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This week in tax: Taxpayer uncertainty at the Brazil Tax Forum

Brazil's tax system continues to change

Tax professionals find more uncertainty in international tax this week as the UK steps back on its Brexit promises and experts at ITR’s Brazil Tax Forum think tax reform in Brazil risks more litigation.

The UK may be trying to get out of the very same deal it negotiated with the EU, but the world keeps turning and tax policy with it. The OECD is racing against time to finalise plans for international tax reform despite the COVID-19 pandemic.

At the same time, the Brazilian government is pushing ahead with its ambitious plans for tax reform and East Asian economies like Malaysia are trying to resolve problems with their own indirect tax regimes.

Most taxpayers can expect the uncertainty over policy to continue, not least in the Asia-Pacific (APAC) region where tax directors are expecting more tax controversy to follow on from the pandemic.

National governments are running huge deficits to try and mitigate the economic fallout from COVID-19. This will likely lead to waves of audits and disputes further down the road. The only certainty in tax policy is that uncertainty is here to stay.

Talking reform at the Brazil Tax Forum

ITR held the Brazil Tax Forum on September 9-10 to give Brazilian businesses and tax advisors a platform to discuss the implications of tax reform in the country.

Leading policy experts at the forum claimed the level of tax litigation will increase as a result of tax reform. Taxpayers in Brazil already face one of the most litigious tax systems in the world. Yet this short-term increase might be worth it to obtain long-term change.

The scale of tax litigation in Brazil was equivalent to half the country’s GDP in 2019, according to EY. The reasons for this are not just down to the tax system itself, but to a lack of specialist tax knowledge among the Brazilian judiciary.

One policy official in the Ministry of Economy was clear that the risks are outweighed by the benefits of reform, especially when it comes to simplifying the indirect tax regime and overhauling transfer pricing rules.

“Potential litigation cannot be a reason for stopping a tax reform, that could be good for business, from advancing,” said the tax official.

“Most of the proposals will reduce tax litigation in the long-term,” said the official. “Every new legislation can create uncertainty and increase tax litigation in the short-term because everything is new,” he stressed.

The Brazilian government is pursuing a dramatic change that will end the formulaic system it has applied for almost 25 years. However, as Brazil returns to the arm’s-length principle, the rest of the world is considering a hybrid system with formulaic elements.

Tax professionals hope that tax reform will lead to a better system for businesses. It could make tax compliance less costly, even if litigation increases in the short-term.

Tax guidance crucial to Brexit

In a new twist in the Brexit saga, the UK government has moved away from the withdrawal agreement bill it negotiated with the EU at a frantic pace in October 2019. There is now more uncertainty over the future of UK-EU trade, customs and state aid than there was in January.

As the December 31 deadline approaches, businesses will need more clarity and guidance from EU and UK officials if the transition is to be successful. Yet the recent change in UK strategy makes it even more difficult to deliver clarity and certainty for taxpayers.

“They can’t keep telling us at the last minute,” said one senior director at a pharmaceutical company. “People need time to plan.”

Speaking at an exclusive ITR event sponsored by Avalara, tax directors agreed that they need a final decision on Brexit and strong communication from the authorities. In a poll of attendees, 90% said there had not been enough guidance from the UK and EU authorities.

This was just as the news of the UK’s new strategy was being processed. The UK has not just broken international law in abandoning the withdrawal agreement, the government has broken its own legal commitments.

The withdrawal agreement would have left Northern Ireland under EU rules on customs, VAT and state aid, while the mainland UK would leave such rules behind. This agreement became British law in February 2020.

Observers have speculated that the UK government may be hoping to secure a US free trade deal by trying to keep the whole of the UK outside EU rules on VAT, customs and state aid. While the UK government insists it is concerned about the status of Northern Ireland post-Brexit.

Whatever the truth may be, the UK government has seen a chance to capitalise on short-term uncertainty. Perhaps the aim is to get better terms before December 31. However, this is a high-risk strategy.

Next week at ITR

Next week will see ITR publish its follow-up coverage to the Brazil Tax Forum and return to the topic of digital services taxes (DSTs).

Across APAC nations, governments are trying to implement DSTs alongside traditional indirect taxes like VAT. And this could lead to the same transactions being hit twice unless extra measures are introduced.

Meanwhile the EU is assessing the impact of the OECD’s pillar one proposals following the leak of the draft reports. This is just as the EU is facing a growing VAT gap from the economic fallout of COVID-19.

Taxpayers can expect the difficulties of 2020 to continue into next year. There is never a quiet moment in tax these days, especially as global institutions try to solve digital tax and national governments battle to contain the fallout of the pandemic.

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