Tax Withholding: points of attention at the business compliance

Luciana Lupinucci e Patrícia Guimarães

The government taxes and contributions withholding at source charges part of taxes due by the taxpayer in advance, working as a resource to control the charge and minimize tax evasion.

As it is known that these values’ withholding is compulsory, the dynamics may sound simple and with no margin for many developments. However, the practice shows that companies must be aware of a number of issues that may reflect the misappropriation of taxes, both underpayment, increasing risks of fines and penalties, and the overpayment, causing financial losses.

The service provided or purchased by the company influences the withholding calculation. Considering only these two issued, there is already a need for a thorough assessment to determine which path is most appropriate for compliance.

What is tax withholding?

It is the destination to the government, in advance, of part of the amounts that the legal entity must pay in taxes.

The withholding highlighted on the invoice issuance is discounted from the gross amount. After this discount, observing the calculation basis, it reaches the service net amount.

What are the taxes involved?

These withholdings fall on the following taxes:

• Social Integration Program (“PIS”);
• Contribution for Social Security Financing ("COFINS");
• Social Contribution on Net Income (“CSLL”);
• Withholding Income Tax (“IRRF”);
• Social Security ("INSS"); and
• Tax over services ("ISS").

Each tax has a base rate, but they may vary depending on the company’s activity.

Requirement

The requirement to withhold tax on invoices is not to all companies. Those following are exempt:

• Individual micro entrepreneurs (MEIs);
• Microenterprises (ME) and;
• Small businesses opting for the Simples Nacional*.

*Those opting for the Simples Nacional will pay the ISS according to the revenue range they fall. There are also activities in which the ISS may be withheld and should not be included in the calculation of the DAS - Simple National Payment Form.

Those required to withhold taxes on services are:

• Companies classified under the Real Profit;
• Companies classified under the Presumed Profit.

In general, we highlight that some services suffer withholding IRRF and contributions: cleaning, conservation, maintenance, security, surveillance, accounting, law, audit, consulting, advisory, teaching, architecture, engineering, labor leasing.

When contracting with public agencies, the taxes withholding will be due even in cases of trading products.

Main cares

Experience has shown that suppliers who issue invoices without highlighting withholding are still frequent.

The joint-and-several liability arises, in which the verification of the withholdings ends up weighing on the taxpayer receiving the service. This must always check whether the company providing the service is properly withholding the taxes at source. Failures or omissions in this process may lead to fines and penalties.

The contract signed between the client and the service provider, which serves as support for the issuance of the invoice, and which is requested upon an inspection, as well as for the calculation of the social security calculation basis, is another relevant aspect that many companies do not perform.

We can mention that, in the construction sector, for example, the discrimination of materials and equipment in the contract is mandatory for the deduction from the calculation basis.

Deductions represent significant amounts and it is common to find cases of undue or improper deduction that raise fines and penalties in inspections.

The focus on all these variables leads to a heavy bureaucratic burden on companies. For this reason, businesses are increasingly transferring this entire scope of tax services to specialized offices, a valuable support for the proper use and calculation of withholdings.

INSS Withholding

The company hiring services by means of the labor assignment or by works, even if under a temporary labor system, is required to withhold 11% of the gross amount of the bill of sale, receipt or invoice.

That is, to avoid liabilities, the service purchaser must have attention of not only labor and social security issues, but of tax obligations.

Only specific services are subject to such withholding as set forth in TRFB Normative Instruction 971/2009.

Under no circumstances should the company fail to pay taxes on outsourcing, as this may result in administrative sanctions, penalties and, ultimately, a tax offense.

ISS Withholding

The ISS withholding is due where the service is provided, and the hiring company is responsible for the payment. The rate varies between 2% and 5%.

As a municipal tax whose application varies according to the specific legislation of each location, it is common to find failure in ISS withholding calculation or even cases of double taxation.

Many companies are unaware of the requirement to apply for registration as a service provider in the municipality of the service contractor.

Some municipalities require such registration, such as Rio de Janeiro and São Paulo. In such cases, there is a need to withhold and collect the tax for both, that is, both for the municipality where the provider is domiciled and for the service contractor municipality.

Withholding Taxes at Cross-checking Times

The investment in technology of inspection agents such as the Federal Revenue has been increasing the electronic crosschecks, optimizing the results of the agency that has among its main tasks the prevention of tax evasion.

INSS Withholdings diverging between borrower and service provider can be identified with the EFD-Reinf transmission as both report the same information.

The quality of generated and transmitted data for the withholdings also reflects at the eSocial. For example, non-relationship of the employees listed in a reported invoice compromises the integrity of the information provided to the platform.

One of the changes that EFD-Reinf brought with its deployment was just the change in the form and the periodicity to report to the tax authorities. If previously they were annually reported only at the DIRF, for the IRRF, with the bookkeeping, these will also be monthly sent, imposing a new rhythm on the companies.

Failures in the PIS/Cofins withholding will be easily checked in the DCTF reporting. This document provides information on monthly companies’ taxes and contributions.

Well-driven business: a competitive advantage

Among abbreviations, rates and details in the laws, the entrepreneur frequently finds oneself lost in the face of his obligations to withhold tax. Relying on experts’ guidance can be a competitive advantage by preventing the company from making mistakes that will lead to rework, as well as fines and penalties.

Domingues e Pinho Contadores offers complete solutions so that businesses in different sectors can achieve the best performance, even facing the complex Brazilian legislation.

Within the taxes consultancy scope, DPC’s specialists work by developing services aimed at efficient tax management, through regime adjustment and review of procedures, always indicating the most appropriate business practices for the business.

DPC also provides customized in-company tax withholding training for companies interested in qualifying their workforce.