Minimum price: decisive step against tax evasion



Source: Correio Braziliense (May 26, 2012)

Brazil's socioeconomic reality has changed a lot in the last 10 years. Research carried out by the Brazilian Institute of Geography and Statistics (IBGE) shows that several indicators have had significantly improved performance, such as per capita income (increase of 176%) and unemployment rate (reduction of 45%). But that was still not enough to change the sad scenario of smuggling and piracy in our country.

The Underground Economy Index, released at the end of 2011 by the Brazilian Institute of Competitive Ethics (ETCO) and the Brazilian Institute of Economics of the Getulio Vargas Foundation (Ibre / FGV), fell by 1,1% last year in relation to 2009. After registering growth for two years (2008 and 2009), with a speed close to that of GDP, the underground economy accentuates the rate of decline, reaching, for the first time, around 17,2%. Despite this, the volume of money involved in the shadow economy has grown (from R $ 589 billion in 2009 to R $ 653 billion in 2011).

The explanations for these numbers were found in a survey by Fecomércio-RJ / Ipsos. The result indicates that the number of Brazilians who consume products of irregular origin jumped from 42% in 2006 to 48% in 2010. Most consumers heard in the survey justify the price difference between the legal and the illegal product as the main motivator of the purchase.

Many Brazilian consumers have not yet realized that the lowest price includes tax evasion, embezzlement, contraband, lack of product guarantees and, possibly, worse quality. How to deal with a problem that does not come up against physical boundaries and is culturally accepted by society? It is evident that stricter laws can contribute to discourage the practice of contravention. Today, very little is done on a punitive basis, both against those who co-opt someone and against those who are co-opted.

The tax issue is perhaps the most important in this regard. Much has been discussed about the tax burden in Brazil, one of the highest in the world, and especially about the difficulty in the process of paying taxes. If we take the cigarette sector as an example, we see that, in 2011, the share of products sold originating from smuggling and manufactured by companies that possibly do not collect their taxes properly reached about 30% of the Brazilian market. As a result, tax evasion is estimated to have reached the R $ 2 billion mark.

The formal industry, pressured by the high tax burden, today above 60%, is forced to practice prices much higher than those offered by the illegal market. The difference between prices charged by the formal industry and smuggling in some Brazilian cities can reach a stratospheric 240%.

Through Law No. 12.546, sanctioned on December 14, 2011 by President Dilma Rousseff, which among other topics will introduce the change of the IPI system for cigarettes, increasing the tax burden to close to 70% by 2015, the federal government created the minimum price for the sale of cigarettes. The goal is to curb tax evasion caused not only by smuggling, but mainly by companies that fail to pay all taxes due. The measure brings penalties to retailers who sell cigarettes below R $ 3 (2012), and the merchant may have the product seized and still be disqualified from selling cigarettes for five years.

For the Federal Revenue, the law aims to "curb the tax evasion that occurs in the cigarette manufacturing sector by the predatory practice of prices that encourage unfair competition in the sector". The initiative is an important step in the fight against the illegal market, but it cannot come alone. In order to prevent it from ending like other laws that “do not stick”, the inspection and the appropriate punishment must be companions inseparable from the minimum price.

The fixing of the minimum price, according to the IRS, "will provide greater competitiveness among companies, ensuring the implementation of favorable conditions for the development of activities in an environment of fair and fair competition". However, the established minimum price is still far from being able to cover all costs, margins and taxes paid by manufacturers.

With the new IPI rules, selling a pack of cigarettes for R $ 3 and paying all taxes will possibly mean still working with a negative margin, which increases the risk of probable tax evasion. Economic-financial analyzes show that, ideally, the minimum price should be set at a level between R $ 3,50 and R $ 4 in 2012.

In order for the country to continue moving forward and to count on an even more attractive business environment, it is essential to persevere in reducing the current levels of tax evasion, not only in the cigarette sector, but in all those that stand out for the high tax evasion, in a way to give priority to an effective balance between market agents, in line with what the principles of free initiative and free competition set forth in Article 170 of the Constitution assert.

Finally, the statement that the increase in taxation on cigarettes would lead to a reduction in consumption is not sustained, since, in practice, it tends to imply a migration of consumption to the illegal market, which, with artificially low prices, constitutes in an even more attractive offer for new consumers.

Robert Abdenur

Diplomat and executive president of the Brazilian Institute of Competition Ethics (ETCO)

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