Brazil’s Taxing Dilemma
Brazil is one of the world’s largest emerging economies. Home to the World Cup last summer, the Olympics in 2016, vast natural resources, and 200 million people, Brazil is an attractive location for business and a consumer market with great potential. But for many companies, one big challenge of doing business there is getting one’s head around Brazil’s complex value-added tax (VAT) system.
There are 160 other countries that have a VAT system. VAT is generally intended to promote exports and the local economy. But in Brazil the legacy of a federal system and a tradition going back half a century of government trying to manage the economy have made the Brazilian VAT system fearsomely complex. “It’s the most complex VAT system in the world,” says Global Upside CEO Ragu Bhargava.
Brazil has four types of VAT: a state VAT, a federal VAT, a municipal VAT (called a municipal service tax), and a gross-receipts VAT.
Brazil’s 26 states each determine their own state-level VAT (though the Brazilian federal government dictates a minimum). Most rates hover around 17 percent or 18 percent, according to Deloitte, though there are also interstate rates varying from 4 percent to 12 percent, depending on the location of the recipient and nature of the transaction. This tax applies to the following transactions carried out in Brazil, even if those transactions begin abroad, according to consulting firm EY:
• The circulation of goods
• The importation of goods
• The supply of transportation between states and between municipalities
• The supply of communication services
• The supply of electricity
Exports of manufactured goods and raw materials are exempt.
The federal VAT applies to national and foreign “finished goods,” which are things produced as part of the industrial process, whether the process is complete, partial, or intermediary. If the shipment of goods is related to an export, a sale to a trading company, or plant expansion plans, some incentives and exemptions are available. The tax rates range from nothing to 330 percent depending on the type of goods, according to Deloitte.
Brazil’s municipal VAT is like a sales tax that applies to anything not subject to the state VAT. Those taxes typically are between 2 percent and 5 percent. Foreign companies providing services outside of Brazil that are for the benefit of a Brazilian client or person may be subject to the municipal VAT, even if a person or entity outside of Brazil actually pays for the services.
The gross-receipts VAT is levied on companies’ gross revenues on a monthly basis. Exports aren’t subject to the tax, but imports are.
If you think that’s a lot of tax work to deal with, you’re not alone. International tax consulting firm PWC evaluated how long it took a case-study company to comply with tax rules in 189 economies around the world. PWC found it took the least time–just 12 hours a year–to comply with tax rules in the United Arab Emirates. The worst case?
You guessed it. Brazil. It takes 2,600 hours, or more than a year for a full-time person, to comply with the tax rules in Brazil. That’s a 10x disadvantage, considering that the world average is just 268 hours. Even for South America, the average is just 618 hours, less than 25% of Brazil.
That complexity isn’t lost on the country’s president, Dilma Rousseff, who was just re-elected in October and said she is making tax reform a priority in her second term. She’d be well advised to move quickly because the state of the Brazilian economy is deteriorating. “Standard & Poor’s lowered Brazil’s credit rating in March for the first time in more than a decade to the lowest level of investment grade, citing slower economic growth as well as deteriorating fiscal accounts,” Reuters reported on Nov. 11. The country’s economy is now forecast to grow at just 0.5 percent a year and inflation rates are over 6 percent, according to PWC.
President Rousseff pledged to improve government transparency and regulatory efficiency in her election campaign, according to one Deloitte report on the country, and she recently appointed Joachim Levy as Finance Minister. He’s a PhD economist educated at the University of Chicago, probably the top free-market economics department in the U.S. But at the same time, representatives of Brazil’s urban poor, labor unions, and interest groups are already pressuring Rousseff and her Workers Party to resist changes in the complex tax-and-benefit system which provides a livelihood to many in Brazil.
One thing we’d be willing to bet on: one reason the Girl from Ipanema looked so long and lovely and cool and gentle when she walked along the beach was that when she went to the beachside bar, she wasn’t thinking about the VAT charged on her banana daiquiri!