There are plenty of cases of withholding taxes. In order to fight against tax evasion and to fasten the collection of taxes – in some cases – IRPJ, CSLL, PIS and COFINS must be retained by the client (and subsequently paid to the Tax Authorities) instead of being paid to the provider.
This applies only for Services and only for companies using the ACTUAL or ESTIMATED Corporate Tax methods. Companies using the SIMPLES method pay the whole amount to the provider; and receive the whole amount from clients.
Taxes and rate usually withheld are the following:
- 1% for l’IRPJ,
- 1,5% for CSLL,
- 0,65% for PIS,
- 3% for COFINS
Corporate Tax Withheld:
IRPJ must be withheld on all invoices. There are only two exceptions:
- The amount of IRPJ ‘withheld’ is below 10R$. In such cases the seller will receive the payment including the IRPJ, and will need to pay the IRPJ to the Tax Authorities himself at the end of the month;
- The seller has selected the SIMPLES method, and therefore pays all taxes in a single document at the end of the month.
PIS, COFINS, and CSLL Tax Withheld:
The article 30 Law nº 10.833/2003 (and SRF nº 459/2004) states that PIS, COFINS and CSLL must be withheld on a limited list of services (see Appendix 5 for the list of services subject to withholding taxes). This applies only for transactions between legal entities. Individuals are not within the scope of this law.
PIS, COFINS and CSLL taxes must be withheld. The rates applied are respectively 0.65% for PIS, 3% for COFINS and 1% for CSLL.
Below is an invoice related to services. The service provider (regime ESTIMATED) has issued an invoice for a total amount of 5,750 R$. The invoice shows the following amounts of tax withheld:
COFINS (3%): 172.50 R$
IRPJ (1.5%): 86.25 R$
CSLL (1%): 57.50 R$
PIS (0.65%): 37.38 R$
Total: 353.63 R$
Note that if the service provider had selected the ACTUAL/REAL method instead of the ESTIMATED, rates would be different.
The amount, net of taxes withheld, and that will be received by the service provider will be 5,396.37 R$ (it does appear at the bottom of the document).
The client will need to pay to the Tax Authorities the amounts withheld. For this, he will use 4 DARFs (one for each tax) to pay these 353.63 R$.
The service provider will pay 287.50 R$ of ISS. He will use a DARM.
Invoice related to services:
Accounting treatment of withholding tax:
The company that buys services subject to withholding tax shall recognize the cost of service for the full value and account for the taxes to be paid.
Example with the DELTA company, that buys consulting services worth 20,000 R$ from the TAX company. The invoice was registered on 31/08/20016, with settlement scheduled for 25/09/2016.
The accounting entries above clearly show that the withholding taxes are paid by the client himself!
After this input, it’s possible to see that the TAX Cpy has a credit (asset) of Corporate Tax (CSLL and IRRF). At the end of year, even if the Company applies the REAL system and makes no profit, some Corporate Tax will have been paid (actually withheld by clients). This credit will increase throughout the years until the Company makes a taxable profit and use this credit.