Brazil remains cautious about its tax reform expectations
Brazil's complex federal and state structure has created a litigious framework for tax authorities, making tax reform in Brazil a continued political focus.
The production and consumption of goods and services has born the heaviest tax burden in Brazil for years, which has brought forward a series of disputes and challenges between Brazilian taxpayers and municipalities. For that reason, the area has been widely viewed as the main focus of tax reform in Brazil.
In a 2015 survey published by the OECD, Brazil has the second highest number of administrative tax proceedings (209,777), losing only to Canada (215,668). Only France has more than 200,000 cases (208,843), with the other countries surveyed having less than 60,000.
In relation to value, Brazil has the largest percentage of tax proceedings, with the money spent on such endeavours accounting for 2.4% of GDP. In most of the surveyed countries, this proportion is below 1% (Canada - 1%, Mexico - 0.5%, and South Africa - 0.3%, respectively the three next highest).
These fiscal disputes hinder business development, contributing to the so-called 'Brazil cost'. Tax Reform, which was widely mentioned in the context of recent Presidential elections in late 2018, is supposed to address those matters.
Tax reform’s primary goal is the simplification of taxation through the aggregation of five production, consumption, and services taxes charged at the federal, state and municipal level, collected in destination or origin depending on the case. These include:
ICMS, a value added tax on goods, communication and transport services by states;
ISS, a municipal tax on specific services listed in legislation;
IPI, a federal excise type tax;
COFINS, a federal tax on revenues of any nature; and
So these taxes would all become one unique IBS, a tax on goods and services, to be collected by place of destination of service/goods (consumer).
The wide array of consumer taxes and respective rules regarding tax credits or cumulative regimes creates a conflict between tax jurisdictions at the federal, state and municipal levels, and is one of the main problems faced by legal entities in Brazil, particularly in digital services and products. There is a great effort by tax collecting entities to characterise certain activities as taxable events in legislation to create legal certainty to businesses who are structuring their organisation with tax considerations.
Among the activities that create this type of conflict includes software, which can be ambiguously defined as a product or service and taxed by different municipalities and by states.
The same occurs with online advertising, which is considered by state tax authorities as a type of communication service (although not stated in legislation), yet municipal legislation notes online advertising is a service taxed by ISS.
More broadly, technological development has caused a reduction in the value of VAT-ICMS collected, which has traditionally been based on the circulation of tangible goods. As a result, there is growing momentum to broaden the concept of communication services so that activities with a technological component are included, ultimately causing tension when identifying services taxable by ICMS and those subject to ISS.
The proposed tax reform advocates one unique tax that will include the shipment of goods and rendering of services, while focusing on intangibles, assignment and licensing of rights, the leasing of goods, as well as import operations.
In theory, a taxation on destination, and the proposed unification of indirect taxes, could potentially reduce a significant part of the litigation arising from the segregation of merchandise and service, but on the other hand, could exacerbate problems associated with identifying tax jurisdictions and the place of the final consumer.
Several reform initiatives were made in the past five decades, all with basically the same goals: to reduce bureaucracy, reduce the number of taxes and litigation, and better share the collection between states, municipalities and the federal government.
However, none of them actually became a reality, so other ways were developed to find solutions to Brazil’s tax system, including the creation of specialised tax justice, alternative models of conflict resolution such as arbitration, and a specific tax model for the digital economy.
Renata Correia Cubas
This article was written by Renata Correia Cubas of Mattos Filho.