Manage Tax Substitution
In Brazil, Tax Substitution (ST) is defined as a tax collection system in which a taxpayer is responsible for paying the tax due from all the other members of the production and retail chain.
ST is applicable on the transaction taxes ICMS, and PIS and COFINS. In addition to the regular ICMS and PIS and COFINS, the taxpayer is liable to pay all applicable taxes until the material reaches the customer.
Here's an example.
A manufacturer sells goods to a wholesaler. The wholesaler sells the goods to the retailer and the retailer sells the goods to a customer at an incremental pricing. The manufacturer selling products to a wholesaler is subject to ICMS and ICMS-ST in the order to cash cycle.
The manufacturer becomes a substitute taxpayer responsible for the retention and payment of the tax on the product price when it reaches customer. This amount is 180 BRL. The manufacturer must pay ICMS on the sale price to the wholesaler (100 BRL) and ICMS ST on the sale price to the customer (180 BRL).
The ICMS-ST value-added-margin (MVA) taxable basis is calculated as follows:
- ICMS-ST computation based on MVA for intrastate trade
- Selling Price = 100 BRL
- Own ICMS 18% on sales price to Wholesaler (100*18%) = 18 BRL
- MVA = 80%
- ICMS ST Taxable Basis (100+80) = 180 BRL
- ICMS ST 18% on sales price to Customer (180*18%) = 32.40 BRL
- ICMS ST 18% after deducting regular ICMS on sales price to Wholesaler (32.40 -18) = 14.40
In Brazil, the value addition percentage can be MVA or adjusted MVA.
If the transaction takes place between states involving certain types of products, for which there is a tax agreement between the states known as protocol, then the adjusted MVA is applicable.
| Adjusted MVA percentage derivation logic specified by tax regulating authority |
|---|
| Adjusted MVA = {[(1 + MVA-ST Original) * (1 - Interstate Rate) / (1 - Internal Rate)] - 1} * 100 Interstate, and internal rate provided by the tax authority |
|
Original MVA-ST 40% Interstate Rate 12% Internal Rate 18% Adjusted MVA-ST % = = (((1+ (40/100))*(1-(12/100))/(1-(18/100)))-1)*100 = 50.2% |
ICMS ST Computation
| ICMS-ST computation based on adjusted MVA for interstate trade | |
|---|---|
| Selling Price | 100 BRL |
| Own ICMS 12% on sales price to Wholesaler | (100*12%) = 12 BRL |
| Adjusted MVA | 50.2% |
| ICMS ST Taxable Basis | (100+50.2) = 150.2 BRL |
| ICMS ST 18% on sales price to Customer | (150.2*18%) = 27.04 BRL |
|
ICMS ST 18% after deducting regular ICMS on sales price to Wholesaler |
(27.04 -12) = 15.04 BRL |