The Language of the ICMS Tax in Brazil by Danilo A. Nogueira
ICMS is the abbreviation of Imposto sobre Operações Relativas à Circulação de Mercadorias e sobre Serviços de Transporte Interestadual e Intermunicipal e de Comunicação, ainda que as Operações se Iniciem no Exterior (Tax on the Circulation of Goods, Interstate and Intercity Transportation and Communication Services, Even when the Operation is Initiated Abroad). In fact, with ICMS, you get three taxes for the price of one, probably the Government's answer to the demand for a reduction in the number of taxes in Brazil. With ICMS, you have (1) a tax on "circulation" of goods, (2) a tax on interstate and intercity transportation services and (2) a tax on telecommunications services.
This article will deal only with the most important of three heads of this particular Hydra; formerly known is imposto sobre a circulação de mercadorias and abbreviated ICM.
If you have to pay ICMS at all, the tax will be computed based on value you added to the taxed item, not on its total price.
ICMS is similar to the European VAT and the Canadian GST. However, unlike VAT and GST, ICMS does not apply to services other than those corresponding to the second and third heads of the Hydra. European translators pay VAT; Brazilian translators do not pay ICMS: we pay ISS, a local service tax of an entirely different nature. There is a lot of talk about replacing ICMS and its sister tax IPI with a purer form of VAT, to be known as IVA (Imposto sobre o Valor Agregado)but, so far, it is only talk.
What is added value?
ICMS and its predecessor, ICM, are value-added taxes (impostos sobre o valor agregado). This means that if you have to pay ICMS at all, the tax will be computed based on value you added to the taxed item, not on its total price.
Very simply stated, this means the following: Companhia Polidora de Peças buys rough parts from Companhia de Peças Brutas for $9, polishes them and sells the polished parts for $12. Companhia Polidora de Peças has to pay ICMS on the $3 it added to the value of the parts ($12-$9), not on the total price ($12). In practice, computing added values is not always easy and thus the tax is treated as não-cumulativo (non-cumulative, non-cascading). Let me try to show how this works. A long story, perhaps.
Mechanics of ICMS
We should probably start with the sistemática de apuração (mechanics). No, we cannot. We must begin with some preliminary information. There it goes:
ICMS is a State tax and thus the regulamento known as RICMS (ICMS Regulations) differs from one State to the next. However, State regulations must comply with the Código Tributário Nacional (Brazilian Tax Code), abbreviated CTN and CTN, in turn, is subject to the restrictions set forth in the Constituição (Constitution). So the basics are the same nationwide.
Companies subject to ICMS must ter inscrição estadual (be registered for ICMS, be registered as State taxpayers). The inscrição estadual (state registration number, state tax ID) must be shown in all notas fiscais (tax invoices) issued by companies whose operations are subject to ICMS.
A nota fiscal is a very formal document and printers will only supply tax invoice orders if shown evidence that the buyer is a legitimate merchant registered for ICMS and authorized to order a new lot of them.
Many companies have been authorized to print their own notas fiscais using their own computers for the task, or to issue cupons fiscais, or tickets fiscais, which are equivalent to notas fiscais. However, the fact is that you cannot just sit down at your computer and prepare a nota fiscal any old way you want. There are strict rules to be followed. Cupons, tickets and notas fiscais together are referred to as documentos fiscais, but we often talk about nota fiscal, even when a coupon or a ticket is meant.
In theory, a documento fiscal is distinct from a fatura (invoice) or conta (bill). In practice, the three documents are usually combined into a single one. However, a documento fiscal, no matter what other uses are made of it, is a document issued for tax purposes and must contain information required by tax regulations.
In theory, anyone carrying goods must be prepared to show the appropriate nota fiscal if so asked by a fiscal (tax inspector). In practice, you will see cars marked fiscalização (tax inspectors) parked on streets and roads and tax inspectors ordering trucks to stop for inspection. They will ask for the notas fiscais, which they will check against the mercadorias (goods).
What happens when the fornecedor (supplier) cannot issue a documento fiscal?
There are two classic cases of suppliers who can not issue one of those documents. In one case, the supplier is a non-resident. For instance, if Companhia Polidora de Peças buys rough parts from a Thai company, it cannot expect its supplier to issue a valid Brazilian tax document. So, Companhia Polidora de Peças must issue a Documento Fiscal de Entrada, a kind of "reverse" tax invoice, issued by the buyer, not by the supplier.
The same thing happens when a company dealing in second-hand computers buys a an old machine from a translator. Translators do not ordinarily sell merchandise (they provide services) and thus não têm inscrição estadual (are not registered for ICMS). Thus, they cannot issue a documento fiscal for the sale of merchandise, and the buyers must issue the document themselves.
What data must be shown on a tax document?
Tax documents may be further divided into two different types: those issued to the consumidor (consumer) and those issued to another contribuinte (taxable person, taxpayer).
