PIS/PASEP and COFINS – Tax on Gross Revenue
PIS/PASEP, short for Programas de Integração Social e de Formação do Patrimônio do Servidor Público in Portuguese, and COFINS, short for Contribuição para o Financiamento da Seguridade Social in Portuguese, are both imposed by the federal government on gross revenue, independently of the source, for the majority of entities and on payroll for some businesses.
Imposed on
PIS/PASEP and COFINS are basically levied on gross revenue, some sales discounts can be deducted, but early payment discounts cannot be. Sales returns are also deductible from these taxes.
Basis and Rate
The gross revenue calculation has two methods. The first one allows consideration of the tax on the purchase invoices (for specific services and goods) as input tax and deduction of the sum from their own liability. Rates are 1.65% for PIS/PASEP and 7.60% for COFINS (9.25% total). This method is used by big companies, which are required to choose the itemized deduction type for their Income Tax Return. There are some financial revenues which are also taxable, but with different rates.
The second method does not allow the recovery of input taxes. The rates are 0.65% for PIS/PASEP and 3% for COFINS (3.65% total). These rates are much lower than the first methods. However, there is no input PIS/PASEP and COFINS. This method is used by middle, small and micro-sized companies which choose the standard deductions type for their Income Tax Return. Usually this method of PIS/PASEP and COFINS is imposed only on revenue (amount earned from a company’s main activities).
One important point is that the first method, with rates of 1.65% and 7.65%, is levied on the gross revenue and any other revenue such as lease, debt forgiveness and financial revenue. However, the second method, with rates of 0.65% and 3%, is only levied on the gross revenue, other types of revenue are exempt.
Although the first method allows companies to recover input taxes, the types of services and/or goods that can be recovered must be specified in law. Therefore, several types of purchases do not allow businesses to claim PIS and COFINS. Companies often fight with the Department of Federal Revenue of Brazil. Companies that provide services usually cannot claim nearly any PIS and COFINS. As a result they often pay a high amount of these taxes.
It is allowed to recover PIS and COFINS in the first method from the following transactions:
- Electricity bill
- Rent
- Inventory purchase such as raw material or goods
- Depreciation of some machines
- Leasehold improvement amortization
Methods
- First Method (9.25%):
- Debits: All revenues
- Credits: Specified in Law
- Second Method (3.65%):
- Debits: Only operating revenues
- Credits: Not allowed
Some companies, having different types of revenues or due to their industry having to operate in both methods, work with what is called a mixed regime. The issue is that the company cannot recover the credits that are linked to the second method, therefore a credit segregation must be done. There are other two methods of calculation, much more complex, named PIS and COFINS single-phase and PIS and COFINS tax substitution.
Exemptions
PIS/PASEP and COFINS are not levied on exports of services and goods from Brazil to other countries. There are also some goods for which the tax rate is zero. Sales of fixed asset are also exempt.
Taxpayer and Governmental Agency
PIS/PASEP and COFINS are owed by the majority of businesses. These are federal taxes, therefore they are paid to the Department of Federal Revenue of Brazil. The official document to pay them is the DARF (Federal Taxation Form).
Main Laws
- Decree (Regulation) 4524, December 17, 2002 (PIS/PASEP and COFINS – Taxes on Gross Revenue)
- Complementary Law 7, September 07, 1970 (PIS/PASEP – Tax on Gross Revenue)
- Complementary Law 70, December 30, 1991 (COFINS – Tax on Gross Revenue)
- Law 9718, November 27, 1998 (PIS/PASEP and COFINS – Taxes on Gross Revenue)
- Law 10637, December 30, 2002 (PIS/PASEP – Tax on Gross Revenue)
- Law 10833, December 29, 2003 (COFINS – Tax on Gross Revenue)
- Law 10865, April 30, 2004 (PIS/PASEP and COFINS – Taxes on Imports)
Tax Returns and Forms
The taxpayer is required to report PIS/PASEP and COFINS on the following tax returns and forms:
- Notas Fiscais (Brazil local invoices)
- EFD Contribution – Digital Tax report for PIS and COFINS
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.
