other countries where the VAT is only applicable at the moment you are selling a product or providing a service, ICMS is subject wherever the company issues an outbound or inbound invoice on distribution of any goods. Following are some samples of transactions in which ICMS is owed:
- Sales;
- Donations;
- Goods transferred between branches;
- Consignments;
- Demonstrations (60-day suspension);
- Bonuses;
- Fairs and events (60-day suspension);
- Product showcases;
- Food and drink supply.
ICMS is also imposed on:
- Importation of goods;
- Interstate and intercity transportation (transportation services within a city are not subject to ICMS);
- Telecommunication services such as the telephone bill.
Basis and Rate
The tax basis is the sales price of the Invoice. If the good is subject to ICMS and you donate, transfer to another branch, or do another transaction instead of selling, you also need to pay ICMS. There are several rates applicable to ICMS that depend on the state and the type of good and service you provide:
- Intrastate: Each state has its own rate, the minimum rate is usually 12%. The State of São Paulo applies an ICMS of 18%;
- Interstate rates based on the from/to:
- 7% from states localized in the South and Southeast to states localized in the North, Northeast and Midwest and the State of Espírito Santo.
- 12% for the other scenarios;
- Specific products: There are rates for specific products such as cigarettes and alcoholic drinks.
Exemptions
Several business transactions are exempt:
- Exportation of goods;
- Sale of books, newspapers and other papers;
- Oil and electricity delivered in another state;
- Gold as a financial instrument;
- Transportation services within a city are not subject to ICMS.
- Lease
Taxpayer and Governmental Agency
The ICMS is owed by manufacturers, wholesalers, retail companies and importers of goods. The ICMS is a state tax, therefore it is paid to the state agency (SEFAZ). The official documents to pay the ICMS are the GARE and the GNRE (National Taxation Form for state taxes).
Tax Principles
The Brazilian constitution and the main federal tax law have several tax principles. The following principles are the main ones which apply to ICMS:
- Selectivity: Essential items have lower tax rates than non-essential items.
- Non-cumulative: It is allowed to consider the tax on the purchase invoices as input tax and the sum can be deducted from their own VAT liability. The difference between output tax and input tax is paid to the government, or you can carry it over in the case of negative liability (more input tax than output tax).
Main Laws
- Complementary Law 87, September 13, 1996 (ICMS – Value-Added Tax)
Tax Returns and Forms
The taxpayer is required to report the ICMS on the following tax returns and forms:
- Notas Fiscais (Brazil local invoices)
- EFD ICMS IPI – Digital Tax report for ICMS and IPI
Written by Thiago M. Silveira
Thiago M. Silveira is a Brazilian Chartered Certified Accountant (CRC) with more than 10 years of success in the accounting field, with insightful understanding in all aspects of accounting, financial reports preparation, local taxes and compliance in Brazil.