Notas para consumidor are very simple: name of fornecedor (supplier), valor da operação (transaction value, supply value) and a few other items, such as place and date.
Documents for transactions between contribuintes (taxable persons) are more complicated. They must identify the buyer (including inscrição estadual) and also destacar o imposto (identify the amount of tax)that is, they must show the amount of ICMS paid on a separate line. You will see why this is important in a few minutes.
If the operação (operation, transaction) is taxed at other than the maximum rate or benefits from some other kind of favor fiscal (relief) the document must also show fundamentação (specify law or regulation granting the relief) or the fisco (tax authorities) will reclamar o imposto (claim the tax) at the full rate.
What are entradas and saídas
An entrada is goods received. All entradas must be described in a documento fiscal. Once a company receives a documento fiscal corresponding to an entrada it must be lançado (entered) in the livro-registro de entradas (good received register, supplies received register, inputs register). A saída is goods supplied. All saídas must be described in a documento fiscal, and all of those must be entered in a livro registro de saídas (goods shipped register, supplies made register, outputs register).
What is a crédito tributário?
Crédito tributário (tax claim) is the Government's right to demand payment of the tax. A crédito tributário is estabelecido (established) when the operação (transaction) is tributada (taxed). This requires a fato gerador or fato imponível (taxable transaction). Brazilian law depends much on doutrina, which is the body of theoretical legal writing. And escritos doutrinários are full of learned discussions about the differences between fato gerador, fato imponível and hipótese de incidência and your client will certainly explain the differences to you in detail. However, do not expect all of your clients to agree on what the differences are.
There are also cases of não-incidência (transactions that are not taxed, tax-free transactions). [The current vogue for using não plus an abstract (não-exclusão, não-incidência) is maddening, but I will have to deal with that in a future article, God allowing.] Não-incidência may be of three types:
Imunidade (immunity), the cases in which the Constitution itself contains a provision freeing the operation from the tax. For instance, book sales are immune from taxation.
Isenção (exemption), the cases in which a specific law (not the Constitution) frees the operation from taxation.
Não-incidência pura e simples (transactions falling outside the scope of the law), the cases in which the law simply does not refer to the operation.
Under certain cases, the Government will grant an anistia (amnesty), which does not require an explanation. Anistias together with hipóteses de não incidência make up exclusões do crédito tributário (cases where no claim for the tax arises).
How is ICMS liability computed
At stated periods Companhia Polidora must apurar (compute) its ICMS liability. This is a three-step process.
First Companhia Polidora adds up the ICMS identified in all tax documents received from its suppliers. The total is referred to as créditos de ICMS (ICMS credits, ICMS inputs) and reflects ICMS paid by the Company's suppliers.
Then, the Company adds up all the ICMS identified in all tax documents it issued. This is referred to as débitos de ICMS (ICMS outputs, ICMS debits) and reflects gross ICMS owed by the Company.
Finally, the Company deducts tax inputs from outputs, to arrive at the actual amount of ICMS owed, which is the crédito tributário.
The terminology may be a bit confusing, but the procedure is obvious.
In other words, ICMS is called não-cumulativo (non-cumulative), because each taxpayer's ICMS bill is always computed by deducting ICMS paid by other taxpayers upstream. Seen from another standpoint, it is an imposto sobre o valor agregado (value-added tax) because in the end taxpayers only pay ICMS on the value they add to the product, although this is computed in an indirect manner.
Additional information and the usual disclaimer
I try to be original in my writings, but writing an original disclaimer for each article is really beyond my powers. However a disclaimer is required: I am neither lawyer nor accountant, but a translator and am contented with my station in life. So all this should be construed not as an explanation of how to handle ICMS, but as a terminological toolkit for translators perplexed with texts on ICMS. In fact, my articles always include a certain amount of generalization and lack of precision that would be unacceptable in the work of a lawyer or CPA.
The terminology used is cribbed from Brazilian, international and U.K. sources. Most of all, I recommend:
Victor Thuronyi, editor, Tax Law Design and Drafting, (Washington, D.C., International Monetary Fund, 1996). Only Volume I has been published so far. A work written in a very clear language on comparative tax law that should be translated into Portuguese and read by all Brazilian lawyers. That might convince them that it is possible to write a very technical text on tax matters without using grandiloquent, highfalutin' and sesquipedal language.
CCH Editions Limited British Master Tax Guide. Several editions. A classic handbook and a mine of terminological information because it discusses VAT.
MCA Führer and MRE Führer, Resumo de Direito Tributário, (São Paulo, Malheiros). Several editions. A book written in plain language, which contains all the information a translator needs. In fact, the same authors have published six more booklets on different branches of law, all of them highly recommended for those who want a readable introduction.
EMF Jardim, Dicionário Jurídico Tributário (São Paulo, Saraiva 1996).