TAXATION IN BRAZIL
THE IMPURITY OF VALUE-ADDED TAXES IN BRAZIL
Roberto Campos made extensive reference to the intriguing distinction drawn by Brazil’s business community between two types of cascade, as seen before. One, considered malignant, includes the hated CPMF, PIS, and Cofins. All criticism, whether fair or not, is leveled against them. The other, applauded unanimously by the business community, includes taxes that are considered laudable contributions made by Brazil to world tax practice: these are the Simple [simplified tax system for micro and small firms] and the presumed profits option for calculating corporate income tax. It is worth noting that the adoption of these two systems is entirely voluntary, and that, by making this choice, firms reduce their tax obligations and the bureaucracy involved in tax assessment. As such, these two modalities deserve extensive praise from business leaders, even though from a strictly technical standpoint the Simple and the presumed profits modalities are no less cumulative than are the CPMF or the Cofins.
It is worth noting that 93% of Brazilian companies have opted to use either the presumed profits or Simple modalities for calculating income tax.166 Companies that adopt these simplified tax collection procedures do not necessarily do so aiming exclusively at reducing their tax liabilities. Many prefer to pay more taxes, but to reduce compliance costs.
The presumed profits modality implies the acceptance of taxable margins that vary from 8% of sales to as much as 32%. Implicit taxable profit margins for the Simple modality can reach as much as 8.21 % of sales for micro businesses, and up to 17.42 % for small businesses. The implied profit margins are very high, compared to those reported by companies taxed under the real profit modality. What makes them choose an assessment procedure that implies cascading incidence, and often higher tax liabilities, is the much lower compliance costs implicit in these simplified systems.
166 See [SECRETARIA DA RECEITA FEDERAL, 2001(b)]. In 1999, 1,988,733 of the 2,826,733 companies that paid the IRPJ tax opted for the Simple corporate tax structure, whereas 626,226 opted for the presumed profits structure, and only 208,729 were taxed on real profits. However, this latter category was responsible for 83.5% of all tax revenue. Most surprising is that only 228 companies are responsible for 50% of all IRPJ revenue in Brazil.
Furthermore, the case for non-cumulativeness is weakened by the fact that even non-cumulative taxes have several forms of cumulative incidence.
A tax comes closer to being totally non-cumulative if legislation allows for generalized clearing of tax credits. In this case, the tax amount levied on all inputs (including permanent assets and usable/consumable inputs) can be claimed to compensate for tax liabilities. However, the ICMS, for instance, allows for tax credits on permanent assets, but does not allow tax credits on ‘consumed’ inputs, such as stationery or office telephone bills.
Furthermore, there are cases in which a firm’s administrative staff is not adequately trained, or equipped, to claim tax credits, thus turning a value-added tax into an effective turnover tax. This happens, for example, when small farmers purchase equipment, seeds, fertilizers, and insecticides, all taxed by the ICMS.
Because they usually do not keep records of their sales and purchases, they are unable to claim credit for those transactions. Some States allow farmers to claim presumed credits based on their sales volume, but usually these compensations fall short of the their true value.
There are instances in which taxes are only partially non-cumulative because they only allow for physical credits. In this case, claims are limited to the amount of tax levied on acquisitions of inputs for production and sale, or alternatively, only for sale. In other words, tax credit is allowed only for inputs that enter and exit the production process, but not for permanent assets, such as machines and equipment.
This is the case with the IPI (tax on industrial products).
Even the ICMS, considered to be a modern tax because of its value-added and therefore non-cumulative characteristics, can be heavily cumulative in its day-to-day operation. Every time the debit-credit chain is broken, it becomes cumulative.
Nevertheless, in Brazil this seems to pass unnoticed. For example, the agricultural sector usually does not claim tax credits for the ICMS for lack of accounting procedures. Service sectors, not registered as contributors of the ICMS, are also liable for cumulative taxation since they cannot claim credits accumulated in purchases of taxed industrial inputs. The ISS (a municipal tax on services) is cumulative, as also would be the new IVV [Retail Sales Tax] on lodging and food which business community representatives want to include in the tax reform bill.
Even more amazing is that, in order to improve compliance, ICMS legislation has been undergoing changes that are totally cumulative. One example is the authorization for the food and restaurant sector in São Paulo to collect the value-added tax as a percentage of gross sales, with no credits allowed. This turns it into a turnover tax. Due to high evasion and in the name of simplification, the government is adopting the same procedures in other sectors and for other value-added taxes, such as the non-cumulative PIS/Cofins; estimates of average value-added in each sector are imputed as bases for charging such taxes, which are collected as final
payments with no credit being allowed in the other links of the production chain.167 Thus, Brazilian value-added taxes for operational reasons are becoming increasingly cumulative.
It is easy to see the ambiguity surrounding the debate on cascading taxes, if even the largest value-added tax in Brazil, the ICMS, is becoming ever more cumulative.168 In these cases, even hard line critics of cumulativeness ignore its cascading effect, provided it reduces the tax burden. However, anytime the cascade prevents evasion and implies a higher tax burden it is seen as highly distortionary.
The obvious conclusion is that criticism of cumulativeness is, in truth, an outcry of revolt against the high tax burden. It is a shame that this is not expressed clearly, which would bring greater transparency and rationality to the debate on tax reform.
