Brazilian tax litigation exceeds 50% of GDP

The Brazilian Institute of Ethical Competition, ETCO and EY, presented, on 28/11, in São Paulo, the study “The Challenges of Tax Litigation in Brazil”, a mapping of the main challenges of this practice in Brazil and potential mitigating measures. The survey considers some relevant aspects of litigation compared to other countries: Germany, Australia, United States, India, Mexico and Portugal.

See the main conclusions of the study

During the event to present the study, the book “Legal Security and Taxation” was also launched, by journalists and writers, Oscar Pilagallo and Fernando Mello. The material was based on the analysis of renowned tax experts, Gustavo Brigagão, Hamilton Dias de Souza, Heleno Torres, Humberto Ávila and Roberto Quiroga Mosquera. On the occasion, EY's technical tax team detailed the main results of the study, which were discussed by tax experts Roberto Quiroga and Breno Vasconcelos, together with Edson Vismona, president of ETCO and Érica Perin, partner of EY for the tax area.

“For Brazil to attract investments, grow and provide public services to the population, it is necessary for the State to collect the taxes due to it and for companies to be secure in relation to current tax rules. Today, the country faces difficulties in both directions, which compromises business development ”, says Edson Vismona, president of ETCO.

Also according to the executive, the relationship between the Brazilian tax authorities and the taxpayer needs to change. “The government cannot regard taxpayers in good and bad faith in the same way. Today, mechanisms are already in place to identify so-called debtors, and there must be a differentiation in the treatment of cases, adds Vismona. 

For EY partner Érica Perin, understanding Brazil's tax litigation is important for both taxpayers and the government. "The high stock of tax credits, the delay in resolving disputes and the inspection strategies for the efficiency of assessments have an impact on the budget of federal entities, on business activity and, in general, on the lives of taxpayers," he said.

The study “The Challenges of Tax Litigation in Brazil” revealed important points related to legal tax security, such as:

Union tax litigation already exceeds half of GDP

The Union's contentious tax credit stock, composed of tax credit from the Federal Revenue of Brazil (RFB) and the Attorney General's Office of the National Treasury (PGFN), reached R $ 3,4 trillion in 2018, according to data from the General Balance Sheet of the Union. This value is higher than the revenues made by the Union and reached 50,5% of GDP in 2018. If collected, it would make the net worth of the Union positive (since 2015, it has been negative).

Tax lawsuits last almost 20 years

The completion of a tax litigation process in Brazil takes an average of 18 years and 11 months, when the administrative and judicial stages are added. The time was calculated based on data from the (i) 2017 Annual Activity Report of the RFB; (ii) report on judgments of the Administrative Council for Tax Appeals (CARF), made available by the agency in 2015 at the time of Operation Zelotes; and (iii) the 2017 and 2018 Justice in Numbers Report of the National Council of Justice (CNJ).

Complexity leads to increased litigation

Among the factors that contribute to the high degree of litigation in the Brazilian tax system, the following stand out: complexity of the legislation; the amount of ancillary obligations; the extension of the country's territory and borders; the high tax burden; and aspects related to penalties, tax debt correction and tax regularization programs that end up making litigation an alternative for business financing.

Tax authorities increase focus on large taxpayers

In recent years, the IRS has increased its focus on inspection

large taxpayers, who represented 68,62% of the assessments in 2016 and increased to 82,05% in 2018. On the one hand, this strategy has an impact on tax collection. In 2018, the investigation of 1.882 collection distortions related to the largest contributors generated revenue of R $ 27,52 billion to Revenue - a record amount for this specific group.

On the other hand, it contributes to the increase in litigation and its weight in the companies' balance sheet. The financial statements of publicly traded corporations show a high representation of tax litigation in this group of companies. In some cases, it even exceeds the company's market value.

Good practices that work in other countries

The experience and practices adopted in other countries point to paths that

they can guide a reform to provide more legal certainty and reduce the generation of litigation in our tax system. The study analyzed six countries better positioned than Brazil (80th place) in the World Economic Forum's 2017/2018 Global Competitiveness Report ranking: United States (2nd), Germany (5th), Australia (21st), India (40th) ), Portugal (42nd) and Mexico (51st), chosen for presenting different models of conflict solutions or for their direct influence (Portugal) or economic similarities with Brazil (Mexico). India was included for also demonstrating a high level of litigation between tax authorities and taxpayers and for not tackling this problem in the deep tax reform carried out in 2017.

