1.2. Taxes and Taxing Powers

In Brazil, the main directives for taxation are provided by the Federal Constitution, which establishes the general principles of taxation, the limitations on the power to tax, tax competence across levels of government as well as tax revenue sharing provisions.

Thus, the National Tax System is instituted by the Constitution itself, which establishes that the Union, the States, the Federal District and the Municipalities may collect taxes. The administrative-political autonomy, which is an essential characteristic of our federative system, confers to each level of government the possibility of instituting taxes, fees (due to its police power or to the use of public services) and improvement charges (due to public works). With respect to social contributions, most of them may only be established by the Federal Government.

According to the Brazilian Constitution, the tax competence of taxing powers is as follows:

TABLE 4

Tax competence of taxing powers as established by the Brazilian Constitution

Tax competence

Taxes

UNION
  • On foreign trade – on imports (II) and exports (IE) of goods and services
  • On income and earnings (IR)
  • On industrialized products (IPI), a value added tax levied on manufactured goods
  • On financial operations (IOF)
  • On rural land property (ITR)

STATES AND THE FEDERAL DISTRICT
  • On inheritance and gifts (ITCD)
  • On circulation of goods and transportation and communication services (ICMS), a value added tax levied on goods in general and some services
  • On motor vehicles (IPVA)

MUNICIPALITIES  AND THE FEDERAL DISTRICT
  • On urban land and property (IPTU)
  • On real estate conveyance (ITBI)
  • On services (ISS), except those subject to ICMS

In the same manner, the Constitution allows the Union to impose compulsory loans under special conditions in it defined, and to institute social contributions, as well as contributions for intervention in the economic order and in the interest of professional or economic categories. The States, the Federal District and the Municipalities may only collect from their civil servants contributions directed to financing their own social security and social assistance benefit plans.

The main social contributions in effect, all assigned to the Union, are presented in Table 5.

TABLE 5

Main Social Contributions

Tax competence

Contribution

UNION
  • Contribution for the Financing of Social Security (COFINS)
  • Social Integration Program/Civil Servants Savings Program Contribution (PIS/PASEP)
  • Contribution on Net Profit (CSLL)
  • Provisional Contribution on Financial Movement (CPMF), a bank debits tax
  • Social Security Contribution, a contribution on payroll and self-employment earnings

The relative importance of each of the taxes that make up the Brazilian tax system may be better assessed by its share in the total tax burden (See annex I). Notwithstanding that most taxes have the primary goal of raising funds to finance government activities (fund raising taxes), some of them have characteristics that qualify them as economic or social policy instruments (regulatory taxes).

Examples of regulatory taxes are the IOF and IPI, that may be used by the federal government as auxiliary instruments in conducting monetary and industrial policies, respectively. Annex II shows a summary table with the main features of each tax within the National Tax System.