Source: Valor Econômico - São Paulo / SP - GENERAL INDEX - 25/11/2009

From Sao Paulo

Complex, confusing and casuistic. This is the definition of the experts for the intricate Brazilian tax legislation. The excess of rules often leads to conflicting interpretations by the IRS on the same case. “The Brazilian model is perverse with the little ones,” says lawyer Helenilson Cunha Pontes, founding partner of the firm to which he lends his name. An example: if a company that follows the real profit regime sells a commodity to another company whose tax regime is the presumed profit, the latter cannot recover the credit for the payment of PIS and Cofins. The point is that 90% of Brazilian companies are within the presumed profit regime.

The picture of what best represents this tangle of laws and regulations is in the World Bank's report (“Doing Business” 2010). The Brazilian businessman works 2.600 hours a year to fulfill the tax obligations with the government. Thanks to this performance, the country ranks first in the bureaucracy ranking, according to the report. Cunha Pontes points out that there are five calculation systems for the same tax. He believes that, today, businessmen may prefer to simplify the tax system than to reduce the tax burden. "The cost of compliance ends up being very high," he says.

For Cunha Pontes, the complexity of the system and the excess of norms cause legal uncertainty. As an example, he mentions the creation of Simples Nacional for microenterprises. The Constitution was amended to create a single system that would include all taxes, paying a single rate. According to him, the amendment that created Simples left a gap so that States could charge ICMS. "With this, the companies that adhered to the system had an increase in the tax burden, when the objective of the measure was to reduce", he says.

The distortion occurs in interstate sales. The loophole left in the legislation provides conditions for States to charge the difference in rates between one region and another, without taking into account that the company that sold has already collected the single tax. “In Pará, the ICMS rate is 17% and in São Paulo it is 7%. It is this difference of 10% that the state government wants to charge the company opting for Simples, which has already paid the 4% provided for in the system ”, he explains.

The cascading effect of taxes often undermines the competitiveness of companies that outsource activities that are not of the essence of their business. "The gain from outsourcing is often lost because taxes are distributed through the supply chain," explains economist Rogério Cesar Souza, from the Institute for Studies for Industrial Development (Iedi). The result is that many companies try to verticalize production to mitigate this effect. "It is a distortion because verticalization should be a strategy to seek more productive efficiency and not tax engineering."

A study released by the Federation of Industries of the State of São Paulo (Fiesp) defends the need to relieve exports of indirect taxes. The work shows that this measure does not harm the agreements of the World Trade Organization and neither the Brazilian Constitution. However, a portion of the taxes cannot be fully recovered. With the exchange rate appreciated, this tax wedge ends up affecting even more the competitiveness of the national product.

Souza, from Iedi, recalls that in the case of productive investments, in addition to the accumulation of credits, there is the problem of delay in receiving the return. According to him, a company that buys a machine takes two to four years to be credited with PIS-Cofins and ICMS embedded in the price of capital goods. Depending on the interest rate, the loss can vary from 2,6% to 8,2% of the equipment price, according to calculations by the Ministry of Finance. "We are one of the few countries that tax capital goods and then make it difficult to recover the tax," he says.

The Iedi estimates that the accumulated stock of tax credits is around 1,3% of GDP and is concentrated in a few taxpayers - those who export the most and those who buy most capital goods. The Fiesp study shows that 5,8% of the industries' net revenue corresponds to taxes paid in the production stage that cannot be recovered through compensation. "In addition to this non-recoverable portion of taxes on exports, a portion of the 17,11% of recoverable taxes is not effectively offset." (EPA)