IMF Advises Brazil To Simplify Tax Regime

By Global Tax Weekly

The John Cleese award, for “stating the bleedin’ obvious,” goes to the International Monetary Fund this week, for advising Brazil that it – and its taxpayers – would benefit from a simpler tax regime.

Of course, those who follow international tax developments are likely to be well aware that Brazil has one of the most complex tax regimes in the world for businesses. But for those who aren’t in the know, let me apprise you of some of the grizzly details.

Brazil routinely props up PwC’s “Paying Taxes” time-to-comply league table, and last year it took the average medium-sized firm more than 2,000 hours to complete its tax compliance obligations. And that actually represented a considerable improvement over the previous year, when PwC put the figure at 2,600 hours.

But what makes Brazil’s tax system so nightmarish, when multinational companies are accustomed to tax complexity in the world’s emerging markets (not to mention most developed ones too)? The interaction of national and state-level taxation must play a large part, as does the Government’s incessant tinkering with aspects of taxation.

Corporate tax, at a headline rate of 15 percent, looks fairly competitive at first glance. But that’s before you factor in a 10 percent surtax and a nine percent social contribution, which takes the effective rate to 34 percent.

This isn’t an unusual occurrence, with many jurisdictions having effective corporate tax rates well above the headline level. Nor is the fact that taxpayers in Brazil face value-added tax at the federal level.

What is more unique is that firms must also contend with the state level VAT system known as ICMS, several layers of labor taxes, including PIS/COFINS which are based on a company’s revenue, and INSS, which is a payroll tax. Furthermore, taxpayers must also be mindful of the IOF, a tax on certain financial transactions at varying rates that are subject to frequent change.

I suppose some credit is due to the Brazilian administration, which has managed to make some progress towards simplification at a time when the country has faced political crises. Nevertheless, if you were starting a tax system from a clean slate, Brazil could be held up as an example of how not to do it.

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