Story: Beatriz Makes Her First Sale
Three months after opening Beatriz & Co. Consulting, Beatriz finally receives good news: her first contract is signed with a logistics company. She is excited to send her first invoice.
But before she celebrates, Mr. Silva, her accountant, calls.
“Beatriz, now that you are selling services, you must pay attention to state and municipal taxes. Which one applies depends on the type of activity: goods or services.”
Beatriz sighs. “More taxes?”
Two Possible Scenarios
Scenario A – Goods (ICMS)
If Beatriz had opened a clothing boutique, her main tax would be ICMS – the Tax on the Circulation of Goods and Services (Imposto sobre Circulação de Mercadorias e Serviços).
Mr. Silva explains:
“ICMS is similar to a Value Added Tax (VAT). It is collected by the state government.”
“It applies when you sell products, move them between states, or import goods.”
“You pay ICMS but you can also receive credits for the tax already paid in the supply chain.”
He shows Beatriz an example invoice with ICMS included.
Scenario B – Services (ISS)
Since Beatriz is running a consulting company, her tax is different.
ISS – Tax on Services (Imposto sobre Serviços).
“This is collected by the municipality, not the state,” Mr. Silva explains.
“The rate depends on the city, usually between 2% and 5% of the service value.”
Beatriz does the math: if her first invoice is R$10,000, and her city charges 3% ISS, then she must pay R$300 in service tax.
“That’s not so bad,” she says.
Mr. Silva nods. “True, but it’s important to declare it correctly. Each city has its own rules.”
Authentic Element: City Hall Guidelines
Beatriz opens a short note from the Prefeitura (City Hall) website:
“ISS is a municipal tax on services. The service provider is responsible for declaring and paying ISS according to the rules of the municipality. Rates vary between 2% and 5%. Electronic invoices must be issued through the city’s online system.”
Beatriz underlines “electronic invoices” and asks:
“Does this mean I need to register in the city’s system?”
“Yes,” Mr. Silva answers. “Every city has its own portal. You must issue an official Nota Fiscal Eletrônica (electronic invoice). Without it, you cannot prove your tax payment.”
Choosing the Scenario for Beatriz & Co.
Since Beatriz provides consulting services, her focus will be on ISS. But she keeps a note in her business journal:
“If I ever sell software products, I may have to deal with ICMS.”
“If I only sell consulting services, I will pay ISS to the city.”
Beatriz is surprised by how taxes depend not only on revenue but also on the nature of her business.
Glossary (Plain English → Portuguese + Acronym)
ICMS – Tax on Circulation of Goods and Services (Imposto sobre Circulação de Mercadorias e Serviços)
ISS – Service Tax (Imposto sobre Serviços)
VAT – Value Added Tax (similar concept to ICMS)
Nota Fiscal Eletrônica – Electronic Invoice (official tax document)
Prefeitura – City Hall (municipal government office)
Discussion
Why do you think Brazil separates taxes by different levels of government (federal, state, municipal)?
What challenges could a foreign company face when trying to understand these rules?
