Tax technology in Brazil: Shifting the burden of tax audits to taxpayers
Dealing with corporate taxes in Latin America has been a significant challenge for corporations for a long time, especially in Brazil. Cristina Sampaio Cavalieri Teixeira, managing partner at GR8 Tax & Finance Consulting, and former Latin America tax director and Brazil Finance Director at DuPont, explores the increasing burdens being placed on taxpayers.
Laws and regulations have always been very difficult to interpret in the region, mostly due to the poor wording of the tax legislation, which results in a number of possible interpretations. In addition, the sheer number of taxes has been a challenge in itself.
In more recent years, companies that operate in Brazil have started to suffer with another issue: tax technology.
In 2007, the Brazilian government began to create a number of new electronic filings (including the digital public bookkeeping system (SPED)) which companies must comply with or pay high penalties.
Though it was created under the supposed intention to be one more initiative to automate the relationship between the tax authorities and taxpayers, the truth is that the strategy behind all of these electronic filings is to shift the burden of a tax audit from the tax authorities to the taxpayers. Companies have to invest a significant amount of money in their systems to comply with all the obligations that have been created by the government. And the tax authorities, in turn, take much less time and use fewer resources to audit companies.
It amazes me to see that the first assumption of the SPED creation is that it was done to “allow a better business environment for companies in Brazil”. The reality is that these obligations have increased even further the so called “Brazilian cost”, which is what companies have to invest (beyond the actual company’s operations) to be able to make business in Brazil. The right to operate has become even more expensive in Brazil.
Back in 2001, the Brazilian government had already created something of this nature – the IN 86, in which companies were supposed to keep all accounting books in a specific electronic format, as detailed by the tax authorities. Companies did not pay much attention to that obligation at the time, until tax authorities started to request those files under audit. Since the penalty for not presenting the files in the appropriate format within 20 days is very high (5% of the company’s revenue), companies started to rush to get the files done. The problem is that many times it is not exactly easy to go back five years and build these files from scratch. More often than one would wish, companies find a significant number of manual entries not properly documented in their accounting books, which makes it very hard to prepare proper electronic files. As a result, many companies have spent a significant amount of money to make this happen.
Similarly to IN 86, the information required today must be provided in the specific format required by the tax authorities. In that way, their systems can easily and quickly read and cross-check all information provided in those files. The difference is that now the requirement includes periodic fillings with the government. This makes companies that choose not to file very visible to the eyes of the tax authorities and subject to penalties.
Therefore, most companies do the filings today; even if the information filed does not necessarily tie with the other tax compliance obligations (such as tax returns) filed with the tax authorities. And that’s where the problem resides.
Today, for example, companies provide their full balance sheet detailed by account on the Accounting SPED. Tax authorities can then cross-check that with the profit and loss information in a company’s tax return, which is the basis of the taxable income, and with the adjustment made to the tax basis. In most cases, this information will not tie. A full audit can then start, which could take a direction that it possibly should never have taken if all files tied in the first place.
Tying all existing electronic obligations is not an easy exercise today in Brazil. There are several reasons for that, including: the company’s operations and systems are too complex; there are different people in different departments filing obligations that require the same information with different data; the person preparing and filing the electronic requirement does not realise there will be a tax implication to a wrong filling; and the simple fact that the number of electronic obligations being filed today is very high.
You don’t want to be under audit to then realise that your files do not tie and you need to find out which one has the correct information. When you have two files that should have the same information, but don’t, the only way to prove to the tax authorities which one is the correct one is by gathering the documentation that supports the correct file. Even if an independent auditor audits your company, you will have to prove with documents that your balance sheet is accurate. Remember that tax audits always tend to start four years after the fact, so it can be very hard to dig into history and find these documents if the company does not keep proper records and documentation processes.
If the company cannot prove the balance sheet is accurate by supporting it with the actual documentation that originated the accounting entries, there is a risk of having the company’s profit presumed by the government. Depending on the industry, this can represent a huge tax penalty, since the margins considered by the government on this presumed profit calculation may be much higher than the company’s actual net margin.
My recommendation is that companies be proactive and implement a methodology of quality control of these electronic filings. They can then rest assured that they would not suffer the consequences of a poor management of all of this complex electronic filings system that Brazil has created.
Brazil has not yet finished setting up all electronic requirements, so, unfortunately, companies should continue to invest in order to comply with all of them.
While this trend started in Brazil, it is quickly spreading to other countries in Latin America. In the past, Brazil had already given ideas like this one to other governments. Therefore, even when Brazil is done setting up all of the requirements, we will certainly need to continue working on similar fronts in other Latin American countries.
Cristina Sampaio Cavalieri Teixeira (pictured above left) – email@example.com – is managing partner at GR8 Tax & Finance Consulting in Sao Paulo, Brazil. She was previously head of tax for a number of multinationals, including Cisco Systems and DuPont, where she also held the role of Brazil Finance Director.