Tax uncertainty emphasises the need for reform at ITR’s Brazil Tax Forum 2020

ITR held its first Brazil Tax Forum on September 9-10 to give Brazilian businesses and tax advisors a platform to discuss the many obstacles they face, eventually leading the conversation to the need for a comprehensive tax reform.

In-house business leaders noted that tax uncertainty arising from having a complex system is being felt across indirect taxation, direct taxation, and transfer pricing (TP) and makes their jobs more difficult. This is why Brazil – even as one of the world’s largest economies – comfortably holds first place in many tax complexity rankings.

With regards to the country’s intricate indirect tax system, where the federal government, states and municipalities are scrapping for tax revenue, a lack of clear definitions in indirect tax judgments decided in favour of taxpayers continue to make it difficult for Brazilian taxpayers to gain the level of tax certainty they seek.

“In 2017, we had a favourable decision regarding [a] matter but this doesn’t mean that the judicial discussions are over. After three years we have no definitions or security for the taxpayer over how, when, and which credits we can offset to effectively compensate other federal taxes,” said Ana Paula Olinto Yurgel, tax manager at Yara Brasil Fertilizantes, commenting on the ICMS exclusion for the PIS/COFINS taxable basis.

Furthermore, taxpayers have say the Brazilian Supreme Court has contradicted and confused the rules on tax incentives granted by states, delaying the end of the country’s tax wars.

“We could see the light at the end of the tunnel when we consider the situation of the tax war in 2017… In August we were surprised by two decisions by the Supreme Court,” said Paulo Nobrega, head of tax at Ontex.

Panellists were also unimpressed by Brazil’s proposed digital services tax (DST), citing more prominent concerns including how to classify digital offerings and pay for foreign technology. Infighting between the state and municipal authorities, combined with a lack of clarity in some legislation, is also causing problems.

“DST proposals don’t seem to fit the Brazilian system… it’s not a good way to address the problems we have here,” said Rodolfo Araújo, head of tax at iFood.

Close to 80% of tax professionals said the country’s tax system has prevented corporate investment on at least one occasion. Some investment opportunities may come from more merger and acquisition (M&A) activity expected in 2021 as many businesses are priced down due to the COVID-19 pandemic.

Investment and deal-making in Brazil has historically presented more tax risks for multinational companies than in other countries, largely due to the complex tax framework and issues with the judiciary.

The country, however, is moving towards OECD standards on transfer pricing (TP) and is encouraging a broader shift in how the tax authorities are dealing with taxpayers to develop a cooperative culture.

Tax uncertainty reigns on all fronts, only reinforcing the need for an overhaul of the tax system. There are concerns that the Brazilian government could trigger a wave of litigation in the short-term through its smaller tax reform. Nevertheless, many businesses see this as a necessary evil to achieve fundamental change.

Reform is key.