Tax Complexity in Brazil
Emerging markets are top targets for multinational companies when it comes to expansion plans. These underdeveloped countries, together, account for 39% of the world’s GDP, according to the World Bank. They offer faster expansion, higher forecast to increase consumer spending, lower labor costs, and tremendous opportunities for growth compared to mature markets. However, there is one important factor that, although not visible at plain sight, highly impacts the business environment: Tax Complexity.
Last June, the TMF Group, a leading global provider of high-value business services to clients operating and investing globally, published the Financial Complexity Index 2017 report. Not to our surprise, seven of the top ten global ranking countries are emerging markets: Turkey, Brazil, Italy, Greece, Vietnam, Colombia, China, Belgium, Argentina and India. [1]
This means that tax policy is becoming more complex every year; especially in emerging markets, where policy is clouded by a politically volatile and unpredictable environment. In countries such as Brazil, the most complex jurisdiction in the Americas and the second most complex in the world, all level of governments have been granted power to collect and structure the tax system, as stated in the 1988 Federal Constitution. Thus, the Union, the states, the Federal District and the municipalities may collect and institute taxes, fees, and improvement charges. In other words, government entities have the liberty to create its own tax regulations and rates. [2]
According to the TMF report, there are three key factors that have increased the complexity in Brazil:
1. The tax system: A total of 90+ taxes, duties and contributions are charged in Brazil. Knowing which taxes to pay, to which government entity, and for which product or service poses a serious challenge to businesses. The different types of taxes, different deadlines, and different rates that vary from state to state and from municipality to municipality often results in paying the wrong amount of tax or paying tax on the wrong goods and services. [1]
2. Aggressive federal tax enforcement is applied through a digital bookkeeping system (SPED), which uses super computers to track every transaction in the country and has made tax compliance in the region a big issue for multinationals due to the specific requirements for accounting and tax returns (ECF) and digital accounting (ECD). [1]
3. The launch and roll-out of eSocial: A joint project by several federal government agencies to unify the sending of employer and employee data, has created a single system that replaces the need to send separate reporting to Social Security, the Internal Revenue service and Brazil’s Ministry of Labor and Employment. From January 2018, all companies (including multinational organisations) with revenues greater than R$78m will be required to submit data via the electronic reporting platform and use this as the primary channel through which to interact with the Brazilian government on all employee-related matters. For all other companies, eSocial becomes mandatory from July 2018. [1]
What’s next? How to solve the Tax Complexity problem? These are difficult questions with no exact answer as of yet, however, leaders can start to evaluate and take action in specific fields to improve the overall system. At a macro scale, the report found three areas that present a challenge and an opportunity for countries to focus on and improve the tax complexity problem: Regulation, Knowledge and Technology. It is essential to maintain an internal framework that would allow total financial compliance, diminishing the diverse reporting obligations and requirements throughout the different entities; building a knowledge base that will serve as a manual beyond legislation to maintain consistency, heavily invest in technology to avoid errors, and maintain transparency throughout all levels. [2]
[1] Financial Complexity Index 2017. TMF Group, 2017, Financial Complexity Index 2017, www.elmostrador.cl/media/2017/06/Financial-Complexity-Index_TMF-Group_June2017.pdf.
[2] Tax System and Administration in Brazil. Ministry of Finance Federal Revenue Service General-Coordination Of Tax Policy, 2002, Tax System and Administration in Brazil, idg.receita.fazenda.gov.br/dados/receitadata/estudos-e-tributarios-e-aduaneiros/estudos-e-estatisticas/estudos-diversos/sistema-e-administracao-tributaria-ingles.