Brazil offers a great opportunity for e-commerce retailers. Not only is it by far the largest e-commerce market in Latin America, but online sales have continued to grow significantly despite the challenging economic and political crises the country has been facing the past few years. However, Brazil is a very particular and complex market and international merchants selling in the country often struggle to understand the particularities of the market, such as the local payment methods like boleto bancário or payment in installments with credit card, domestic credit cards – even Visa and MasterCard labeled – enabled only for purchases in BRL, and the complexity of the country’s tax system.
For instance, among the taxes that international retailers might be charged, there is the Withholding Tax, known in Brazil as “Imposto de Renda Retido na Fonte”, which translates as Revenue Tax Withheld at the Source. Such tax is applied over the amount to be transferred to the merchant’s foreign account and paid at the moment of the remittance. However, what exactly is Withholding Tax? Why are there product categories exempt of such taxation? And why can the amount taxed vary depending on the country where the money is being transferred to?
What is Withholding Tax?
The Withholding Tax is a modality of the federal tax over taxable income. It applies to labor income, capital income, remittances abroad, money prizes, advertising services provided by legal entities and remuneration for services provided by legal entities. It was originally created as a tax over financial operations but nowadays the Withholding Tax serves as a way of anticipating tax collection as the taxes are paid at the same time the funds are received/remitted.
As for the international remittances, it is levied on income paid, credited or remitted to legal persons residing in a foreign country by a local Brazilian entity. It presents different aliquots based on the legal definition of the earnings as well as the country where the money is remitted to. In this case, the paying source is obligated to ascertain, calculate and pay the Withholding tax on behalf of the beneficiary.
How is the Withholding Tax Calculated?
There are several different Withholding Tax aliquots, each accorded to a specific activity which generated the income. In general, all earnings that will be subject to overseas remittance are taxed 15% to 25%. However, the percentage can vary depending on product or service category, as well as the country where the funds are sent due to double taxation agreements signed between Brazil and the country of destination. For instance, Brazil and Spain have signed such treaty, reducing the Withholding Tax to 10% over the amount sent to Spain.
Although the paying entity, generally the local payment provider, is responsible for paying the Withholding Tax, it is important for international merchants to understand how it works and the impact it might have over their earnings. When setting the prices in local currency, online retailers should always take all fees and taxes charged into account so as to make sure not to hurt their margins. Furthermore, it is worth noting that even though working with a local payment processing service might make merchants’ earnings subject to Withholding Tax, it is thanks to the local partner that international businesses will see a conversion boost in Brazil. Offering local payment methods is key to driving more conversion in the country as it can help merchants reach a bigger portion of the population.
I was wondering if I can ask a question about this withholding tax as it pertains to providing services to a Brazilian company from outside of Brazil and how the treaties interact with this tax?
If 15% is withheld on a payment for services, to a nonresident company (in a country without a tax treaty), will that company be able to offset their final income tax liability in Brazil by the Revenue Tax Withheld at the Source? Sounds simple, just hoping for absolute confirmation. Thank you.
I was looking for clarity on the following – does a resident of Brazil who holidays abroad, say a safari camp in Africa, pay a WHT on the amount they remit to the agent and or lodge provider ?