Article published in Revista Exame, analyzes the relationship between illegality and high tax burden

(Article published in Exame Magazine - Edition 1163)

by: Raphael Martins

The crisis reduced the purchasing power of the Brazilian. The tax burden stifles formal business. Control over borders remains fragile. Who wins with all this? Illegality, which has been on the rise since 2014 and sets a new record

JB PIRACY MATERIAOn the eve of a world cup, like the one that starts on June 14 in Russia, the Brazilian's passion for football multiplies the sales of national team shirts. At that time, demand for the canary uniform is 20 times higher than normal, according to Nike, a supplier brand of the Brazilian Football Confederation (the company does not disclose the quantity). So far, it's great news for Nike and retailers eager to cash in on the great phase of the team coached by Tite. But an important portion of the Brazilian fans must appeal to pirated copies of dubious origin, thus aggravating a known problem in the country: that of illegality. Only a third of the uniforms of stars like the versatile Neymar and striker Gabriel Jesus sold around are, in fact, original. According to Ápice, the Brazilian association of sporting goods manufacturers, the presence of such swings hampers investments in the sector, tied at 1,2 billion reais a year. “We could contribute up to 35% more in Brazil”, says Marina Carvalho, Ápice's director.

The slowdown in investments in sporting goods is only one of the consequences of the ills caused by the sale of contraband, counterfeit goods and all types of production that disrespect copyrights or pay taxes in Brazil. This market moved 1 trillion reais in 2017, equivalent to Colombia's gross domestic product and a record for national standards, according to the Underground Economy Index, calculated by the Getúlio Vargas Foundation and the  (ETCO), a social organization to combat corporate deviations such as illegality. The numbers reinforce a terrible trend: the “gray economy”, dependent on illegal goods and services, has grown again. After a decade in which the share lost to informality fell, year after year, from 21% to 16% of GDP, since 2014 the informal economy has grown again - last year it reached 16,6% of the sum of wealth produced in Brazil. To discuss the causes of the repique, EXAME magazine and ETCO promoted the Forum Against Illegality, held on May 24 in São Paulo. The event was attended by authorities such as the former governor of São Paulo and pre-candidate for the PSDB for the Presidency Geraldo Alckmin, as well as specialists such as lawyer Edson Vismona, president of ETCO, economist Samuel Pessôa, of the Brazilian Institute of Economics of FGV, former São Paulo Public Security Secretary Eduardo Muylaert and sociologist Caio Magri, president of Instituto Ethos, a non-profit organization for the dissemination of good governance practices. To debate the effects of illegality on business, the president of cigarette maker Souza Cruz, Liel Miranda, the founder of clothing and accessories brand Osklen, Oskar Metsavaht, and the vice president of fuel manufacturer Raízen, also participated in the debate. Antonio Ferreira Martins, as well as Marina Carvalho, from Ápice.

shutterstock_1012271758Behind the increase in illegality rates there are a number of factors that interact with each other. "Informality is a complex problem: it ranges from pressure on the tax burden due to income transfers to distortions caused by small organized groups that are able to impose agendas of private interest, such as exemptions, to the detriment of the collective need," said economist Samuel People at the event organized by EXAME. A consensus in the debate was that the economic crisis, experienced since 2014 and from which the country has not yet completely emerged, is an important part of the problem. Starting with the impoverishment of the Brazilian. The recession brought GDP down and doubled the unemployment rate, which is at 12,9% of the active population. The consequence: in four years there was a 9% drop in the average Brazilian income, who was more tempted to exchange the original for the copy. According to a survey by the Trade Federation of Rio de Janeiro, carried out in 2016, at the height of the crisis, 96% of the 1 respondents stated that having the low price as the main attraction for buying a product. Of this total, one third admitted to having already consumed piracy to save resources.

To make matters worse, companies that continued to be formalized in the recession were penalized by the government's searchable revenue in the fight against the leak in public accounts. Although the crisis depressed consumer demand across the country, the tax burden has increased by half a point since the beginning of the crisis: today it is 32,4% of GDP, well above the Latin American average of 13%, and close to OECD level, club of the richest countries in the world, where the productivity and quality of public services justify the average annual bite of 34% of GDP. In the midst of all this, the diminished public coffers helped to trigger a public security crisis in many states. Result: there was an escalation of cargo thefts, which practically doubled since 2013. Last year, the rate closed at 11 occurrences per 100.000 inhabitants, according to data from the Brazilian Forum on Public Security, a center for the study of crime. The proliferation of assaults on truck drivers in areas where the crisis has gotten stronger, such as the suburb of Rio de Janeiro, has opened up more space for smuggling. Nowadays, Rio's public transport is full of street vendors with meat, milk, treats and all sorts of goods stolen in the neighborhood.


