Battles for tax simplification


Author: Everardo Maciel

Source: Jornal do Brasil, 02/02/2009

Modern tax systems have evolved to adjust to new circumstances dictated by the complexity of economic relations, due mainly to globalization and the sophistication of financial businesses. Not infrequently, they were also affected by the intensive use of tax favors. From all of this, tax systems have become increasingly complex.

As a consequence, the possibilities for tax evasion and abusive tax planning were increased, and the cost of complying with tax obligations (compliance costs) increased. In many forums the possibility of extinction of the IRPJ has already been raised, due to the effective inability to face issues such as transfer prices, tax avoidance, mergers, mergers and divisions etc. In the United States, compliance costs already represent almost 15% of the value of tax obligations. General anti-tax rules have been incorporated into positive law in almost all developed countries.

In contrast to this trend, a reaction to “tax chaos” was forged, as pointed out by Klaus Tipke (Tax morale of the State and the taxpayer), by requiring, in many countries, the adoption of simplifying rules. In Brazil, this reaction was sometimes expressed through the defense of the single tax. In Eastern Europe, income taxation has come to ignore ranges, deductions, rebates and progressivity, with the institution of the so-called flat tax. Without making a judgment about the solutions adopted, there is plenty of evidence regarding the demand for simplification.

Richard Musgrave, the main theorist of modern public finance, who died two years ago, already proclaimed, in a correspondence dated 2004, published in the first edition (April 2008) of the Revista de Finanças Públicas e Fiscal Direito, the imperative need to simplify teratological legislation of the American income tax.

The principle of practicality that embodies the purposes of simplification is today of equal importance to the classic principles of contributory capacity and neutrality. Good fiscal policy is able to balance these three principles in a balanced way.

In Brazil, the biggest achievements of the simplifying wave were: the elimination of the monetary correction of the balance sheets that made the IRPJ legislation unintelligible matter for the tax authorities, taxpayers and specialists, about being a notable instrument of concentration of corporate income; the implementation and extension of the presumed profit regime, which brought service providers to formality who frequently promoted the deplorable spectacle “with or without invoice”; and the institution of Simples, which benefited small and micro-enterprises with a fiscally favored regime and as simple as its name suggests.

The battle for tax simplification in Brazil has suffered, in recent years, some setbacks. Simples Nacional aimed to gather federal, state and municipal rules related to the tax treatment of small and micro-enterprises: unfortunately, what was simple became frighteningly complicated, raising companies' accounting costs by more than 50%. The PIS / Cofins, before being easily understood, despite the cumulative effect, became a patchwork that even the tax authorities are unable to understand. Taxation of beverages, within the scope of PIS / Cofins and IPI, which resulted from the simple application of an ad rem rate, became subject to a myriad of rates that will make the tax evaders happy and will lead to long and long legal disputes. The IRPF welcomed intermediate rates whose benefits will not be perceived by taxpayers, aside from becoming more complex and moving in the opposite direction than has been done in the rest of the world, in a flagrant exercise in tax demagogy.

It is not claimed that the tax reform proposal, under examination in the Chamber of Deputies, when it intends to merge PIS with Cofins and incorporate the CSLL to the IRPJ, can be seen as a form of tax simplification. As they are practically the same, the proposed merger and incorporation are merely silly. It is simplistic and not simplifying. Nor is it reasonable to assume that an ICMS legislation to be approved by Confaz will mean simplification. If the proposal were successful, it would be a monster to welcome all the idiosyncrasies of the different tribes of the ICMS, certainly far more complex than the current legislation.

A real simplification would involve the establishment of a national VAT, with federal legislation, state supervision and collection automatically shared between the Union, the states and the municipalities. This is an uphill battle that demands an exceptional political climate and not too adverse economic conditions. For now, why not promote the simplification of specific issues, but no less relevant?

Everardo Maciel

Tributary consultant