Tax Reform: Personal consumption, use of tax credits, and implications for employee relations

Companies should be mindful of what may or may not generate tax credits in relation to benefits granted to employees

In the IBS (Goods and Services Tax) and CBS (Contribution on Goods and Services) financial credit system, one rule that must be understood is that only purchases of goods and services related to the company’s economic activity are eligible for credit.

On the other hand, purchases intended for personal use or consumption are considered circumstances in which credit is prohibited.

Based on this logic, the issue extends beyond the tax sphere and requires consideration of aspects of labor relations as well. Granting certain benefits to employees has tax implications, making it necessary to analyze the issue in conjunction with labor law.

Tax Reform and full non-cumulative treatment

As a general rule, the IBS and CBS amounts itemized on the Electronic Tax Document (DF-e) for the purchase of goods and services will generate tax credits for the purchaser.

In other words, there will no longer be a need to assess whether that transaction gives rise to a subsequent taxable transaction or whether the good or service is part of the production process.

However, the legislation includes exceptions that must be observed. The purchaser may not claim the IBS and CBS credits shown on the invoice when the purchase is intended for personal consumption.

Permissions for the use of credits

The law provides for certain benefits that, although provided free of charge or at a price below market value, are linked to the employee’s work hours and are therefore excluded from the concept of “personal consumption.”
The criteria for permitting the use of credits are:

Essentiality Criteria:

Goods and services necessary for the performance of work (e.g., office supplies, IT) continue to generate tax credits.

Collective bargaining agreements and conventions:

Health insurance plans and educational benefits provided to employees pursuant to an obligation set forth in a collective bargaining agreement are eligible for tax credits by the taxpayer.

Transportation, food, and meals:

The provision of transportation vouchers, meal vouchers, and food vouchers qualifies for IBS and CBS credits, regardless of the collective bargaining agreement.

Expenses related to meals for executives and partners remain ineligible, but providing food to employees and managers during working hours qualifies for the credit.

Prohibition on the use of credits

Goods and services that are not strictly necessary for the legal entity’s business activities are considered personal consumption.

As examples, the legislation expressly lists the following items:

a) jewelry, precious stones, and precious metals;

b) works of art and antiques of historical or archaeological value;
c) alcoholic beverages;

d) tobacco products;

e) weapons and ammunition;

f) recreational, sports, and beauty-related goods and services;

g) goods and services related to the acquisition or maintenance of the above items.

In addition to these, goods and services acquired by the taxpayer (legal entity) and provided free of charge or at a price below market value to partners, employees, or their spouses, partners, or relatives, whether by blood or marriage, up to the third degree are also classified as personal consumption and do not generate tax credits.

The legislation highlights residential real estate and vehicles as examples, including other goods and services related to their acquisition and maintenance, such as insurance and fuel.

If a company acquires the good (claiming the tax credit) and then diverts it for the personal use of a partner, the tax credit must be reversed.

Tax and Labor support

Domingues e Pinho Contadores has a multidisciplinary team that helps ensure your company’s compliance. For advisory and operational support in tax and labor matters, please contact us at: dpc@dpc.com.br.