Tax regime
Choosing the tax regime is not just a bureaucratic matter: it directly affects the profitability and sustainability of your business. To make this critical decision, you need rigorous analysis supported by accurate information and expert advice.
When to choose and possible changes
You can change your company’s tax regime annually during the initial fiscal year period, which usually extends until the end of January. Once made, the choice will remain valid until the end of the following fiscal year.
What you will learn in this article
In this article, we will explore:
- The importance of choosing a tax regime aligned with the characteristics of your business.
- The different tax regimes available in Brazil, with their advantages and disadvantages.
- Criteria you should consider when making this important decision.
Make more informed choices. If you want to make well-founded decisions and verify if the guidance you received about the tax regime is the most appropriate, keep reading!
Why is the choice of Tax Regime crucial for your business?
Avoiding Excessive Payments
The first and most direct impact of choosing the tax regime is the amount of taxes the company must pay. The regime determines how the company’s profit is calculated, and it is on this profit that taxes such as Income Tax and Social Contribution on Net Profit (CSLL) are levied. An inadequate choice can result in unnecessarily high tax payments.
Impacts on Various Areas of the Business
The decision on the tax regime has ramifications beyond taxes. It affects:
- Salaries
- Profit distribution
- Investments
- Expansion strategies
- Pricing of products or services
Practical Example: Pricing
Consider the pricing of your products. The tax cost is passed on to the customer in the final price. Opting for a more efficient tax regime can reduce this burden, allowing you to offer more competitive prices to the market, which has a cascading effect on your entire operation.
How to Make the Right Choice?
Determining the ideal tax regime is not a simple task given the complexity of Brazilian tax legislation. The only way to make a well-founded choice is through a thorough and personalized analysis conducted by an experienced accounting team.
What’s Next?
The first step to making a well-informed decision is to understand the different tax regimes available in Brazil. We will address this in detail in the next section, so keep reading!
What are the types of tax regimes and their characteristics?
Brazil operates with four tax regimes and a sub-modality: Simples Nacional (with MEI as a sub-modality), Presumed Profit, Actual Profit, and Arbitrated Profit, the latter being rarely used.
We will cover the three main models:
Types of Tax Regimes in Brazil: A Practical Guide
Brazil offers four distinct tax regimes, with a sub-modality. They are:
- Simples Nacional (MEI as a sub-modality)
- Presumed Profit
- Actual Profit
- Arbitrated Profit (less common)
We will focus on the first three, which are the most widely used.
Simples Nacional: For Whom and How Does It Work?
Who can Adopt?
Simples Nacional is intended for Microenterprises (ME) and Small Businesses (EPP). The annual turnover criteria are:
- Up to R$ 4.8 million for EPPs
- Up to R$ 360 thousand for MEs
Both consider the turnover in the last 12 months.
How is it Taxed?
This regime is taxed based on the company’s turnover.
Why “Simples”?
The regime simplifies the entrepreneur’s life by unifying various taxes into a single payment slip, known as DAS (Simples Nacional Collection Document).
Conditions for Qualification
To be eligible for Simples Nacional, a company must meet the following conditions:
- Be composed only of individuals as partners.
- Not have partners who participate in another company.
- Not have a total turnover, adding all the partners’ companies, exceeding R$ 4.8 million.
- Not be a Public Limited Company (S/A).
- Not have foreign partners.
- Be up-to-date with tax and social security debts.
- Operate in activities permitted by Simples Nacional, as indicated in the official table.
Caution!
Simples Nacional may seem like the ideal option for MEs and EPPs, but it is not always the best choice. To understand more, check out our article: “Simples Nacional: How It Works and Why It’s Not Always So ‘Simple.'”
Presumed Profit: Who Should Opt and How Does It Work?
General Characteristics
Presumed Profit calculates taxes based on a fixed rate on sales revenue. This value is established by the Federal Revenue, which “presumes” the company’s profit based on turnover and specific rates.
Who can adopt?
Companies with annual turnover of up to R$ 78 million can opt for this regime. The rates vary according to the company’s sector of activity, whether it is commerce, industry, or services.
Advantages of Presumed Profit
- Ideal for companies with low operating costs and payroll.
