The Brazilian tax system is one of the most complex worldwide. According to the “Doing Business” report 2018 from the World bank, companies in Brazil need about 1.958 hours a year to prepare their taxes. Thus, Brazil places 184th out of 190 nations.
With view to taxation in e-Commerce it is similar: tax calculation and tax debt are causing those working in the region a bad headache!
Specifically two challenges will be analyzed: taxes on interstate trade and cancelled transactions.
Tax on Interstate Trade
In 2015, a constitutional change altered the nature of ICMS collections for transactions with non-taxable end users. This situation will persist in 2019.
With view to interstate trade the ICMS rate is linked to the origin state. The difference between the internal tax of the target state and the interstate tax is called Difal (Aliquot Differential). If a product is sold from Sao Paulo to Rio de Janeiro, Sao Paulo has to pay 12% ICMS. Rio, in turn, would have to pay 20& ICMS (ICMS plus 2% Fundo de Combate a Pobreza) from which the 12% ICMS paid by Sao Paulo are being deducted which leaves Rio with an ICMS debt of 8%.
According to the constitutional change, the recipient of the delivery is ICMS-taxable. However, if the delivery goes to a non-taxable end user, the e-commerce business needs to collect the tax. This leads to further costs that have to be factored in to the determination of the product pricing and the needed workload to carry out the additional administrative steps.
The first challenge for e-commerce businesses is to train their team with view to internal tax rates of all target states and the calculation of Difal in case of interstate transactions. Furthermore, they need to be educated on which guidelines, what payment process and which interest rates to apply. They also need to know whether an additional poverty funds in in place or not.
A product which has not been delivered on time, as happens regularly in e-commerce, can lead to a cancellation of the transactions. The costumer either stops the sale or requests a refund from his credit card provider.
The cancellation can lead to problems for example when the regularization procedure has been forgotten during the cancellation process. In that case, the taxation depends on the actual cash flow. Consequently, taxes on cancelled products may be paid which are difficult to be returned.
The main challenge of the cancellation process is that the e-commerce business needs to be in control of the ICMS Difal collection in order to pay it forward to the respective tax institution.
Technological solutions can help solve the tax issues at hand. Using a software that automates the tax calculation is recommended in order to reduce mistakes from manual submissions and grant compliance with local rules of the financial institutions.
These regulatory changes could affect your business with view to customizing or support of your ERP/SAP system. Please contact us to learn about possible necessary reactions to the changes – we are happy to assist you!