Tax & Accounting Blog

The Brazilian State of Bahia Increases Substitution Tax on Construction Materials

Blog, Indirect Tax, ONESOURCE, Reuters Tax & Accounting News, VAT Tax Rates February 9, 2015

On Feb 01, 2015, the Decree 15.807 entered into effect in the Brazilian state of Bahia. This decree relates to ICMS Tax Substitution for transactions involving construction materials within the state of Bahia.

Under the regime of Tax Substitution, a manufacturer or other business entity designated as a tax substitute becomes responsible for remitting the estimated future VAT that will be due on all transactions with a good, up until final consumption. To calculate the taxable basis of the substitution VAT, related law forecasts the theoretical final price that will be charged to the end consumer. The most common way of making this estimate uses a markup adjustment percentage applied against the net amount of the sale proceeding from the substitute taxpayer to its direct customer.

The Decree 15.807 in the state of Bahia involves the product sector of construction materials, for which the government has chosen this markup adjustment method for estimating the final price. The decree included a slight increase to the markup rates on most products. Most manufacturers of construction materials that sell to customers in the state of Bahia will now be responsible for collecting more VAT on those items, and they can be expected to raise the prices they charge to distributors and wholesalers in that state.