Complication²: Can Complicated Solutions to a Complicated Problem Mean a Simple Result?

By: Megan Wilson

Brazil has one of the, if not the, most complicated tax systems in the world.[1] According to a 2017 study by the World Bank, companies spend, on average, almost twice as much time on tax compliance annually in Brazil (2038 hours) as they do in the next most complicated system – Bolivia (1025 hours).[2] In 2017, companies spent almost 12 times as many hours on tax compliance in Brazil as in the United States (125 hours), which is often described as unnecessarily complicated and onerous.[3] Over the past several decades it has been generally acknowledged that a tax overhaul is badly needed.[4] So, though Brazil’s tax regime consistently ranks near or at the bottom in terms of complexity, fixing the system would take a large amount of political capital and there is a strong likelihood that any changes would be unpopular, due to the fact that streamlining the system would require taking power away from the individual municipalities.[5] Either of these obstacles make it unlikely that leaders will want to focus on reform, and together they almost guarantee it.

Brazil has been using a system since the late 1960s that is, theoretically, a value added tax (VAT) regime.[6] Unlike most countries that have a single-VAT system, Brazil currently has in excess of 60 types of taxes.[7] In addition to the many schemes, the system is also disjointed geographically, in part because of the wide latitude given to individual state and municipal governments.[8] Even within federal systems there is extreme variation. For example, IPI, the federal excise tax on industrial products, typically hovers around 15%, however, some are in excess of 300%.[9]

Federal taxes are not alone in terms of complexity. ICMS, which is levied on consumer goods and services, is administered by each of Brazil’s states, and companies must register in each place they do business.[10] ICMS can only be applied to intrastate activity, and rates are more consistent than IPI, with a range of approximately 17% - 19%.[11] The federal government, however, administers a transfer tax of 12% on interstate activities (though there are some discounts for activity in certain regions).[12] The 12% can be credited towards the ICMS, so it does not add additional cost directly, but it does add another layer of complexity in terms of compliance.[13]

In late 2019, the Federal Revenue Service announced a plan to release reform proposals.[14] The proposed overhaul would happen in four phases over several years, starting with the less controversial parts of the plan.[15] Over the past year, specifics have been released about each of the phases.

Phase One

The first phase will take the two federal consumption taxes and replace them with one tax on goods and services (CBS).[16] The proposed replacement would allow businesses to take a credit of any CBS they paid when acquiring the goods, which was not previously allowed.[17]

Phase Two

The second phase is an overhaul on the tax on industrial products (IPI).[18] This will still be an excise tax; however, it is planned to have a more specific focus.[19] The revised IPI will have rates based on the individual items.[20]

Phase Three

Phase three concerns the personal income tax and taxes on corporate profits.[21] The anticipated proposals will add personal exemptions and change some tax rates, as well as reducing the corporate rate for net profits (IRPJ) and the “social contribution” tax on net profits (CSLL).[22] Currently, the IRPJ and CSLL are a combined rate of 34%.[23] The Economy Minster has said that he would like to see them lowered to be a combined rate of 20% - approximately 60% of the previous rate.[24]  He anticipates that change taking several years to implement.[25]

Phase Four

Phase four will focus on payroll taxes – a popular topic around the world today.[26] In order to cut the payroll taxes effectively, however, it is necessary to find another source of money to fund programs.[27]

Finally, the Brazilian government hopes to introduce a “calibration feature” to keep taxes around 35% GDP for years to come.[28] One issue with that, of course, is that no one can see into the future to know what issues will appear. Additionally, it is imperative that any such feature does not re-complicate the tax system.

Any potential fix for the Brazilian tax code is going to be complicated and lengthy. The plan or plans will have a lot of steps and take years, and the switch over to the new – hopefully less complicated – system will likely be messy and, at times, difficult. A multi-phase approach like the one proposed here comes with an increased likelihood of success for more popular proposals, but it also means that it may be easier for opponents to put a stop to changes that they do not approve. This method prevents using popular changes as leverage for less popular ones.

Due to the staggered nature of the plans, it will also be necessary for future administrations to continue the work. Since tax reform has been historically unpopular with administrations, it is reasonable to wonder whether future presidents will want to tackle it either. Hopefully now that the plans have been introduced, future presidents and administrations will be able to use any momentum gained and continue to usher in the necessary change to the system that has existed for over fifty years.

#Brazil #Taxes #InternationalLaw #Wilson

[1] William Hoke, Simplification Measures Address Tax Reporting Burden, TaxNotes, Aug. 14, 2017, https://www.taxnotes.com/tax-notes-international/corporate-taxation/simplification-measures-address-tax-reporting-burden/2017/08/14/1w7zr.

[2] Id.

[3] Id.

[4] Robert Goulder, Brazil’s Push for a Proper Vat, TaxNotes, Aug 11, 2020, https://www.taxnotes.com/tax-notes-today-international/tax-policy/brazils-push-proper-vat/2020/08/11/2ct55.

[5] Id.

[6] Id.

[7] William Hoke, Brazil’s Economy Minister Compares Tax Refime to a ‘Madhouse’, TaxNotes, Aug. 10, 2020, https://www.taxnotes.com/tax-notes-international/tax-reform/brazils-economy-minister-compares-tax-regime-madhouse/2020/08/10/2ctd8.

[8] Brazil’s Push for a Proper Vat, supra note 4.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] William Hoke, Brazilian Government to Propose Tax Reform in 4 Phases, TaxNotes, Nov. 25, 2019, https://www.taxnotes.com/tax-notes-international/tax-reform/brazilian-government-propose-tax-reform-4-phases/2019/11/25/2b4wg.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Id.; Jonathan Curry, White House Tries to Set Record Straight on Future of Payroll Tax, TaxNotes, https://www.taxnotes.com/tax-notes-federal/employment-taxes/white-house-tries-set-record-straight-future-payroll-tax/2020/08/17/2cv70.

[27] Brazilian Government to Propose Tax Reform in 4 Phases, supra note 14.

[28] Id.