Actual Income: implementation, advantages and caution in choosing this taxation method

By André Cavalheiro

Although the definition of the taxation method is guided by rules related to size, billing, or segment, it is possible to add strategy to the choice. The option for the Actual Income method, for example, can be advantageous in some cases regardless of the size of the company or segment.

The migration to this regime has been in the sights of many companies since the proposal to create the Contribution on Goods and Services (CBS) was presented by the government as part of the tax reform.

The measure, which proposes a fixed rate of 12% and the end of the cumulative regime, may eliminate the advantage of adopting presumed profit, which is widely adopted by services companies and considered a more simplified calculation model.

On this time, when starting a tax review, it is necessary to consider a scenario with possible effects of the CBS approval in addition to analyzing what is less costly for calculating and paying taxes.

See also: CBS: changes for companies with the new form of taxation on consumption

What is Actual Income?

In the Actual Income taxation method, the calculation of the Corporate Income Tax (IRPJ) and the Social Contribution on Net Profit (CSLL) is done based on the company's actual profit, that is, considering revenues less expenses.

This profit corresponds to the income of the financial statements, with the necessary adjustments (additions or exclusions), as set by the tax legislation.

Mandatory implementation of the Actual Income method

The implementation in the Actual Income is required for:

• companies earning annual gross revenue greater than BRL 78 million;
• companies operating in certain segments, such as banks, credit unions, private insurance companies, securities dealers and foreign exchange, among others;
• companies that recorded profits, income or capital gains from other countries;
• companies that explore credit rights purchases resulting from credit sales or services (factoring);
• companies that have tax benefits from tax reduction or exemption.

Companies in other branches of activity and earning annual gross revenue of less than BRL 78 million are able to choose this taxation model, if preferred.

Actual Income: when is it advantageous?

Firstly, it is important to highlight that, in order to take advantage of this model, it is essential to maintain a precise control of finances, which will make it possible to calculate net profit accurately.

Here are some situations that represent advantages for companies opting for Actual Income:

Offsetting tax losses

The Actual Income regime has a particularity of allowing for the possibility of offsetting tax losses from previous periods.

This characteristic usually attracts emerging companies or businesses that have already identified that the revenue will not offset the expenses in a specific period. Many companies affected by the pandemic must even consider migration to the Actual Income at the turn of the financial year.

Determination in different tax periods

The option for the Actual Income allows a certain flexibility concerning the determination of income tax and social contribution. Each business must stipulate the strategic periodicity for the tax practice, which can be quarterly or yearly with monthly advances.

The quarterly determination periods end on March 31, June 30, September 30, and December 31 of each calendar year.

Determination by monthly estimate

The Actual Income allows businesses to monthly pay taxes determined based on gross revenue, according to a percentage of profit established in legislation, similar to the Presumed Profit. At the end of the year, through the annual balance sheet, the company determines the Actual Income for the year, and adjusts the amount of tax paid to its actual income.

For purposes of the monthly estimated payment method, the gross revenue comprises:

• the revenue from the sale of goods in own account operations;

• the price of services provision in general;

• the income from third-party account operations; and

• other revenues from the activity or the main legal entity’s purpose.

Gross revenue does not comprise:

• the canceled sales;

• the unconditional discounts granted (contained in the goods invoice or services invoices and not depending on event after the issuance of such documents);

• non-cumulative taxes payable separately by the buyer or contractor of which the seller of the goods or the service provider is merely a depositary. These taxes are IPI on sales and ICMS due by tax substitution.

Use of PIS/Cofins credits

The PIS/COFINS determination is made on a non-cumulative basis. This also allows credits related to certain costs and expenses (except labor) to be discounted from PIS/ COFINS.

Tax incentives

Another advantage is the tax incentives from which companies taxed by the Actual Income can benefit. These benefits aim to encourage the development of a certain sector, region and even encourage the involvement of taxpayers, individuals and companies, with socially related issues.

For the better use of the benefits, it is necessary to know the legislation applicable to the incentive and check its benefits when paying the income tax.

Cautions in choosing

The Actual Income is a model widely recognized as more complex, which makes many companies currently avoid it. In fact, specialized accounting advice is needed to support the consequences of this choice.

By adopting it, the company assumes the obligation to prepare, for example, an Income Statement (DRE), a Cash Register Report, inventory control, among other new requirements.

Companies with operational limitatsions for a closely and thoroughly follow-up will face difficulties that may compromise the business health.

Inconsistent data in the taxes determination may lead companies that choose this regime to fines ranging from 0.25% to 3% of the net income.

How to migrate to Actual Income

It is allowed to change the taxation method at each turn of the fiscal year, when at the first payment of income tax.

In the case of Actual Income, the limit is the payment date of the first payment slip of the year. That is, if the taxpayer makes monthly payments, it is possible to migrate in February; if quarterly, in April.

Strategic tax management

The choice for the method that will be effective for the new year should be based on a diagnosis of the operations and the company's turnover projection, among other variables. This option is part of a strategic tax management, as it has the potential to reduce expenses with taxes and preserve cash.

Domingues e Pinho Contadores, with a wide experience in advising companies that elect the Actual Income method, works in a consulting manner, guiding clients in terms of the tax compliance of the business, executing an accurate tax determination and contributing for the company to enjoy all the advantages of this model.