This content is from: Sponsored Content

Brazilian taxpayers want greater focus on simplicity

In a series of exclusive interviews, Matthew Gilleard talks to five Brazilian taxpayers from the automobile, chemical, IT and oil and gas industries about recent and future challenges, their relationships with the tax authorities, and what measures they would recommend to authorities and legislators to improve taxpayer-tax authority interactions in the future.

Júnia Abrantes, Brazil tax manager at Weatherford – Oil & Gas

International Tax Review: What are your biggest concerns at the moment?

Júnia Abrantes: One of the biggest concerns for Brazilian taxpayers is the expected new tax legislation which will state the tax treatment to be applied on the changes provided by the new accounting rules. In 2007, the Brazilian accounting practices were substantially changed [by Law no. 11,638/07].

In general terms, the changes introduced aimed at the convergence of Brazilian accounting principles with the International Financial Reporting Standards (IFRS). From a tax perspective, the Brazilian IRS decided, at that moment, to make null the accounting changes in the income tax returns [Law no. 11, 941/09]. According to the discussions I am aware of, there is a new project of law being prepared to determine the tax impacts of such changes in the Brazilian accounting rules. Therefore, there are rumours related, for example, to the new rules on the tax deductibility of goodwill paid. Legal entities that recorded a goodwill but have not considered it deductible until now may lose their right to make such an expense deductible in the future.

ITR: Generally, what are the obstacles and challenges facing corporate taxpayers in Brazil?

JA: One of the major challenges in Brazil is to comply with all the tax returns required by the federal, state and municipal tax authorities. One suggestion is to make these tax returns less complex and more useful in tax inspections, for example. Despite the fact the tax authorities have almost all of the tax information filed in these tax returns, the tax inspector requires the same information during an inspection.

ITR: How would you describe your relationship with the tax authority?

JA: The tax authorities, in general, have no background in the taxpayers' activities and specialties and have difficulties understanding how the accounting and tax rules are applicable and adjustable in each specific case. Given that, it is not unusual to receive tax notices that do not make any sense.

ITR: What is the most important message for the authorities? If there was one thing you could change about the way they operate, what would it be?

JA: The tax authority should have tax inspectors prepared and focused on specific activities, such as the oil and gas industry, the mining industry, and financial institutions. My message would be to ask them to discuss with the company's tax representative how things work and check the information that can be cross-checked with other information also prepared and provided by taxpayers.

ITR: What are your priorities for the year ahead?

JA: My team and I have been working to make sure the companies under our care are in compliance, not only with the accounting and tax legislations, but also with the tax authorities' understandings based on the jurisprudence held in the administrative and judicial levels.

Augusto Flores de Flores, tax director at DAF Trucks Brazil

International Tax Review: What are your biggest concerns at the moment?

Augusto Flores de Flores: Nowadays, my biggest concern is related to the INOVAR-AUTO tax regime, because DAF is a "newcomer" and while we need the INOVAR-AUTO to reduce the IPI (VAT) tax burden (otherwise we won't be competitive), in parallel we need to increase the activities performed in Brazil in place of certain activities we are currently doing abroad (R&D, engineering, manufacturing and so on) as this is a requirement to get the benefits of the INOVAR-AUTO. There are other concerns based on topics that are not well explained in the law, though that is a very common feature of operating in Brazil, unfortunately.

ITR: Generally, what are the obstacles and challenges facing corporate taxpayers in Brazil?

AF: There are so many challenges, but mainly, compared with other tax authorities around the world, I think the Brazilian tax authorities are very focused on tax collection. Therefore, what happens is that on many occasions companies do tax planning or they have an understanding about the rules and it is not accepted by the tax authorities. As a result, Brazilian companies need to spend much more money with attorneys, consultants and so on.

Also, Brazilian companies must comply with so many tax obligations and so many tax returns – some of them yearly and others monthly – that tax teams often need to be huge.

It is also very complicated for Brazilian tax professionals to explain the Brazilian transfer pricing rules to foreign investors. These rules are very different from the OECD or US transfer pricing rules. The same applies for R&D tax benefits, which are very different from rules governing the same around the world.

ITR: How would you describe your relationship with the tax authority?

AF: I would describe the relationship with the tax authorities as respectful. That is it.

