Brazil Further Expands Payroll Tax Switch and Extends Tax Cuts

Brazilian Finance Minister Guide Mantega on December 19 announced an extension of tax reductions for vehicles and 22 retail activities that will be subject to the new monthly gross income tax instead of the current 20 percent payroll tax. The executive branch had previously extended the monthly gross income tax (replacing the payroll tax) to a total of 40 business sectors. Now the government has decided to benefit commerce -- specifically, the retail business. (For prior coverage, see Doc 2012-25913  or 2012 WTD 243-4 .) The following retail activities will be subject to a 1 percent tax on monthly gross income as of April 1, 2013:

• department stores;
• civil construction;
• computer equipment and supplies;
• telephone and communication equipment;
• home appliances and audio and video equipment;
• furniture;
• clothing and its accessories;
• fabrics;
• notions;
• bed, bath, and table dressing items;
• books;
• newspapers and periodicals;
• stationery;
• CDs, DVDs, tapes, and similar items;
• photography and filming equipment;
• toys;
• sports equipment;
• pharmaceuticals (chemist's shops excluded);
• cosmetics, perfumes, and personal hygiene items;
• shoes;
• travel items; and
• household cleaning/disinfecting products.

Mantega said the latest expansion will reduce the payroll tax burden for the selected retailers by BRL 1.27 billion (about $616 million) in 2013 (April through December) and BRL 1.91 billion (about $927 million) from 2014. The change will be introduced by a provisional measure by the end of the year.

IPI Cut Extended

The executive branch also announced an extension of the rate reduction for the federal excise tax (IPI) levied on automobiles and utility vehicles, home appliances, and furniture that was set to expire on December 31. Automobiles and utility vehicles eligible for the extension are those manufactured in Brazil and subject to Brazil's automobile regime. Until December 31, the following tax reductions apply according to fuel and cylinder capacity (in cubic centimeters), as follows:

• any fuel up to 1,000 cc: reduction from 7 percent to zero;
• gasoline, between 1,000 cc and 2,000 cc: reduction from 13 percent to 6.5 percent;
• ethanol/flex fuel, between 1,000 cc and 2,000 cc: reduction from 11 percent to 5.5 percent; and
• utility vehicles (any fuel): from 4 percent to 1 percent.

Between January and March 2013, the IPI rates will be as follows:

• any fuel up to 1,000 cc: 2 percent;
• gasoline, between 1,000 cc and 2,000 cc: 8 percent;
• ethanol/flex fuel, between 1,000 cc and 2,000 cc: 7 percent; and
• utility vehicles (any fuel): 2 percent.

Between April and June 2013, the IPI rates will be increased as follows:

• any fuel up to 1,000 cc: 3.5 percent;
• gasoline, between 1,000 cc and 2,000 cc: 10 percent;
• ethanol/flex fuel, between 1,000 cc and 2,000 cc: 9 percent; and
• utility vehicles (any fuel): 3 percent.

As of July 1, 2013, the IPI tax rates will return to normal and no more reduction will be available. A similar extension schedule will be put in place for home appliances and furniture. The existing zero or reduced IPI rates will be extended until the end of January 2013, and between February and June rates will be incrementally increased until they reach regular rates in July 2013. The change will be introduced by a presidential decree by the end of the year.

- David Roberto R. Soares da Silva is a partner with Battella, Lasmar & Silva Advogados in São Paulo

(Article originally published in the December 26, 2012 edition of World Tax Daily - Copyrights Tax Analysts).