IRPJ (Corporate Income Tax; Imposto sobre Renda de Pessoa Jurídica (IRPJ)
Brazilian Income Tax Rules stipulate that income tax is due as earnings and profits are accrued, regardless the manner in which the corporate entity is organized and established (including “de facto” companies, professional firms in general and cooperative societies). Brazilian companies are subject to IRPJ which is levied over the net profit at the rate of 15%. In the event the net profit exceeds R$ 240,000.00 per annum it will be subject to an additional 10%. The taxable income for IRPJ purposes is to be based on one of the methods:
- Taxable Income Method (Lucro Real)
- Estimated Profit Method (Lucro Presumido)
- Arbitrated Profit Method (Lucro Arbitrado)
Taxable Income Method
The taxpayer may elect to calculate the IRPJ on the taxable income from an annual or quarterly basis. If the IRPJ is calculated quarterly, it may also be paid on a quarterly basis. Over the profit ascertained in the quarter applies a 15% tax rate, plus an additional rate of 10% over the net profit that exceeds R$ 60,000.00 per quarter. If the IRPJ is calculated on an annual basis, the taxpayer advances the monthly payments of the IRPJ, calculated based on an assumed profit (or by means of the profit obtained by the analysis of monthly balance sheets). To a large number of companies the monthly assumed profit corresponds to 8% of thetotal monthly gross revenues plus capital gains and other income and positive results obtained by the company, whose percentage may vary between 8% and 32% according to the field of business in which the taxpayer is engaged. A tax rate of 15% applies over this tax basis, plus an additional 10% over the assumed profit that exceeds R$ 20,000.00 per month. In the case of electing the annual calculation method and making advance monthly payments, at the end of the period the company must pay the amount due or apply for the return of the difference between the entire of the amount paid monthly and the amount calculated based on the annual taxable income.
For the taxpayers that have adopted the Taxable Income method, the tax loss created in a given period may be cleared through the taxable income related to the subsequent period, provided that such loss is restricted to 30% of the taxable income (e.g. for each R$ 1.00 of profit, R$ 0.70 are susceptible to taxation, irrespectively of the figure representing the existing tax loss). The tax loss may be maintained on an infinitum basis, that is, without legal restriction. It shall be noticed that non-operating Accrued Tax Loss may only be cleared through non-operating profits.
Estimated Profit Method
Corporate entities that are not obliged to adopt the Taxable Income method, as described above, are entitled to elect the Estimated Profit method, that is a simplified tax system for determining the basis for calculating the income tax and social contribution. In this methodology income tax is due quarterly. The election is definitive for the entire calendar year and it is formalized though the payment of the first installment or lump-sum payment of the tax due corresponding to the accrual period of each calendar year. Companies that elect the Estimated Profit method must assess their taxable income through application of a percentage (estimated profit margins defined according to the company’s activity) to the gross revenues accrued in each quarter. Gross revenues are understood as the product from the sale of goods or products, from the price of the services rendered and for the results accrued on operations for other parties, with the following exclusions applying:
- • Sales cancellations and returns of merchandise;
- • Unconditional discounts granted;
- • Federal Tax on Industrialized Goods (IPI) and State Value-Added Tax on Circulation of Goods and Services on a Tax Substitution basis (ICMS-ST) levied on sales.
However, the possibility of adopting the assumed profit method is subject to the fulfillment of certain conditions, such as:
- incomes asserted in the preceding year cannot exceed R$ 48,000,000.00;
- the profit, capital gains or other gains cannot have a foreign origin;
- financial institutions or similar organizations, as determined in Brazilian law, cannot adopt the assumed profit method for income tax purposes;
- companies cannot be beneficiaries of tax incentives granted under Brazilian law (e.g. tax exemption or reduction of income tax);
- companies cannot have paid income tax calculated based on a monthly estimate; and
- factoring companies cannot adopt the assumed profit method.
Arbitrated Profit Method
Arbitrated Profit is a methodology of calculation the basis of the income tax used by the Tax Authority or by the taxpayer. According to Brazilian Income Tax Regulations, the IRPJ and CSLL due by the corporate entity will be arbitrated in cases where:
- A company is subject to taxation based on Taxable Income method, but does not keep appropriate bookkeeping records as provided in commercial and tax laws or fails to prepare and publish the financial statements required by the tax legislation, in a way that it precludes the assessment of its net income, according to the BR GAAP ;
- The bookkeeping records that the company is required to maintain reveal obvious attempts of fraud or contain such an extent of flaws, errors or deficiencies that they are rendered useless in terms of identifying the effective financial turnover or account movements, including in the company’s bank account, or dDetermining the taxable income.
- A corporate entity
– Fails to present to the Tax Authorities, whenever required, the commercial and tax bookkeeping records and documents
– Does not keep its General Ledger in an orderly manner and according to recommended accounting norms
– Does not maintain the proper controls and the documentation provided in law
Arbitrated Profit method will be applied to the periods in which bookkeeping was deficient.