Recovery of ICMS amounts under Simples Nacional

Companies subject to the Simples Nacional (National Simple Tax Regime) that carry out manufacturing operations on behalf of third parties have an excellent tax opportunity.

Manufacturing on behalf of third parties occurs when a company sends raw materials or semi-finished products to another company, which will then perform a transformation or processing process before returning the finished product. In this process, the company that performs the transformation is called the manufacturing company, and the company that sends the raw materials is called the ordering company.

It is important to note that manufacturing on behalf of third parties should not be confused with manufacturing to order; they are distinct types of manufacturing, as provided by tax legislation.

In manufacturing on behalf of third parties, the raw materials are supplied by the ordering company, with the manufacturing company being responsible only for the labor. On the other hand, in manufacturing to order, the manufacturing company is responsible for both the supply of the raw materials and the labor, and ICMS is due in this case.

Regarding third-party manufacturing, São Paulo State legislation provides that the ICMS (Tax on Goods and Services) will be paid by the ordering party, not the manufacturer.

However, manufacturers are typically under the Simples Nacional (Simples Nacional) system and end up paying the full tax rate, including the ICMS itself. This is due to the fact that under the Simples Nacional (Simples Nacional) calculation system, taxpayers pay a single tax rate based on their revenue, which covers the following taxes: IRPJ (Income Tax), CSLL (Social Contribution on Net Income), PIS (Social Contribution on Net Income), COFINS (Social Contribution on Net Income), CPP (Consumer Tax on Goods and Services), ICMS (Social Contribution on Net Income), ISS (Social Contribution on Net Income), and IPI (Social Contribution on Net Income).

However, manufacturers are not required to pay ICMS. The State of São Paulo has even issued responses to inquiries regarding the interpretation of tax legislation that favor the non-payment of ICMS in third-party manufacturing.

Therefore, manufacturers have the option of excluding ICMS from the Simples Nacional tax rate and recovering the tax unduly paid over the past five years. The estimated tax savings correspond to one-third of the Simples Nacional tax rate due during the fiscal year.

Raphael O. F. de Toledo Piza holds a Master’s degree in Accounting and Actuarial Sciences from the Pontifical Catholic University of São Paulo, a degree in Economics from IBMEC São Paulo (Insper), and a degree in Law from Mackenzie Presbyterian University. He has ten years of experience in the tax field, including stints at traditional law firms and large audit firms (the Big Four).

Beatriz Giansante Moquiute, attorney, graduated in law with a concentration in tax law from Mackenzie Presbyterian University (2021), and is a registered attorney with the Brazilian Bar Association, Section 9 São Paulo (OAB/SP) (2022). She is currently pursuing a postgraduate degree in Tax Law from the Pontifical Catholic University of Rio Grande do Sul. She is a lawyer in the Tax Department at TM Associados.