Access the main conclusions of the study here:



"We don't need to unify taxes"

For the doctor and professor of Tax Law Roberto Quiroga Mosquera, the ideal would be for less drastic changes to be made than those currently being discussed by the government. He believes that one way is not to focus on tax unification.
“It is no use just joining the taxes that already exist and putting a different name for them” - says Mosquera. As an example, he cites so-called excise taxes, taxes on specific products such as fuels, tobacco and energy. “We already have our
IPI (Industrialized Product Tax). It is a selective tax, which represents less than 5% of the collection, but which already takes the place of excise taxes. There is no need, therefore, to change this tax. ”
For him, taxation alone will not be enough to change the situation in Brazil. “Currently, R $ 1,4 trillion is collected
federal taxes, 80% of which are levied on income and revenue. It would hardly be possible to raise so many resources otherwise. With only 5% of the population earning more than R $ 4 thousand, it is complicated to transfer taxes in an economy
that is stagnant. It is necessary to have an economic change to then make the taxation accompany it. ”


Another difficulty is tax litigation, litigation between companies and the tax authorities. According to Mosquera, there are about 15 thousand companies in this situation, which will end in a discussion in the Judiciary with a ten-year term and a decapitalization of the company, which can generate a major macroeconomic problem.
“And today it is not easy to discuss a tax issue within the federal court. Judges demand guarantees, and this is costly for a
company." According to Mosquera, the tax rule has to adapt to the country's economic factors.
“There is no use for a magic rule to solve the economic problem. It is the substrate of the tax issue. Of course, it will impact business, but that means she is not the savior of the country. We need to change the economy a lot to have a tax rule that is really efficient. ”
For Mosquera, it is necessary to create specific solutions for the country and not have principles based on parameters from abroad.
“What to do so that there is no more cigarette smuggling in Brazil? Eventually companies that manufacture cigarettes
Premium can produce other products to compete with the tax evader. You need to know the Brazilian reality to find the best solutions. ”
As alternatives for greater efficiency in Brazilian taxation, Mosquera points to small reforms, which can be much more assertive. “I find it difficult for the merger of taxes at the federal, state and municipal levels to be accepted. But taxing fate and not origin is an interesting idea. And sometimes, a value added tax, thinking about public finances, may be the most correct. ”

Ethics and legality are fundamental to development

The tobacco industry pays the country's highest tax rates, between 70 and 90%. Meanwhile, taxation in Paraguay is the lowest on the continent, at 18%. The consequence of this, together with the lack of border control, is the growth of the illegal cigarette market in the country. Today more than 50% of the cigarette consumed in Brazil is illegal. As a result, the government stopped collecting R $ 11,5 billion in taxes on the sector last year. In addition, as contraband cigarettes do not meet the phytosanitary standards imposed on Brazilian companies, reducing smuggling will prevent Brazilians from consuming unregulated products. For the Brazilian Institute of Ethics in Competition (ETCO), if the taxes were lower, the consumer would buy more of the national product, and this would increase public revenue.
A survey carried out by ETCO, in partnership with the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV IBRE), reveals that 16,9% of GDP - about R $ 1,17 trillion - originates from the informal economy. This calculation includes the production of goods and services not declared to the government. The evasion of taxes and contributions reduces costs and increases the profit of these companies in an illegal way.

“In the meantime, we, who want to keep up with our contributions, encounter all kinds of difficulties. Many 'penduricalhos' have been
placed over the years, and often the Treasury itself cannot understand this whole mechanism ”- highlighted Edson Vismona, president of ETCO and the National Forum Against Piracy and Illegality, during the Taxation and Sustainable Economy panel.
For him, effective practices that guarantee inspection and fair competition are not only a matter of ethics and legality, but, rather, a fundamental step for the development of the
parents. In the case of cigarettes, according to Vismona, the difference in price is drastic: if a pack of legal cigarettes is sold for R $ 7, the one obtained through smuggling can cost only R $ 3.
- Our market is being delivered to the traffic of these illegal products. In states like Mato Grosso do Sul, for example, 82% of the cigarette consumed comes from smuggling.
Organized crime finances itself with these billions that are evaded.


