Tax Substitution is the legal principle which allows, from that provided by law, the possibility of giving the other person, the condition responsible for payment of tax on taxable event practiced by others.
The ICMS ST or Tax Substitution (In Portuguese “Substituição Tributária) is taxation scheme used by federal and state governments in Brazil created to avoid double taxation and tax evasion and it facilitates the enforcement of taxes that are levied several times during the production of goods and provision of services in Brazil.
The Tax Substitution assigns responsibility to the taxpayer to pay the tax owed by his customer. The replacement will be collected by the taxpayer and subsequently to the government. The incidence of tax substitution is defined depending on the product or service in question and responsibility takes place in relation to goods or services provided by the law of each state.
The ICMS Tax Substitution was implemented because it was found that few manufacturers sell their products to thousands of distributors and resellers, and these last used to evade ICMS.
Parts of the text below were extracted from Federal and State Government websites where ICMS ST regulation is stated or other sources.
The transaction of ST involves two types of taxpayers:
• Substitute taxpayer(Contribuinte Substituto): He is responsible for the retention and payment of the tax. Usually it is the manufacturer or importer responsible to the subsequent operations.
• Substituted taxpayer (Contribuinte Substituído): He has the tax due on the operations and services paid by the substitute taxpayer.
Types of Substituição Tributária
There are three types of Tax Substitution, as follows:
1) Antecedent Tax Substitution (Substituição tributária antecedente): where the law chooses the time and responsible for collecting the tax from taxpayers involved in the previous steps, the purchaser or recipient of the product, as is the case of deferral, which has set the close of the command and the taxpayer responsible for gathering exaction. The ST in relation to subsequent operations is characterized by the assignment of a particular taxpayer (usually the first in the marketing chain, the manufacturer or importer) to pay the value of ICMS due in subsequent operations with the goods until his departure meant the consumer or end user.
2) Concomitant Tax Substitution (Substituição tributária concomitante): determines the need for the instant payment as the triggering event occurs. This kind of substitution regime is characterized by the allocation of liability for payment of tax to another taxpayer, and not one who is performing the operation or provision of service, concomitantly with the occurrence of a triggering event. This species is the Tax Substitution of cargo transportation services.
3) Subsequent Tax Substitution (Substituição tributária subsequente): futures tied to events (also called tax replacement forward), applying to cases relating to our regulation (beer, mineral water, cigarettes, ice cream, new vehicles, tires, cement, etc.). Fixing margins profit and those responsible for this obligation. This is the best known type.
Assuming, for example, a product with a value of BRL 10.00, which was originated in the state of Rio de Janeiro, and is to be sold in the state of São Paulo. If this operation covers substitutição tributária for the ICMS tax, the government will provide for an agenda (normally a presumed resale value, for example, BRL 20.00). Assuming that under the interstate operation between SP and RJ partners the rate of ICMS is 12%, and on operations in intrastate SP partners the rate of is 18%, total ICMS will be calculated as follow:
Total ICMS-Normal = (BRL 10.00 x 12%) = 1.20 Total-ICMS Substitution = (BRL 20.00 x 18%) = 3.60
As the ICMS is calculated as a debit and credit, the amount collected would look like:
3.60 – (1.20) = BRL 2.40
Some advantages derive from the system of ST:
– For taxpayers: The tax substitution centralizes the collection of the tax due on the taxpayer by a third party replacement, facilitates the monitoring and encourages equality in taxation, preventing unfair competition between taxpayers who collect and those who do not regularly collect their taxes.
With the VAT / ST, business operations earn agility and simplicity in the issuance of tax documents and bookkeeping, and mitigate distortions and competition between taxpayers in the same field of activities.
– For society: The system of tax substitution is an important tool used by the state to broaden its revenue base, facilitating the monitoring and reducing tax evasion, revenue generating benefits to society.
The basic concept of VAT / ST is that the consumer is the taxpayer’s tax, but the tax will be paid in advance by the industry, incorporating the cost of the tax charged on the invoice value. The taxpayer is the ultimate consumer, which will be replaced in the obligation to pay the tax by industry, that’s where the name comes from: Replacement Trbiutária.
This subject can be very confused, specially when the exceptions occur’s… however my next posting is where I will explain how to have the basic ICMS ST Tax Calculation working on SAP 🙂
Are you felling confused? Trust me, you are not alone…
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