- Suitable for companies with profit margins above the presumption.
Specific Characteristics
- Applicable to goods subject to the ICMS Substitution Tax regime.
- Benefited by goods with a reduced tax base or other tax incentives.
Payment Method
Taxes are paid individually, on a monthly and quarterly basis.
Additional Considerations
This regime allows for the “generalization of profits,” facilitating accounting.
Actual Profit: The Most “Fair” Regime
General Characteristics
Unlike other tax regimes, Actual Profit is based on accounting balances and actual results. It is considered by many as the “fairest” regime, as the amount of taxes to be paid is strictly linked to the company’s actual profit.
Who Can Adopt?
Actual Profit is the only tax regime that can be adopted by any type of company, regardless of its turnover. It is mandatory for companies with annual gross revenue above R$ 78 million.
Complexity and Calculation
This regime is complex and requires robust accounting knowledge. The basic formula for calculation is:
Receipts−Expenses=Actual Profit
Advantages and Disadvantages
- Advantages: It is the fairest regime in terms of taxation as it reflects the company’s actual profit.
- Disadvantages: Due to its complexity, it requires stricter accounting control and resources to manage it effectively.
Which is the best Tax Regime for my company?
The Complexity of the Choice
There is no one-size-fits-all solution or magic formula to determine the best tax regime for your company. Generic advice such as “if your profitability is high, Presumed Profit is better” or “if you have many employees, opt for Simples Nacional” are, at best, imprecise guidelines and, at worst, can lead to incorrect framing and negatively affect your business.
Factors to Consider
To find the most suitable regime, it is crucial to consider multiple variables, such as:
- Economic information
- Financial situation
- Accounting details
- Type of product or service
- Operating expenses
- Possible tax incentives or exemptions
The idea is that comprehensive tax analysis considers all these factors to provide the best possible guidance.
The Importance of Specialized Analysis
A thorough tax analysis conducted by a qualified accounting firm is the only safe way to determine the most advantageous regime for your company. This type of analysis will study your business’s particularities and provide an accurate view of which regime would be most beneficial.
Key Points for the Analysis
To help understand the complexity of this decision, below we list 5 important points that should be analyzed. Note that this list is not exhaustive and should be complemented by an accounting professional.
5 factors to consider when choosing the tax regime
As you already understand, there is no “one-size-fits-all” recipe when choosing a company’s tax regime. However, there are some points that MUST ALWAYS be observed during the analysis.
They are:
- Turnover
Considering the three tax regimes we have in Brazil (Simples Nacional, Presumed Profit, and Actual Profit – understanding that MEI is a sub-modality of Simples), turnover alone is already an exclusion factor for regimes.
Presumed Profit and Simples Nacional have framing requirements related to the maximum allowed turnover, so if a company invoices more than R$ 4.8 million annually, for example, it is excluded from Simples Nacional, as this amount is the regime’s ceiling.
The only tax regime that can be opted for by any company is Actual Profit (which does not mean it is the best option).
Besides being an exclusion factor, turnover also impacts the choice of the best tax regime, as depending on the business’s peculiarities and various points to be analyzed (the first of which is turnover), it may not be so interesting for a company to remain in Simples or even Presumed Profit.
- Company’s activity sector (CNAE)
Some activity sectors have very specific characteristics, which will impact the choice of the best tax regime.
There are sectors that are prevented from being in Simples or Presumed Profit, for example, and some sectors can transit through any of these frameworks, but due to the characteristics of that sector, a particular regime may not be interesting simply because of the type of activity and the company’s way of operating.
For example, we can mention medical PJs framed in the Simples Nacional regime. The activity carried out was, until 2018, included in Annex VI of Simples, with rates starting at 16.93%, which was not always the best option from a financial point of view.
Nowadays, new rules have come into force in Simples Nacional that allow, depending on some factors, the possibility of framing medical PJs in Annex III (with rates starting at 6%) and Annex V (with rates starting at 15.5%).
In Presumed Profit, for this same area, the average rate is between 13.33% and 16.33%, and it still includes Employer Social Security Contribution.
To discover how Numeric Brasil can drive your company´s growth, contact our team of specialist. We are ready to provide the ideal solution for your needs.