To solve the issue of parallel products and guarantee the survival of companies in the sector, a group composed of several players has been discussing proposals to make legal trade viable and, thus, to benefit both companies and the government. One solution would be to review the taxation model for these industries.
- We agree that the tax burden on these products needs to be high. But we have to look at the demand, act to crack down on criminal organizations that benefit from this money.

If not, the market will be increasingly dominated by smugglers who pay nothing for it. The largest share of the market does not pay tax. Another practice suggested by currents in these sectors is the physical control of beverages and cigarettes. The ETCO president also stresses that the convergence of actions between public authorities and companies must be a two-way street, always respecting those taxpayers who are up to date with their obligations.
- Otherwise, the beneficiary will always be the regular debtor who makes non-payment of taxes his source of income, harming public coffers, competition and the whole of society.

Smuggling is an evil to be fought

Tax review should prioritize productive sector and focus on weakening the illegal market



The fight against the illegal market that took over the country and expectations regarding the tax review were the main issues addressed by the federal deputy and president of the Mixed Parliamentary Front to Combat Smuggling and Counterfeiting, Efraim Filho, at the Taxation seminar in Brazil.

For the deputy, the productive sector needs to be prioritized and be able to maintain his business. “The problems are not circumstantial, they are structuring. There is a rule in the country to make life easier for the State, the collection, but not to collaborate
with the taxpayer. It is necessary to value those who create jobs and offer opportunities. ”
He questioned the fact that the cigarette sector, for example, has almost 60% of the illegal market. “We are failing to collect taxes and generate jobs. Smuggling is extremely harmful to society. ”
According to Efraim Filho, society is tolerant of small deviations, but when investigating, it is possible to see that the market
illegal finances organized crime, generates evasion of foreign exchange, loss of revenue, in addition to harming the formal labor market and offering a product without registration or control by Anvisa. “It is a game of lose lose. Smuggling inhibits business and needs to be fought. ”
For him, during the period when the country's economy was growing, contraband was not adequately combated
and settled down. However, in times of crisis, increasing losses have been a cause for concern for Brazilian companies.

According to the deputy, despite the challenges, there is fertile ground to advance the discussion on tax reform. For Efraim Filho, the role that Congress assumed in pension reform should be repeated in this agenda. He says the intention is that the productive sector, the Federal Revenue and the government give their opinions so that the proposal has legitimacy.

"We have chosen president and rapporteur, the special tax reform commission is installed, but public hearings must take place so that the most diverse sectors can be heard."
According to Efraim Filho, the great challenge of tax reform is not to change the law, but to change the country's culture. “Our role is to lead the renewal process and keep our hands out for those who want to collaborate.”
For the deputy, Congress is open to receiving suggestions and making a really new proposal possible. According to him, parliamentarians need to accept opinions on the matter and call the responsibility to advance reform. “In the Temer government, the discussion that took place in the special tax reform commission left the legacy of a more mature debate. The diagnosis, therefore, is already ready. Now the focus must be on the approval of the materials. ”

ETCO holds the Taxation and Legal Security seminar – Registration closed

Invitation banner for the seminar held on 25/6/2019

One of the research conducted in 2019 by consultancy EY, at the request of ETCO, showed that the stock of tax litigation by the federal government alone is already equivalent to more than half of GDP.

On June 25, 2019, ETCO held in São Paulo the Seminar on Taxation and Legal Security, which brought together leading jurists to discuss solutions to problems in the Brazilian tax system.

Correio Braziliense holds seminar on illegal market. Participate! Places are limited.

The event 'Correio Debate 10 measures against the illegal market: the 3 Powers united against Organized Crime 'will bring together experts and authorities to discuss measures to end crime, increase security and contain the illegal market, one of the greatest threats to Brazilian society today. The event is a realization of Correio Braziliense and is sponsored by ETCO.

  • Date ………: 04/09/2018
  • Schedule…: 08h to 14h.
  • Location ………: Correio Braziliense headquarters auditorium - SIG QUADRA 02, 340 - Brasília - DF

Join this debate by signing up for free here. Vacancies are limited.