Tax classification: don't get sunk by the taxman

Understanding the differences between the possible tax regimes for your venture is essential, both to sort out your business's tax situation and to secure its growth. Choosing the wrong tax classification will mean paying more taxes and fees to the tax authorities, compromising your company's financial and budgetary health.

Many entrepreneurs end up leaving this knowledge in the hands of their accountant, who is responsible for the operation's tax compliance as well as every function related to business accounting. However, as much as the accountant is the cornerstone of this territory that other professionals rarely explore, the final word still belongs to the business owner. In other words, no matter whether your background is in advertising, data mining, a graduate degree in communications, design, or anything else tied to the excuse “I don't know how to deal with numbers”, you'll still have to have the final say on this. But don't worry, today is your lucky day! You won't need a degree in pure mathematics to understand the differences between the classifications we're about to walk you through.

First lesson: Simples Nacional. Sim, parece rótulo de cachaça, mas não, é apenas o título de um regime fiscal dessa pátria abençoada. Vamos começar pelo que desce mais redondo: damas e cavalheiros, eis o…

… SIMPLES NACIONAL

Want to know why it's called that? Simple, and it has everything to do with how this classification is structured. Its advantage for the business owner is that it makes tax organization and compliance easier by bringing all the information together in a single portal, the same one where you can check whether your business activity is listed among the regulated activities. Not only that, under this regime the business owner can pay all taxes at once, with a single payment slip. In other words, simple! The taxes and contributions for this category can be paid through a tax document called the DAS (Simples Nacional Collection Document), generated on the site itself.

However, for entrepreneurs who are just starting out and don't yet have a large or formalized structure, there's the MEI option (Individual Microentrepreneur). The differences between the MEI and the entities under the SIMPLES regime lie in total revenue and company structure, since MEIs were designed to simplify life for microentrepreneurs, whose operations are supported by only a few employees besides the founding partner. The revenue ceiling is R$ 60,000.00 a year, and the list of activities allowed under this classification can be found on the Receita Federal website – see the full list here: http://www.receita.fazenda.gov.br/legislacao/resolucao/2011/CGSN/Resol94.htm. Nessa categoria, o faturamento pode exceder em até 20% do limite imposto antes de precisar se adequar ao SIMPLES Nacional. Antes disso, o empreendedor que optar pela categoria de MEI deverá pagar os seguintes insumos:

• 5% of the current minimum wage (as the business owner's social security contribution)
• R$ 1.00 per month in ICMS (Tax on the Circulation of Goods)

Now, if they have an employee helping with day-to-day operations, the contributions owed go up. Employment ties in this category don't carry the same constraints and barriers as those at large companies, since it's a lean operation that, in many cases, hasn't yet been properly validated. For MEI owners who have chosen to hire help for the business, the amounts to be paid out monthly – on top of those listed above – are:

• 8% of the employee's pay to the INSS
• 3% on the employee's pay, also for the employer's INSS share

Once you exceed the limit allowed for the MEI category, the business owner has to choose between two categories that can fit this regime, depending on revenue. They are: ME (Micro Company); and EPP (Small Business). The main difference between MEs and EPPs, however, is the annual revenue of the operation in question. To be considered an ME, it must bring in up to R$ 360,000.00 a year, while an EPP has revenue that can range from R$ 360,000.00 to R$ 3,600,000.00. To fall under Simples, revenue must not exceed the R$ 3.6 million mark, either in the current year or the previous one. Also, if you have other partners, they cannot hold a stake greater than 10% in another business classified under Lucro Presumido or Lucro Real (with revenue above R$ 3.6 million). All the information about the regime mentioned above is compiled on the government website, https://www8.receita.fazenda.gov.br/SimplesNacional/.

Companies with branches outside the country, even below the revenue limit, cannot be classified under the Simples regime. Not only that: cooperatives, NGOs, OSCIPs, credit management firms, or companies that are the result of a spin-off in the last 5 years, or that hold a stake in another company, also don't fit this classification.

The taxes and contributions that must be passed on to the authorities are:

• IRPJ (Corporate Income Tax)
• CSLL (Social Contribution on Profit)
• PIS (Social Integration Program)
• COFINS (Contribution for Social Security Financing)
• ICMS (Tax on the Circulation of Goods and Services)
• INSS (Social Security Contribution for the employer's share

In any case, hiring an accountant you trust, whether to advise you or to actually take care of the company's bookkeeping, is critically important to the tax and financial health of your operation. Beyond helping you navigate the supplies and taxes to be paid, a skilled accountant can help with the tax planning of your venture, making sure not only that you stay out of trouble with the taxman, but also that you understand when you should change classification. The different activities tied to the categories mentioned above carry varying taxation and, depending on the operation your business runs, you may fit into one or more of them. In those cases, it's better to consult a professional who can point out which one is the best option, both for legal compliance and for the tax to be paid. Depending on the complexity of the business, sometimes even a law firm specializing in the tax field, since your corporate purpose (in the company's articles of association) will directly affect your classification.