Brazil: Import VAT on Leased GoodsBy Richard Thompson Ainsworth
All consumption taxes are not the same. Although many believe the EU VAT sets the standard, there are other ways of thinking about the VAT. When countries take a different approach businesses need to be careful (or take advantage). This is the case with imported leased goods. The EU imposes VAT; Brazil does not (at the State level).
The United Kingdom’s rules on imported leased goods are typical of those in many (if not most) jurisdictions. If goods (that are currently under a lease) are imported into the UK, then VAT is due on the customs value of the goods. The key to tax liability is that the goods have physically entered free circulation. The importer of record will need to pay VAT, and the goods will not be released until satisfactory arrangements have been made. (There is a provision exempting the temporary importation of leased goods in the EU, where the leased goods are in the EU less than 24 months.)
If there is a difficulty in the UK regime it is in calculating the tax base. The base is determined by customs valuation. This valuation is not simple when leased goods are involved. Customs has a series of rules that apply: (a) the value could be based on the last sale prior to entering the UK, or (b) on the value of identical imported goods, or (c) on the value of similar imported goods. Then again, (d) the value could be deemed to be the sales price of the same goods in the EU, or (e) the cost of producing the goods. The solution most commonly used for leased goods however is a formula. The annual rental payment or lease cost is multiplied by the expected economic life of the goods.
Although complicated, these customs valuation rules have near universal application. All countries that impose consumption taxes on imported goods use Customs valuation, and the VAT is collected by Customs agents.
In Brazil four consumption taxes are collected at the border –
•IPI (Imposto sobre Productos Industrializados) – a federal VAT on industrial production that functions as a single stage tax on goods manufactured (or imported) into Brazil
•ICMS (Impostos Sobre Circulacao de Mercadorias e Prestacao de Servicos) – a State VAT imposed on supplies of goods in Brazil, interstate services, telecommunications services and the importation of goods into Brazil
•ISS (Imposto Sobre Servicos) – a municipal tax on services which is not a creditable tax like the IPI or the ICMS
•PIS/Pasep (Programa de Integracao Social) & COFINS (Contribuicao para o Financiamento da Seguridade Social) – federal social security taxes.
However, recently the Supreme Court of Brazil ruled that the second of these, the ICMS may not be constitutionally levied on imports of leased goods, if (a) the lease agreement is entered into outside of Brazil, and (b) by the terms of the lease ownership of the property will not transfer to the lessor (even at the expiration of the lease).
The ICMS can be a very significant levy. The rate is 17%, 18% or 19%. The tax base is the customs value of the imported goods plus the IPI, customs expenses, the ICMS itself, and also the PIS and COFINS.
The Supreme Court’s decision was rendered on May 30, 2007 [STF, RE 461.968/SP]. The court reasoned that some commercial leases were not subject to the ICMS because they essentially constituted the performance of a service outside of Brazil (in spite of the fact that the goods may have been brought into Brazil and may have been used in a Brazilian business). The specific goods involved in this case were air plane parts, and the taxpayer was one of the three major Brazilian airlines.
What to do?
What should a tax manager do in this case? If your firm uses a globally effective tax software program simply test your transactions against it and watch carefully for the automated prompts. In the case of Brazilian leasing transactions the software should asking for contract details. If the lease has the potential to transfer ownership, then the ICMS must be collected; if not then the goods are ICMS-free. The savings can be substantial if the commercial relationship is flexible, and the contract is drafted properly.