Every company dealing with Brazilian taxes agrees that the country urgently needs to reform its Taxation System. Over the last decade, several projects for reforms were made, but the changes adopted until now are far from meeting the taxpayers' needs.
It's been quite some time that Tax Reform is among the most discussed topics of the Brazilian agenda. But the conflicts of interests involved and the absence of an agreement between the Union and the states seem to be the main obstacles for a more meaningful changing process. Meanwhile, Brazil suffers the consequences of having an outdated system, unnecessarily complex in its legal and administrative aspects.
According to some researches from the Brazilian Institute of Tax Planning, those are the three mayor problems of the Brazilian Tributary System:
1) High taxation rates
2) Excessive bureaucracy
3 )Legal uncertainty
We will see further how each of those problems affect the Brazilian economy and what are the solutions proposed.
High Taxation Rates
Brazilian governments (Union, states and municipalities) earn an outstanding amount of money from taxes. On average, 35% of the wealth produced in the country goes to the public purse. The amount is shared according to those percentages:
- Union: takes 60% of the money collected
- States: take 25% of the money collected
- Municipalities: take 15% of the money collected
Brazil is one of the countries that most collect taxes around the world. Yet, the country occupies the lowest positions when it comes to the return of the taxes’ money in benefits to the population. The Government’s budget is too compromised with the public civil service, interests of the public debt and the Social Security. Aside from the debts, the leftover money is poorly managed.
The high rates of the Brazilian Taxes drive investments away, specially foreign investments. Investors are discouraged to put money in Brazil, as the high taxation inhibits the earning of the company and delays the return of the investment. It is estimated that Brazil could improve its investments in 10 to 15% for each percentage point dropped in the total value of the country's taxation.
So the abusive taxation is one the main points to consider in the so called “Custo Brasil”, which is the index that measures the viability of investing in the country, considering its bureaucracy, corruption, business environment etc. The taxes that most charge the investments are the ones deducted on payroll and consumption, such as PIS, Cofins, ICMS and IPI.
Because of its high tax rates, Brazil is even losing foreign investments to its neighbors. A lot of companies are transferring their production and offices to Argentina, Uruguay or Paraguay in order to pay less taxes. This way, they can still maintain business relations with Brazil, as the Mercosul agreement guarantees advantageous commercial and customs relations among its members.
The high tax burden make it very hard for a company that produces on Brazilian soil to compete in the world's economy. A good example is the “invasion” of the “made in China” labels in the Brazilian market. The low-cost Chinese products caused the failure of many Brazilian producers. Easy to know why: China has a tax burden of about 17% of the GDP, while Brazil has an index of 35%.
Brazilian Tax System is composed of more than 60 different taxes and contributions, each with a different rate, levied on a different source and collected by different institutions. Aside from the taxes, companies must comply to more than 90 ancillary obligations.
The complex Brazilian Tax Legislation demands a lot of time and effort, time that could be better invested in the business. A 2011 research made by a consulting firm and the World Bank, concluded that, in Brazil, a middle sized company takes about 2,6 thousand hours doing tax services. In USA, for example, similar companies only take 187 hours.
But not only time is lost in the process. Companies in Brazil also disburse an amount of BRL 43 billion per year only to maintain the accountancy employees and equipments working to comply with the taxation bureaucracy. That is an expense that does not enhance the products' quality, only increases the companies' costs and consequently the final price to the consumers. That is a good lesson on how to kill competitiveness.
Also, the rules that regulate the taxation system are changing all the time. According to the Brazilian Institute of Tax Planning, the Federal, State and Municipal governments launch an average of 15 new standards every day.
The so-called “efeito cascata” (a cascading effect that results from the interaction between the IPI, the ICMS and the ISS, the different tax rates between the Brazilian states and variations on the fees charged for the same products also complicate the calculations. For instance, the aliquots charged over a roasted chicken in a supermarket is different from the ones charged over the same roasted chicken in a bakery.
It is pretty often to see a company with taxes' irregularities being assessed by the Department of Revenue. Some of these assessments are abusive. The administrative judgment is sometimes partial, restraining the defense, assuming the company is guilty without further proof.
