Brazil: Living with some of the most complex tax legislation in the world Brazil: Living with some of the most complex tax legislation in the world

Brazil: Living with some of the most complex tax legislation in the world
11 Apr 2018

It is a common mistake for companies doing business in Latin America to assume that setting up shop Brazil will be similar. But the unique complexity of the nation's tax regulations set it apart from other countries, not just across the region but the rest of the world.

Brazil has a huge variety of different taxes, and a continuous flow of regulatory changes averaging an immense 51 new tax rules every working day. Besides the national taxes imposed by the Secretaria da Receita Federal do Brasil, most commonly referred to as Receita Federal (RFB), regional taxes from the country’s 27 states and 5,570 different municipalities, each of which imposes its own levies, also need to be paid.

Unsurprisingly then, according to research by The World Bank, it takes more time to prepare, file, and pay (or withhold) the three most important types of taxes - corporate income, value-added or sales tax, and labour taxes – in Brazil than any of the other 264 countries in the world. In fact, it takes 1,958 hours (2017 statistics) to do so compared with a world average of 240.14 hours.

But one big recent change relates to digitising the delivery of information and reports to the tax authorities. In keeping with the growing worldwide trend for transparency and compliance, all organisations that operate in the country must submit their tax forms electronically via a digital system known as SPED - Sistema Público de Escrituração Digital. It integrates tax administration activities at the federal, state, and municipal level.

SPED in action

The system originally covered tax and employment regulations, but as it evolved, it became clear that these issues needed to be dealt with separately. As a result, one of the systems now handles tax as it applies to commercial operations, clients, suppliers, inventory and the like.

A second ‘social’ system, meanwhile, looks after hiring, firing, promotions, payroll taxes etc. But both systems share the same objective – to enable real-time monitoring and ensure transparency and openness.

As the authorities are now receiving all the information they require electronically, it makes it easier for them to identify issues, errors and non-compliance. Continuous audits of the information trigger regulatory questions which may, in turn, lead to a tax inspection.

In fact, the Internal Revenue Service has specialist teams that constantly monitor the country’s biggest corporate tax payers. They account for 61% of federal taxes on a day-by-day basis.

But it is worth bearing in mind that the penalties for non-compliance can be severe - fines range from 20% to 220% of the tax amounts involved and company managers can end up in prison.

Elaine Pomin

Elaine Pomin is tax director for the TMF Group. She has a diversified background in tax, accounting and finance, having worked for a range of multinational companies. Her focus is on corporate business strategy and working on projects aimed at reducing the tax burden, mitigating fiscal risks, prospecting and recovering tax credits. Elaine holds a degree in Executive Management from the Stockholm School of Economics.

 

It is a common mistake for companies doing business in Latin America to assume that setting up shop Brazil will be similar. But the unique complexity of the nation's tax regulations set it apart from other countries, not just across the region but the rest of the world.

Brazil has a huge variety of different taxes, and a continuous flow of regulatory changes averaging an immense 51 new tax rules every working day. Besides the national taxes imposed by the Secretaria da Receita Federal do Brasil, most commonly referred to as Receita Federal (RFB), regional taxes from the country’s 27 states and 5,570 different municipalities, each of which imposes its own levies, also need to be paid.

Unsurprisingly then, according to research by The World Bank, it takes more time to prepare, file, and pay (or withhold) the three most important types of taxes - corporate income, value-added or sales tax, and labour taxes – in Brazil than any of the other 264 countries in the world. In fact, it takes 1,958 hours (2017 statistics) to do so compared with a world average of 240.14 hours.

But one big recent change relates to digitising the delivery of information and reports to the tax authorities. In keeping with the growing worldwide trend for transparency and compliance, all organisations that operate in the country must submit their tax forms electronically via a digital system known as SPED - Sistema Público de Escrituração Digital. It integrates tax administration activities at the federal, state, and municipal level.

SPED in action

The system originally covered tax and employment regulations, but as it evolved, it became clear that these issues needed to be dealt with separately. As a result, one of the systems now handles tax as it applies to commercial operations, clients, suppliers, inventory and the like.

A second ‘social’ system, meanwhile, looks after hiring, firing, promotions, payroll taxes etc. But both systems share the same objective – to enable real-time monitoring and ensure transparency and openness.

As the authorities are now receiving all the information they require electronically, it makes it easier for them to identify issues, errors and non-compliance. Continuous audits of the information trigger regulatory questions which may, in turn, lead to a tax inspection.

In fact, the Internal Revenue Service has specialist teams that constantly monitor the country’s biggest corporate tax payers. They account for 61% of federal taxes on a day-by-day basis.

But it is worth bearing in mind that the penalties for non-compliance can be severe - fines range from 20% to 220% of the tax amounts involved and company managers can end up in prison.

Elaine Pomin

Elaine Pomin is tax director for the TMF Group. She has a diversified background in tax, accounting and finance, having worked for a range of multinational companies. Her focus is on corporate business strategy and working on projects aimed at reducing the tax burden, mitigating fiscal risks, prospecting and recovering tax credits. Elaine holds a degree in Executive Management from the Stockholm School of Economics.