ITR: What is the most important message for the authorities? If there was one thing you could change about the way they operate, what would it be?

AF: Simplify, simplify, simplify. I would eliminate withholding taxes (there are so many withholding taxes in Brazil on domestic and international services), create a new VAT (to replace the many we have at the moment, including IPI, PIS, COFINS and ICMS), and eliminate some tax obligations. It would also be greatly appreciated if the government could eliminate the Tax Substitution System, which obliges the manufacturing industries (in most cases) to anticipate the tax collection instead of considering the whole chain (wholesaling, retail, final customers).

ITR: To what extent is tax transparency becoming more of a focus for you? Do you think companies in Brazil are becoming more transparent in their tax affairs?

AF: That is the current focus that the tax authorities have in Brazil. The Brazilian governments (all levels, from the federal, state and cities) are investing a huge amount to achieve a tax transparent environment, but instead of simplification, taxpayers are facing more and more obligations and investments in IT and people.

ITR: What are your priorities for the year ahead?

AF: To establish an efficient transfer pricing policy and to keep the tax strategy as simple as I can.

Daniel Hora do Paço, assistant manager in the tax division of Petrobras' legal department

(These remarks represent a personal opinion and do not necessarily reflect the views of Petrobras)

International Tax Review: What are your biggest concerns at the moment?

Daniel Hora do Paço: Ancillary obligations related to digital tax accounting, so EFD [Digital Tax Bookkeeping] and everything else.

ITR: Generally, what are the obstacles and challenges facing corporate taxpayers in Brazil?

DP: Tax assessments coming from different interpretations of tax law. You can try to overcome this with good internal and external consultants. The workload related to EFD and the lack of time and personnel to handle it are also issues. You can try to overcome this by investing in automated systems.

ITR: How would you describe your relationship with the tax authority?

DP: It is difficult. Both parties do not trust each other, and there's a lot of prejudice.

ITR: What is the most important message for the authorities? If there was one thing you could change about the way they operate, what would it be?

DP: Sending drafts of tax regulations to taxpayers before they are enacted would help everyone to understand interpretation concerns.

ITR: To what extent is tax transparency becoming more of a focus for you? Do you think companies in Brazil are becoming more transparent in their tax affairs?

DP: Definitely there is greater transparency, born of both internal (Brazil's EFD) and external (Sarbanes Oxley, BEPS and so on) pressures.

Rogerio Leite Araujo, tax consultant at Voxx Consultores and accounting and tax professor at Kroton University in Sao Paulo, Brazil. He was previously tax manager for a number of multinationals, including IBM and GE.

International Tax Review: What are your biggest concerns at the moment?

Rogerio Leite Araujo: The Brazilian government has been improving the digital system for tax management and control: SPED (Public System of Digital Bookkeeping) which represents a real time connection between taxpayers and tax authorities.

The system was implemented in 2007, initially for billing invoices and in the following years the SPED should cover all tax transactions and tax obligations that exist in Brazil, with the promise to reduce the massive number of tax returns to one or two SPED files depending on business structure, products or services sold and so on.

The big concern at present is that the SPED is now going to the final stage, when the income tax return will be part of the programme for 2013 accrual basis, but the promise to reduce or eliminate those existing tax returns has not yet been fulfilled. This delay in replacing tax returns has been causing duplicity in the information submitted to the tax authorities and mismatches between different returns, resulting in high value penalties in the assessments and also significantly increasing the number of hours necessary to comply with the tax authorities' requests.

ITR: Generally, what are the obstacles and challenges facing corporate taxpayers in Brazil?

RL: Generally Brazilian tax leaders are very busy with compliance matters. I would say that in Brazil, tax compliance takes around 80% to 85% of the working time of Brazilian tax teams. This means there often is not enough time left to focus on strategy and tax planning and ultimately to be part of the profitable centre of the company.

This focus on compliance measures is explained by the massive number of tax returns every Brazilian company should submit every month, some of them with repeated information but in different returns. Again, this increases the potential of mismatches in the tax returns, resulting in penalties.

Brazil has the highest number of working hours to comply with tax regulations: around 2,700 hours per year. Additionally, the Brazilian tax authorities implement several new tax laws every day – in the past 24 years there were 4 million new tax rules. So keeping up to date and measuring those changes and how they will impact the business is the biggest challenge for Brazilian businesses.

