Difference between direct and indirect taxes: what do companies pay?
Find out more about direct and indirect taxes and what your legal company's obligations are when it comes to paying these taxes in Brazil. See also a brief differentiation between direct and indirect taxes and their rates.
In the world of accounting, it is essential to understand the different types of taxes a company can face. In particular, it is crucial to distinguish between direct and indirect taxes and to understand what the obligations of legal entities in Brazil are.
Direct vs. indirect taxes
Taxes can be classified into two main categories: direct and indirect. Direct taxes are financial charges levied by the government directly on taxpayers and are based on their ability to pay. In other words, the higher the taxpayer's assets or income, the higher their tax payments will be. Examples include Corporate Income Tax (IRPJ), Social Contribution on Net Profit (CSLL), and Financial Operations Tax (IOF).
Indirect taxes, on the other hand, are taxes levied by the government through the products and services that taxpayers consume. These taxes do not depend on citizens' ability to pay and can affect everyone equally. Some examples of these taxes in Brazil are the Tax on Industrialized Products (IPI), the Tax on Services (ISS), and the Tax on the Circulation of Goods and Provision of Services (ICMS).
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Direct taxes
Personal Income Tax (IRPF): calculated on the taxable income of individual taxpayers, such as salaries and rents received. Self-employed professionals also pay IRPF on their income. The rates range from 7.5 to 27.5%, according to the income brackets stipulated by the Receita Federal.
Corporate Income Tax (IRPJ): for presumed profit and real profit companies, income tax is levied separately, directly on the presumption of profit and accounting profit, respectively. In Simples Nacional, income tax is levied together with other taxes, in a single form, and is considered an indirect tax.
Urban Property Tax (IPTU): municipal tax levied on properties built in the urban perimeter.
Motor Vehicle Tax (IPVA): levied annually on motor vehicles, the amount of which varies according to the characteristics of the asset.
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Examples of indirect taxes:
-Tax on the Circulation of Goods and Transportation and Telecommunications Services (ICMS)
-Services Tax (ISS)
-Industrialized Products Tax (IPI)
-Import Tax (II)
-Contributions to the Social Integration Program (PIS)
-Social Contributions for the Financing of Social Security (COFINS)
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Direct taxes that a PJ company will face
IRPJ - Corporate Income Tax
IRPJ is a progressive federal tax paid by companies based on their annual gross revenue and net profit. The tax varies from 15% to 25%, depending on the calculation basis. Companies are obliged to declare it quarterly to the Federal Tax Authorities.
CSLL - Social Contribution on Net Profit;
CSLL is a social tax paid by companies based on the net profit obtained during the fiscal year. The main purpose of this tax is to finance government social programs. The rates vary between 9% and 20%, and payment is mandatory on a monthly basis with the Receita Federal.
IOF - Tax on financial transactions
The IOF is a Brazilian federal tax that levies financial transactions such as loans, foreign exchange and insurance. Its main purpose is to regulate the national financial market and generate revenue for the federal government. Rates vary according to each type of financial operation.
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The importance of accounting in determining direct and indirect taxes
The help of qualified accountants in the company's field of activity is essential to ensure the correct determination of municipal, state and federal taxes, as well as the preparation of an appropriate tax plan.
Solid accounting will be aware of the tax possibilities of the activities carried out and the specific legislation of the place where the company is established, ensuring that all strategies are supported by the law and presenting all the scenarios for optimized decision-making on the part of the entrepreneur.
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Conclusion
Understanding the different types of direct and indirect taxes in Brazil is fundamental for companies to have a clear vision of their financial obligations. By consulting an experienced accounting firm, you will receive help and know how to distinguish between direct and indirect taxes and understand the specific examples of these types of taxes, and companies will be able to better manage their financial resources and successfully comply with all tax requirements.
In addition CLM ControllerWe have a team of highly qualified and experienced specialists, ready to provide all the necessary support in the preparation and execution of tax planning.
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