Due to the regrettable involution of Brazilian tax system, the creation of a bank transaction tax was an innovation in which rests high hopes for greater tax efficiency. The CPMF/IPMF has become a very productive tax that is highly effective in preventing evasion. Nevertheless, the Brazilian tax system remains predominantly dependent on classical tax bases: income, circulation, property, payroll, and foreign trade. Thus, it remains dependent on declaratory taxes, which require extensive paper work. Taxpayers continue to self-assess and self-collect taxes using their own respective fiscal accounting procedures. Tax evasion lives on. The quality of the tax collection system remains poor. All a delinquent taxpayer must do to enjoy generous financial returns is not to comply with tax legislation, or else, to fiddle with his accounting procedures, knowing that his crimes have a low probability of being uncovered. Thus, corruption and growth of the underground economy continue to thrive in Brazil.
167 As of 2008 such procedures became applicable for the ICMS in São Paulo for the personal hygiene, cosmetics, medicines and imported beverages sectors; in the state of Rio de Janeiro various important sectors such as beverages, pharmaceuticals, textiles, electronics and many others follow the same rules for the ICMS. Similar procedures are used by the federal government in collecting PIS/Cofins of alcohol production, and in some cases such “value-added” tax is charged on a ad rem basis, or in other words, as lump sum value excise per unit of physical production.
168 Critics of cumulativeness are quick to point out the damage caused by the cascade effect of the PIS/Cofins and CPMF taxes, calling them disastrous to the efficiency and competitiveness of domestic production. However, they do not levy charges against the effects of cumulativeness implicit in the Simple and IRPJ-presumed profits tax systems (which together encompass 93% of Brazilian companies), in the ISS, the partial cumulativeness of the IPVA and IPTU, nor even in the increasing cumulativeness of the ICMS and IPI. When they admit that this cumulativeness is present in the Brazilian economy, they say it occurs only in “miniscule doses that do not impose significant losses on production”, as in [VARSANO et alii, 2001]. These authors should explain, for example, how they can call the cumulative effects of important taxes such as the ICMS and IPI “miniscule”, which, when collected from sectors that do not pay those taxes, such as the primary and tertiary sectors (which account for more than 50% of Brazil’s GDP) create totally cascade incidence proportional to their purchases of industrial inputs. For an eloquent newspaper article written by a former deputy and author of a polemical tax reform proposal, showing that the concept of cumulativeness is nothing but a stereotyped cliché, see [PONTE, 2000]. See also [CINTRA, 2004];
[MARTINS, 2002]; and [MACIEL, 2007].
All in all, rejection of the bank transactions tax remains significant, even if it is capable of eliminating many of these distortions.
I recently received an e-mail from a friend who, indignant with the CPMF (the bank debit tax), said, “I pay taxes when I send money to my daughter who studies in another city, and she pays taxes again whenever she withdraws the money from the bank in order to use it. That makes no sense.”
The CPMF is a tax on the circulation of money. The existence of such a tax could be conceptually justified as being the payment for the supply of public services and for the public cost of making possible the circulation of money without physical handling. It is a tax on a social service that creates value, reduces transaction costs, and which society makes available through the banking services. Such a service would not be possible without institutions that guarantee its safety and reliability.
Taxing the circulation of money is a cumulative process, but must not be confused with double taxation, which means multiple tax incidences on a single tax base.
But let us return to my friend’s line of questioning: he asks whether the CPMF – and, consequently, the Single Tax – are fair taxes.
An adequate response requires a meticulous cost-benefit analysis. At issue is not the fairness of a 0.38% tax on each bank transaction, but rather the possibility of its alternative being even more unfair to current tax payers, namely the resulting necessity of, for instance, increasing the current 27.5% income tax rate. Certainly, greater unfairness results from evasion made possible by declaratory taxes such as the income tax or the ICMS. Greater inequity lies in allowing multinational corporations to use transfer prices to remit their profits to foreign tax havens, thus avoiding collecting them in Brazil even though Brazilian public services are required in order to generate the very same profits that are sent abroad. It is not fair that tax rates have to be increased every passing year to compensate for tax revenue lost to increasingly sophisticated evasion mechanisms. For these reasons, in a proper cost-benefit analysis, my friend should prefer to pay 0.38% – or even 3% if necessary – on his money orders to his daughter, to the alternative of collecting 27.5% out of his total wages or of paying 30% indirect tax on his grocery cart at the supermarket.
If there were a single tax, a single CPMF of, say, 3% or 4% on all bank transactions, almost all other taxes could be eliminated. There would be no tax avoidance, and this would certainly be fairer than the current system.
Unfortunately, political pressure coming from powerful lobbies commanded by the tax bureaucracy and by major tax evaders have managed to portray the CPMF as unfair, and the Single Tax as utopian and inefficient. But the truth lies elsewhere.
Those who reject the Single Tax are those who will lose by not being able to practice tax evasion, or by not keeping control of the bureaucratic power with which the current declaratory system endows them.
If an oft-repeated lie eventually becomes the truth, then it is high time to question some of the allegations that have been made about the CPMF before they become universally accepted as true.