Brazilian Tax Regimes

Part II – Deemed taxable income and simples nacional

In our last meeting, we briefly discussed the importance of choosing the tax regime and the nature of the Actual and Arbitrated Profit regimes. This edition will explore the last two copies of the “Brazilian jungle”, the Deemed Taxable Income, and the Simples Nacional.

Deemed Taxable Income

The great differential of this system is the simplification of its form of calculation (which, as we will see in the next chapter, from a mathematical point of view, is simpler than the Simples Nacional system itself). In this system, the profit earned by the company is not effectively calculated (as in the Actual Profit, in which gains are added and expenses are reduced). Here, the Public Power itself defines (or rather, assumes) its profit rate will depend on its activity.

For example, the law determines that the profit of companies that provide services in general (in most cases, technology startups or software development are framed in this segment) will be 32% of the total collected by the company in the fiscal period, regardless of whether the company earns less or more. Thus, such a regime is simple to operate. Still, it can present an advantage or disadvantage for the reality of each company.

Except for companies required by law to adopt the Actual Profit Method (as we saw in the previous edition), any company can opt for Presumed Profit or Simples Nacional. But there are also cases in which some companies, by choice, prefer to adopt Real Profit. Which one is the best? Here’s the old lawyer’s answer, but one that any prudent businessman should absorb: “It depends”.

The maxim plastered on the lips of most people is that companies with high operating costs, such as commerce or industry, are most benefited by the adoption of the Actual Profit Method since they have more values to deduct from their earnings, decreasing, in turn, time, the amount on which the taxes will be levied. On the other hand, service companies, which do not incur so many operating costs that can be deducted, may view the “presumption” of profit established by the Government as more advantageous. Despite being a good indication of which regime to choose, it is necessary for the entrepreneur, well advised by his accountant and by a tax lawyer, to analyze the company’s balance sheets and cash flow, covering both the history and the forecast for the next semesters to define the best tax regime.

The period for calculating the Deemed Taxable Income is quarterly (that is, taxes must be calculated and paid by the end of March 31, June 30, September 30, and December 31). However, the option for such a regime is Yearly. After adopting the Presumed Profit, the company will not be able to fluctuate from one regime to another, which appears to be more advantageous each quarter

Simples Nacional

Simples Nacional is the regime created especially for Small Businesses2 (EPP) and Microenterprises (ME).

The great advantage of this regime is that a large part of a company’s taxes (IRPJ, CSLL, ISS, ICMS, IPI, PIS/Pasep-Cofins, and CPP) are unified in a single payment, issued through the Simples Nacional Collection Document (the already famous and beloved “DAS”).

But despite the payment being unified, each company opting for the Simples Nacional will have a different incidence of taxes. This regime adopts different rates and deductions, staggered according to the activity developed and the revenue achieved

For example, there are three different rate tables (thus, a dance academy, an architecture office, and a dentist’s office may have different calculations).

Another important element for defining which table of rates and deductions a service company will be able to use is the “R Factor”, which is the calculation between the costs incurred with the payroll and the company’s gross revenue – if the ratio between these two amounts is greater than or equal to 28%, your company will be included in the table with lower values; if it is smaller, it will be framed in the table with increased values. In a simple explanation, if the company spends less on its employees, it pays more tax; if you spend more, pay less.

Forms of Determination

All the tax regimes are presented to calculate the taxable income base – the amount on which the income tax rate will fall. The Deemed Taxable Income, Actual Profit Method, and Simples Nacional will determine the basis for calculating the IRPJ and CSLL. Thus, regardless of the regime adopted, 15% of the IRPJ (plus 10% on the calculated amount that exceeds R$ 20 thousand per month) will be levied, and 9% of the CSLL.

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