To overcome this scenario, Brazilian tax heads should be supported by very skilled teams and have the support of tax experts from renowned firms trying to act as proactively as possible, and not reactively as we usually see today.

ITR: How would you describe your relationship with the tax authority?

RL: Relationships with the tax authorities can vary depending on which tax authorities you are dealing with. The federal tax authority promotes a higher level relationship with more professionalism than at state or municipal level.

Because of the SPED programme, interactions with the tax authorities are reducing drastically. Tax auditors now have access to all of a taxpayer's information in their systems, checking everything they want without the need to formally ask for any document from the taxpayer. In fact in most cases when you receive a tax auditor, they already know what the inconsistencies are and might ask only about problems they found in the information supplied through SPED. And sometimes they will just send the assessment.

But usually tax auditors are friendly if taxpayers work closely with the auditor, respecting their timelines and requests and giving them the proper answer. This proactive approach can help to avoid circumstances where initial tax audit turns into assessment.

ITR: What is the most important message for the authorities? If there was one thing you could change about the way they operate, what would it be?

RL: Brazilian taxpayers complain about the penalties imposed by the tax authorities when they find something wrong. The value of penalties plus interest sometimes surpasses the value of the taxes not paid correctly.

Brazilian taxpayers want the penalty system reformed. Before the tax auditor issues an assessment, they should evaluate if those mistakes were intentional. Only for tax avoidance is it justified to charge high value penalties; for cases where the taxpayer did not act intentionally, they should charge only the interest.

ITR: To what extent is tax transparency becoming more of a focus for you? Do you think companies in Brazil are becoming more transparent in their tax affairs?

RL: The SPED system creates transparency in the relationship between taxpayers and tax authorities. The taxpayer electronically provides all tax transactions to the government on a daily basis. There is no space for tax avoidance and every transaction should be approved by the government before issuing an invoice.

Because of this, taxpayers should be very careful in each transaction performed by the company, given the proper tax impact and risks, certifying that they will be reported properly to the government.

ITR: What are your priorities for the year ahead?

RL: The following will be priority areas in the coming year:

  • Implementing SPED for income tax returns, adjusting the systems to fulfil the correct tables and giving the proper format to comply with regulations;
  • Keeping up to date about new tax regulations. Brazil usually rules most impactful laws in the year end; and
  • Trying as much as possible not to lose tax team members. They are the most valuable asset in the company and now in Brazil the market is very hot for tax experts. If they leave, they also take with them the expertise learned in the company and critically, they know the existing tax issues in the company and where the tax information is, such as tax basis, tax forms and so on. This is very helpful at the time of audit.

Cristina Sampaio Cavalieri Teixeira, founder of GR8 Tax & Finance Consulting, and former Latin America tax director and Brazil finance director at DuPont

International Tax Review: What are your biggest concerns at the moment?

Cristina Sampaio Cavalieri Teixeira: One concern relates to VAT credits that accumulate in many countries in Latin America and the corresponding difficulty to get a refund. Also, the lack of knowledge on reporting deferred taxes to the headquarters can cause significant adjustments impacting the company's global effective tax rate. Lastly, complying with the large number of electronic requirements, especially in Brazil, is a huge challenge.

ITR: Generally, what are the obstacles and challenges facing corporate taxpayers in Brazil?

CT: Nowadays it is certainly the fact that all filings are becoming electronic and can be easily checked by the tax authorities. This significantly increased the speed at which companies are getting tax assessments and they will not necessarily have time to fix the problem in order to provide the right answer. The only way to overcome this obstacle, as far as I can see, is by planning ahead and organising the company robustly in advance.

ITR: How would you describe your relationship with the tax authority?

CT: It is cordial, but with very little transparency from the side of the tax authorities in terms of explaining what they believe they are finding so the company can prove otherwise before getting an assessment.

ITR: What is the most important message for the authorities? If there was one thing you could change about the way they operate, what would it be?

CT: I would ask them to be more transparent during audits in order to give taxpayers a chance to explain what they think they are seeing, before assessing, especially in Brazil. They need to stop thinking that companies are the enemy, when they are ethical.

ITR: What are your priorities for the year ahead?

CT: Keep a close eye on the changes of interpretation of law and implement tax strategies to reduce costs, as every penny will make a difference.

Related