POTENTIAL IMPACTS ON LIFE SCIENCES IN BRAZIL
The highly complicated tax system is one of the main hindrances for Brazilian economic growth and encouraging foreign direct investment. Several attempts have been made by the past and present governments to pass tax reform bills that simplify the system and create a suitable environment for foreign investment and start-up companies.
Most recently, the government tabled a tax reform bill (PL no. 3.887 / 2020) – “Contribuição sobre Bens e Serviços” – in English “Contribution on Goods and Services – CBS” or “IVA – Federal”.
The aim of this latest reform bill is to amalgamate the existing Programa de Integração Social (PIS) and Contribuição para Financiamento da Seguridade Social (COFINS) taxes.
Current PIS/COFINS legislation
PIS and COFINS are federal taxes charged on gross revenue – calculated and reported on a monthly basis as part of SPED EFD Contributions submission.
These taxes are determined using one of two tax regimes – Non-Cumulative or Cumulative:
Non – Cumulative Tax Regime:
In this regime, taxpayers (i.e. companies) can claim PIS/COFINS credits to recover taxes on costs and expenses related to:
- Products purchased for resale
- Goods & services used in the manufacturing processes, excluding labour costs
- Utility bills used in the main business activity
- Rental of real estate and fixed assets such a machinery or plant rental
This regime is usually applied to companies that calculate their corporate income tax under Lucro Real (i.e. the actual profit method).
Cumulative Tax Regime:
In this regime, taxpayers cannot claim PIS/COFINS credits and it is applied to:
- Companies that cannot generate input PIS/COFINS credits through their procurement process such as financial institutions
- Companies in industries like telecommunications, transportation service providers, and software consulting follow this regime
- For specific activities such as importation, companies can claim 9.25% in tax credits and special regimes are applied to promote particular industries like automotive, pharmaceuticals, and energy to boost the Brazilian economy.
This regime is applied to companies that calculate their corporate income tax under Lucro presumido (presumed profit method).
IMPACT OF EXISTING LEGISLATION ON LIFE SCIENCES
Under law 10.865/04, the pharmaceutical and consumer healthcare industries enjoy special regime benefits to allow them to operate under the ‘single-phase regime’. This means:
- Non-cumulative regime rules apply when purchasing raw materials, components, and consumables for the manufacturing process
- The cumulative regime applies when pharmaceutical companies sell finished products to clients – under special rates
- Finished products are exempt from PIS/COFINS tax in subsequent commercial transactions
In Life Sciences, finished products are charged at different PIS/COFINS tax rates. This is based on the classification of products into three categories: Positive, Negative, and Neutral.
Positive Products:
- Type of products: Prescription and Controlled drug substances
- Single-phase regime with 2.1% PIS and 9.9% COFINS
- The calculation is based on lucro presumido & Zero rate for products listed in decree 6.426/2008
Negative Products:
- Type of products: OTC products that fall under PL 10.147/00.
- Single-phase regime with 2.1% PIS and 9.9% COFINS
- This calculation is not based on lucro presumido.
Neutral Products:
- Type of products: All other consumer products
- Multi-phase Regime with 0.65% of PIS and 3.0% of COFINS
- Taxation is cascaded at each stage from production to distribution.
IMPACT OF THE PROPOSED CBS TAX REFORM ON LIFE SCIENCES
- PIS and COFINS taxes will be replaced by CBS tax with a 12% rate
The non-cumulative regime tax rate will increase from 9.25% to 12% - The cumulative regime will be abolished
- Single-phase regime under which most life sciences products are taxed will no longer apply – PL no. 10.147/2000 will be replaced by 3.887/2020
- Certain pharmaceutical products currently taxed at 0% under the PL no. 10.865/04, will no longer have this benefit
- Products classified as food also lose the zero tax rate benefit
- Basic products (Cesta Básica) are exempted from the CBS taxes
- New CBS tax submissions for a given month are to be submitted by the 20th day of the following month, rather than the 25th day for current PIS/COFINS taxes
Key tax reforms
- PL 3.887/2020 – Introduction of new tax CBS
- PEC-45/2019 – Consolidation of 5 different taxes by creating a GST.
- PEC-110/2019 – Replacing existing 9 taxes with 2 new taxes.
Current PIS / COFINS Legislation:
PL no. 10.147/00
PL no. 10.637/02
PL no. 10.833/03
PL no. 10.865/04
- Non-Cumulative Tax regime rates: PIS @ 1.65% and COFINS @ 7.60%
- Cumulative Tax regime rates: PIS @ 0.65% and COFINS @ 3.00%
CBS tax reform potential impact on life sciences:
- Increase in tax burden by 2.75% for non-cumulative regime.
- Cumulative regime abolished.
- Zero rate benefit on hospital products is abolished.
- PL 10.865/04 will be abolished.
- Basic products (Cesta Básica) are exempted from new law.
Helixr’s Strengths
Our team are experts in implementing tax technology projects in the most complex regimes of the LATAM region and will provide experience in:
- Understanding the tax regulations and incentives that are applicable to pharmaceutical manufacturing and commercial distribution processes
- Recognising the requirements for managing the end-to-end contract manufacturing processes in line with ICMS tax legislation for states like Rio de Janeiro and Sao Paulo
- Understanding the requirements of the electronic nota fiscal
- Defining systems for processes from master data standardisation and transactional processing to SPED submissions
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