Then, it comes the astronomic fines, that represent the same as death to the small businesses. Or else, the situation can evolve to a criminal process. What should be in the mind of public servers is that a company that falls into the tricks of a very complex taxation system is not a necessarily practicing tax evasion.
Asides from the possibility of bankruptcy (because of the fines), the possibility of an unfounded conviction that can end up in some jail time discourages and drives investors away.
Finally, about Tax Reform...
The overwhelming majority of the tributary lawyers defend that a Tax Reform in Brazil should be done as a consistent and structured plan, composed by integrated actions. The problem is that, in a realistic view, Brazilian politics work really slowly. So maybe the only way to get some actual changes in our Tax System will be doing the reform little by little.
What definitely causes more problem in the Brazilian Tax System is the number of different taxes, each one with its specific regulations and rates. Because of that, since 1997, lawmakers launched proposals to unify some of those taxes, so the rules would not be so complicated, conflicting and confusing.
The ICMS tax, for example, deserves a separate chapter. Here goes some characteristics of this tax:
- It is collected by the states
- It is restricted to goods and selected services
- It has many different rates (intra-state and inter-state)
- The internal rates are defined by the state and the inter-state rates are determined by the Senate (there are more than 40 rates and 27 laws over it)
- The tax liability is calculated on a tax-inclusive basis, not on a tax exclusive-basis
- It is mainly an origin-based tax, not a destination-based tax.
As you can see, ICMS is a very complex tax, specially because of its lack of uniformity throughout Brazil, which generates:
- Fiscal wars among the states
- Regional inequality, as the tax is much more productive in states that are large producers and net-exporters of industrialized goods
- An accumulation of exporters’ tax credits.
- Difficulties with international fiscal harmonization
- Excessive administrative costs
As for the ICMS, one of the latest Tax Reform proposals was done in 2010, by the Federal Senate. According to it, IPI, Cofins, PIS/Pasep, CIDE, FUST, FUNTTEL and ICMS would be merged into a sole and broad national value added tax, similar to the European VAT. This project is still stalled in the National Congress.
The main obstacle to such change will be the lack of a consensus between the states and the Union over it. That is because the new VAT tax administration would be transferred to the Federal Government, as well as the ISS, which is now levied by the municipalities.
Another considered Tax Reform project is the Imposto Único (Unique Tax). The idea is to unify all the taxes in only one tax, with an unique rate. With it, IRPF and IRPJ, IPI, IOF, Cofins, CSLL, INSS, ICMS, IPVA e ITCD, ISS, IPTU e ITBI would no longer exist.
But of course, the Imposto Único project goes against the interests of groups that profit with the current taxation chaos. Accountancy companies, tax evaders and the public and private bureaucracy linked to the collection and inspection of taxes are doing their lobby to avoid any change in the Taxation System.
About the Government Actions
The Tax Reform process in Brazil does not exist. Until now, there is no consistent project able to effectively correct the current Taxation System. The governments and lawmakers insist on doing the reform in parts, what is actually constructing a “patchwork” Tax System. Mixing new regulations with the old ones does not seem to be the best alternative. When you write something wrong you erase and rewrite it, never write over the error.
Former president Lula's administration took the first steps towards a Tax Reform, but those were more like baby steps. Among the main changes we can quote the creation of the Simples Federal system and other fiscal incentives for small businesses. Also, we can include the creation of a non-cumulative PIS/Cofins tax and the calculation basis increase of the CSLL tax and the new ISS.
During his administration, two Tax Reform proposals were forwarded to the National Congress: one in 2003 and another in 2007. The projects were not approved. The former president stressed in an interview that the entrepreneurs were the ones who did not want the tax system to change, and that they made arrangements with the federal deputies to avoid a tax reform.
Dilma Roussef assumed the presidency already with a plan for a Tax Reform, summarized in the "Plano Brasil Maior" project. But so far very little has been done, aside from some tax measures. Yet, the current administration defends slicing up the reform, instead of changing the whole tax structure. Let us see how this “tributary Frankstein” is going to look like in a few years.