Igor Nascimento de Souza, Madrona Advogados
Throughout 2018, Brazil has seen many promises of reforms to the national political and economic scene. In tax law, much has been said on the subject of reform.
Because this is an election year, there has been plenty of discussion about the need to change Brazil’s tax rules, which would have a decisive impact for foreign investors.
The Brazilian tax system is full of complicated and excessive laws and riddled with exceptions. This complicates the business environment and transfers the tax burden to the consumer via pricing.
Taxation should not be complicated. In any part of the world the tax rules are basically the same: they are universal samples of ability to pay, taken from income earned by individuals or legal entities, income spent on consumption of goods and services, and moveable or real estate property. Thus, income, consumption and assets are the three pillars that support various taxes. For legislators and those working with the tax laws, the constant concerns should be how to measure progress; and the selectivity, non-cumulative nature, proportionality and reasonableness of taxation.
Brazil is ranked 125 (out of 190 countries) in the World Bank’s “Ease of Doing Business” index. It is a very bad position for any nation wishing to become a developed country. Brazil also has the highest rate of time spent calculating and paying taxes: 958 hours, with about $60 billion reais spent per year. Brazil comes 184th (out of 190 countries) in the World Bank’s “Paying Taxes” index, measuring the effect of legislation on companies’ contributions to the national taxation system.
The complexity of the system means it is virtually impossible to determine with precision the amount of tax that exists in the country. It is estimated that, in the federal, state and local spheres, the country now has at least 60 different taxes and over 90 accessory obligations creating costs that necessary for compliance - that is, the costs companies must bear in order to comply with legislation. There is a saying that the only thing worse than paying taxes, is paying to pay taxes.
We should remember that ancillary obligations – such as tax bookkeeping; digital accounting bookkeeping and digital tax bookkeeping; and VAT on sales and certain services/excise tax – are all linked to the Public Digital Bookkeeping System (SPED), adding complications. Even more obligations have been created, such as the Transition Fiscal Accounting Control, the Declaration of Health and Medical Services, and the Information Report on Real Estate Activities.
These developments are presented without resorting to hard-to-remember acronyms (such as DTTA, COAF, DEREX, DCP, DNF, DIF and DBE, for whose detailed explanations an encyclopedia would not be enough), or to the obligations that it was promised would be eliminated with the evolution of the SPED project (such as GIAS and SINTEGRA).
Worst of all, the ferocity of the state in ensuring the collection of tax results in further hundreds of charges. The huge amount of taxes, and the way in which they are established and overseen, create financial instability for businesses.
As if the peculiarities of Brazil’s tax system were not bad enough, the circumstances in which it was created is wildly different from the current environment. There have been various technological innovations since the internet revolution – such as downloading, streaming, software as a service, the use of robots, and the performance of activities on the blockchain platform. The world has changed and become virtual. The economy has become dominated by companies in the technology sector (Google, Amazon, Apple, Facebook and Microsoft), facilitating the emergence of unimaginable business arrangements. The unprecedented intangibility of these companies has made physical presence in a particular jurisdiction unnecessary. As such, transactions have started to occur remotely.
The current legal system is full of peculiarities, and is neither prepared nor structured to adequately handle taxation of wealth in this new, virtual world.
This ultimately results in an intense conflict for authority – one in which states and municipalities fight to bring these new technologies under their purview of taxation. For example, not too long ago states and municipalities discussed the taxation of internet providers. The states claimed these were telecoms services, subject to VAT; the municipalities argued that they were data processing services, subject to municipal service tax. Case law has not set a precedent for either argument, and there are no specific rules that apply to this matter.
Another example is the recent publication of different rules about the taxation of streaming. This caused states (Cooperation Agreement ICMS 106/17) and municipalities (Supplementary Law 157/16) to each consider that they had authority to tax the streaming services. Taxpayers were thus doubly taxed for their streaming activities.
This situation of legislative uncertainty about the rules (and taxes) applicable to these new technologies, resulting from a conflict of tax laws or the absence of clear regulatory standards that define them, leave taxpayers baffled over how to pay.
Fortunately, at a political level, there does appear to be some concern over these issues, which ultimately damage the Brazilian economy and chase foreign investors away. Most current political speeches clearly express desire for tax reform. Restructuring the tax system is very important for the success of macroeconomic policies and general reform, and is extremely beneficial in attracting foreign investment.
It is extremely important that companies and foreign investors stay informed about these changes. Complying with the system, and taking advantage of all the benefits that it offers, are essential for the best use of Brazil’s the tax burden.