The damage caused by the gray economy is not felt homogeneously in the different production chains. Nothing beats the damage done to cigarette manufacturers: 60% of the 20 billion reais handled by smokers in the country in 2017 went to the informal economy. Almost all of this criminal market is occupied by brands smuggled from Paraguay, a country in which the average tax burden is 16% of GDP - in Brazil, the tax on the tobacco industry is equivalent to 70% of the sector's revenue. With so much tax on national production, and such laxity on the borders on the sweepstakes coming from Paraguay, it is not surprising that the cigarette brand most sold in Brazil is Paraguayan. This is Eight, a real “killer mouse” with nicotine levels 20 times higher than the national ones. Found on the internet and in bars around the country for up to 2 reais a pack - the cheapest Brazilian cigarettes, Belmont, Continental and Minister, cost at least 5 reais -, Eight holds 12% of the market in the country, ahead of traditional competitors such as Derby, Free and Hollywood. “We need to guarantee, through Mercosur or other groups in which Brazil participates, pressure to match the competition”, says Liel Miranda, president of Souza Cruz. “Our taxation is regressive. It penalizes the poorest in price and pushes it towards a product of poor quality. ” Next in the list of the most pirated products are glasses and clothes, including the shirts of the Brazilian selection: the illegal market for these items represents 31% and 15% of the total, respectively.

The advance of piracy is not limited to consumer goods. Another affected market is pay TV, the fourth most consumed item in the underground economy. According to the Brazilian Pay-TV Association, 3,3 million households have clandestine cable and internet connections - the illegal service became known as “gatonet”. If legalized, gatonet would be the country's third largest operator. One of the mandatory items of the sacoleiros in Ciudad del Este, a Paraguayan mecca of swag on the border with Brazil, is the satellite signal receivers for closed channels sold for over R $ 200. Today, 13% of Brazilian pay TV spending is directed to illegal operators. The spree, however, may be about to end. A bill pending in the Senate provides for a fine of R $ 10 and a prison term of six months to two years for anyone who distributes or receives pirated pay TV signals - despite a public consultation by the Senate itself showing that 000% of Brazilians reject criminalization gatonet. "We have to get out of the situation where evasion, cargo theft and other crimes can be accommodated within the Brazilian way," says Antonio Ferreira Martins, legal vice president at Raízen, who recalls that cars in the country consume 95 billion reais per adulterated fuel year.

Geraldo AlckminIn the face of so much piracy, how to fight the problem? Advancing tax changes would be a good start. The Congressional commission for tax reform, which ended last year in the face of the problems of the Michel Temer government, is expected to resume work in June and is expected to send a proposal to plenary in June. The main measure considered is to transform nine consumption taxes into two: value added tax (VAT) and an additional for certain categories, such as cigarettes. The idea is to tax less goods and services to make the original products cheaper - and therefore reduce the difference in relation to the pirated product, which costs less. “We would leave the worst tax system in the world for the best”, says the measure's rapporteur, deputy Luiz Carlos Hauly (PSDB-PR). The proposal has the support of the President of the House, Rodrigo Maia (DEM-RJ), and presidential candidates. “Worldwide, taxation is done with VAT. It is urgent to simplify our tax model to regain competitiveness and reduce tax evasion ”, said Geraldo Alckmin at the event organized by EXAME. “We have a notary culture in Brazil, with rules and more rules. The craze for creating charges for each case is what makes the system so complex. ” In parallel, a private sector project has been gaining momentum. At the initiative of the Association of Industrialists of Colombia, a group of business entities from 15 countries, including Brazil, created in 2016 the Latin American Anti-Counterfeiting Alliance to jointly oversee piracy and pressure governments to tackle the problem. "The plan is for the group to be chaired by people from the private sector and the government, as well as members of the Itamaraty, the Institutional Security Office or the Federal Revenue Service," says Edson Vismona, ETCO's president. There is no shortage of proposals to combat piracy. It remains to be seen whether they will be adopted with strength and speed in the face of a growing problem.


Business, political and third sector leaders discussed the perverse effects on the Brazilian economy of consumption of goods and services that do not pay taxes or respect competition rules - which includes counterfeit copies and smuggled items from countries with a lower tax burden than Brazil
WhatsApp Image 2018-05-24 14.11.09 at