Analysis: Brazil’s Crazy Tax System Creates “Brazil Cost” for New Businesses

RIO DE JANEIRO, BRAZIL – Expectations that the Bolsonaro Government would put the liberal discourse used in its campaign into practice and pass a tax reform in the administration’s Year 1 gave way to the frustration that nothing happened in the Government’s Year 2 either. Now it is hoped that something will happen this year, given that 2022 will most likely be focused on attempting reelection.

“Insanity” seems just a figure of speech, but it is not. Brazil has one of the world’s most complex tax system, which is confirmed by any measure assessed. In the Complexity Tax Index, for instance – an index compiled by two German universities that reflects tax complexity worldwide – Brazil ranks second among the 100 countries analyzed.

However, indexes may sound abstract and may not convey the essence of what this chaos in Brazilian taxes actually means. To render reality more tangible, one only needs to observe in practice what an international investor faces when trying to establish a plant in Brazil.

The entrepreneur’s first step: where to set up his plant?

Here, each state has its own ICMS (VAT tax on sales of goods and services) rate. In São Paulo it’s 18%. In Rio de Janeiro it’s 21%. In Santa Catarina it’s 17%.

But these are only the rates applicable to sales within the state. The ICMA rate varies according to the sales destination.

In other words, if you are in Rio de Janeiro state and sell to a customer in Minas Gerais state, you pay 12%. However, if you sell to Alagoas state, it is 7%. And if you import a product from abroad, ICMS is 4%. This is a brief sample of a tributary system that, to be efficient, should be simple.

Then comes the IPI (VAT tax on Industrialized Products), charged by the federal government, where rates range from 0 to 30% depending on the product. Watercoolers pay 10% but refrigerators pay 15%. The official document showing the tax rate for each sector consists of “only” 442 pages.

After choosing where to establish oneself – deciding between Bahia state or Rio Grande do Sul based on tax reasons – the time comes to choose the federal corporate tax system governing your business- there are four options: Super Simple; Simple; Real Profit; and Presumed Profit.

Depending on the model, the federal PIS/COFINS (Program of Social Integration/Contribution for the Financing of Social Security) tax will be either 0.65% and 3% of gross revenue under the Simple option, but will be 0.65% and 7.6% with tax credit if you choose Real Profit.

Given that, as a rule, smaller companies are more benefited, the federal income tax system creates an incentive for companies not to grow. If you grow, you must choose another tax system which will cost you more.

The tax chaos torments entrepreneurs in their daily lives. A Brazilian company spends, on average, 1,500 hours (62 days a year!) simply to be on schedule with its fiscal obligations, according to the World Bank.

Is this a problem that governments created on their own?

No, quite the opposite. It is a reaction to the demands of corporate groups themselves, who lobby for and applaud each new exemption, each new subsidy.

For those looking at their own company, there seem to be advantages. But those who look at the whole picture realize how detrimental this is to each new business that emerges.

Those receiving the subsidy, generally well established firms, benefit from the chaos. The new entrants pay this Brazil cost.

It is clear that the Brazilian tax insanity was a demand from those who asked for differentiated treatment. But Congress and the Planalto have their share of responsibility.

Because it is a problem that has been dragging on for decades, our tax insanity should be a priority for the National Congress. And an Executive elected for allegedly believing in liberal measures and reforms should have already passed some reform, however modest it may have been.

We will not make our tax system competitive like that of developed countries overnight, but it is past time for Brasília to try. The challenge, of course, is to face powerful interest groups, particularly with the elections looming.

Source: Brazil Journal