Brazil’s Massive Tax Code May Face Moment of Reckoning

(Bloomberg Businessweek) -- At 7.5 tons, it’s heavier than an African elephant.

At more than 7 feet, it’s taller than LeBron James.

At 41,266 pages, it’s about 85 times longer than the collected stories of Franz Kafka.

Vinicios Leoncio spent more than 1 million reais ($250,100) to assemble a volume of Brazil’s tax code to demonstrate the absurdities of the system. For fun, he perches on top of his creation. “It’s an attempt to make the stupidity of the Brazilian tax legislation visible,” says the tax lawyer.

Fresh off its success in winning congressional support for a landmark pension overhaul, the administration of President Jair Bolsonaro has set its sights on revamping the tax code, a goal that has eluded prior governments. The lower house and the Senate have put forward their own plans. Vice President Hamilton Mourao promised on Oct. 23 that a new system will be in place by the middle of next year.

The stakes are high. Brazil’s tax burden is close to 33% of gross domestic product, almost 10 points higher than the Latin American average. A sweeping simplification could boost GDP by 10% over 15 years, according to an analysis by the Center for Fiscal Citizenship, a São Paulo-based think tank.

Most of the complexity comes from the value-added taxes assessed at the federal and state level, with their profusion of brackets and exemptions. There’s broad support for merging several taxes into one that applies uniformly across all 27 states, yet the effort could still run aground on the details. It’s hard to find the rationale behind many taxes. Ethanol fuel for cars is taxed at 32% in Rio de Janeiro but at only 12% in São Paulo. And those rates change constantly.

For Ana Carla Abrao, who heads up Oliver Wyman’s office in São Paulo, the Brazilian tax system has always been this way, with countless rules and exceptions for different companies, different industries, and different products. “For that reason, it’s hard to carry out a reform—because if you try to simplify and equalize the system, each one of these groups feels wronged and lobbies against the changes,” she says. What’s more, some levies are codified in the Brazilian constitution, so any alteration must be passed as an amendment. That requires a three-fifths majority in both the lower house and senate, promising extended debate.

While some industries are invested in preserving cherished concessions, most of Brazilian business is clamoring for relief. Companies devote an average of 1,958 hours per year to preparing and paying their taxes, according to the World Bank—more than eight times as much time as their peers in Mexico and Argentina. “We are working with an enormous supply of products, and each individual product has its own purchase tax or sales tax that may be different in each region and in each state,” says Carlos Guerra, chief executive officer of Giraffas, a Brasilia-based chain of 400 fast-food restaurants. “We spend weeks to figure out the costs, due to the different fiscal classifications. It’s a real fiscal madhouse.” The army of lawyers, accountants, and tax consultants Giraffas employs to figure out how much it owes consumes 5% of profits, Guerra says.

Alongside the professionals, an informal industry of amateur accountants has sprung up to service those without deep pockets. Assis de Souza, a 56-year-old elementary school teacher, moonlights as a tax preparer for friends and family. He learned to navigate the process in the 1990s, when forms had to be completed by hand. “I’m not an accountant, but today, I can make a nice bit of supplementary income,” he says. Nathalia Torres, a 22-year-old college student, learned the ropes working as an intern at an accounting firm. In the two months leading up to filing day on April 30, she earned around 2,000 reais preparing more than 100 returns. Most of her clients are pensioners who don’t know how to account for their income, or young people starting their own businesses.

Some of the country’s brightest minds can be tripped up by the tax code’s complexity. Recepta Biopharma SA, a cancer research company, became the very first Brazilian firm to license a drug patent abroad in 2015. Revenue from domestic patents is usually exempt from the social contribution tax on profit, as are exports in general, but Recepta ended up facing a huge bill for exporting intellectual property to the U.S. “According to the Brazilian constitution, exports should be exempt from social taxes,” says Fernando Peres, president of Recepta. “But this immunity was granted only for goods and services, and a patent is not a good or a service. So the tax authorities say we have to pay.” The patent earned $65 million for the company, and Brazilian tax authorities demand a 10% cut. The matter is now before a state court in São Paulo.

Tax cases can consume years awaiting adjudication. Vale SA, the Rio de Janeiro-based company that is the world’s biggest iron ore producer, settled a $9.6 billion dispute in 2013 after a decade of wrangling.

Leoncio, the lawyer with the giant tax book, has labored in the field almost three decades, building up a towering animus over the years. He took his creation to Congress a few years ago to impress on lawmakers the importance of fixing the system. Fewer than 1% of the members came to see it. Says Leoncio: “We pay 104 different taxes and, aside from generating a huge amount of legal uncertainty, this is a major obstacle in the life of each citizen.” —With Rachel Gamarski

To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net, Stephen Merelman

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