Dynamics 365 Finance And Operations - Brazilian TAXES - 3. Tax Calculation

This is the third article in this series about challenges to implement Dynamics 365 in Brazil. When I say challenges is because the tax in Brazil is one of the most complex system in the world. But don′t be scared, if you hire the right people to support your implementation it should not be a big deal, It will be a great learning process with too much fun.

In this article I want to describe the different types of tax in Brazil and how they are calculated. In addition, how it will affect the product cost and sales price. The focus is to present the indirect tax, because these are the ones that are calculated based in the invoice amount and will be part of the company day to day transactions.

The taxes in Brazil are applied when the company sell goods and services and when purchase, yes in Brazil the company that purchase goods and services needs to calculate taxes.

The following chart shows the most common taxes calculated in Brazil. This chart is the same that I used in my article about NF-e that you can click here to read if have interest.

In Brazil we have the taxes that are included, withhold, calculated on top of the price and calculated including other taxes amount. That sounds interesting, did′t it? Our government is very creative when it′s about the ways to calculate taxes.

The taxes are calculated for Federal, State and City authorities.

Let′s start to describe each type of calculation and make it more interesting.

1. Included taxes

The included tax are the taxes that should be included in the final price of the goods or services. The taxes that are calculated in this way are ICMS, PIS, COFINS applied to goods and ISS applied to services.

Why these taxes are called included taxes? This is because the way that they affect the final price of the goods or the invoice total amount.

ICMS - The tax applied to goods that the rate vary according to the state that the company ship to and the type of customer that the company sell.

Product amout = 100,00 x 18% ICMS rate

ICMS amount = 18,00

Invoice Total amount = 100,00

In this case, if your cost amount plus margin is 100,00 in order to have the final price to invoice, the company needs to apply the reversal calculation, you can see how it will affect you final price in the example below.

Sale to from S?o Paulo to S?o Paulo

Net price amout = 100,00

ICMS rate = 18%

Invoice amount including tax = 100 / 0,82 = 121,95

ICMS amout = 21,95

Invoice Total amout = 121,95

Sale from S?o Paulo to Bahia

Net price amout = 100,00

ICMS rate = 7%

Invoice amount including tax = 100 / 0,93 = 107,52

ICMS amout = 7,52

Invoice Total amout = 107,52

Note that your sales price changes depending on where you sale. The same logic can be applied for the others included taxes.

Either in the purchase side these taxes will affect the cost of the goods, because in Brazil when you buy product you can deduct the taxes amount as credit from the amount to be payed in the sales side.

Purchase from S?o Paulo to S?o Paulo

Invoice amout = 100,00

ICMS rate = 18%

ICMS amount = 18,00

Inventory cost = 82,00 (As the company credit the ICMS amount it will not be part of the cost).

Purchase from Bahia to S?o Paulo

Invoice amout = 100,00

ICMS rate = 7%

ICMS amount = 7,00

Inventory cost = 93,00 (Note that in this scenario although the invoice amount is the same, the cost is greater than the first scenario)

2. Tax applied on top of the invoice

This is the most simple way to calculate tax. Do you see? Not all the taxes in Brazil are complex.

IPI - This tax is applied to manufactured goods or assimilated to manufactured goods (imported products).

The IPI rate vary according to the NCM code.

Product amount = 100

IPI rate = 10%

IPI amount = 100 * 10% = 10,00

Invoice amount = 110,00

In this case depending on the company business, the government allow to credit the tax on the purchase side and if that is the case on your company your inventory cost will be 100,00.

3. Withholding taxes

The withholding taxes are the taxes that the company needs pay in behalf of the vendor. This kind of taxes are normally applied when you purchase service, however there are some kinds of business that needs to withhold taxes when purchase goods, as last customer that is an agribusiness company. In this scenario when the company receive an invoice part of the invoice amount they pay to the vendor and part the they will pay to the government. The taxes that have this type of calculation are IRRF, INSS, CSRF (PIS, COFINS, CSLL), ISS (Some of these ones are also in the item number 1, in other words, you can have different ways to calculate the same tax). In addition there are some scenarios where you need to withhold more than one tax in the same invoice. See the example below:

Invoice amout = 1000,00

IRRF rate = 1.5%

INSS rate = 11%

ISS rate = 2%

Amount to be payed to the vendor = 855,00

Amount to be payed to Federal government: IRRF 15,00 and INSS 110,00

Amount to be payed to Municipal government: ISS 20,00

In this case if you are the vendor, you need to calculate your final price like in the item #1 of this article, because the taxes will need to be embedded in the invoice amount.

4. Tax calculated including other taxes amount.

There are some scenarios where the tax will be calculated including other taxes in the bases for the calculation. This scenarios are the import process and the ICMS-ST, both of them included other tax in the base of calculation.

These are more complex tax calculation and probably as you should be tired after read from item 1 to 3 I will not put example in this case, but I promise you that when I start the hands on in Dynamics I will show examples of each type of tax.

In the next posts I will start to setup and show the how this taxes works in Dynamics 365.

I hope this big article can help you in some way. I will be glad to receive questions, suggestions or comments from you, because this will help me to write better articles in the future.

Thank you for you click and don′t forget to click on like if you really like.

Also you can check the previous articles of this series:

The ERP Dynamics 365 and Brazilian TAXES - Introduction

The ERP Dynamics 365 and Brazilian TAXES - 1. Brazilian Challenges - NF-e

The ERP Dynamics 365 and Brazilian TAXES - 2. Chart of Account