tax management system in brazil and lessons for vietnam

Abstract Introduction Finding and analysis 2.1 Overview of Brazil economy Brazil is the fifth largest country in the world and the largest in the southern hemisphere, with 8.514 million km2 of contiguous area It has over 15.7 thousand kilometers of land borders and approximately 7.3 thousand kilometers of coastline (Atlantic Ocean) The Federative Republic of Brazil consists of the Union, 26 States, the Federal District and over 5,500 Municipalities The country is divided into five territorial macro-regions – North, Northeast, Southeast, South and Central -West – which group States with similar physical, human, economic and social characteristics The current population of Brazil estimate for 2018 is 211,107,804 (estimated by theworldometers.info), spread irregularly throughout the national territory The Brazilian population is predominantly urban, with approximately 81% of people living in cities and towns The overall view of the Brazilian economy is marked by regional unbalances requiring that the State play an effective role as redistributor agent - a determinant factor in the tax model The heterogeneous profile of the demographic distribution of the Brazilian population presents the South and Southeast regions the main consuming centers in the country At the other end, the North region, almost completely immersed in the Amazonian landscape, presents the lowest demographic density rate 2.2 Overall Tax management system of Brazil 2.2.1 Tax authority The official body responsible for federal tax administration in Brazil is The Federal Revenue Service, called Receita Federal Brasil, or RFB, which is the official body subordinated to the Ministry of Finance The structure of RFB consists of Central and Decentralized units The Central units deal with regulatory, supervisory and planning activities, while Decentralized units consisting of the regional and local offices, enforce the directives and guidelines established by the Central units (Source: The Brazilian Institute of Tax Planning IBPT) The administrative structure of RFB has three main objectives: −to present to the taxpayer a unified tax administration, with equal procedures applied throughout the country; −to confer the organization with a dynamic style of management, capable of administering various taxes and maximizing the use of human and material resources; −to define clear and efficient criteria of decentralization, granting local offices broad autonomy in performing their activities 2.2.2 Tax policy and regulation • The Decentralized Tax System and Taxing Power of Brazil In Brazil, the main directives for taxation are provided by the Federal Constitution, which establishes the general principles of taxation, the limitations on the power to tax, tax competence across levels of government as well as tax revenue sharing provisions Thus, the National Tax System is instituted by the Constitution itself, which establishes that the Union, the States, the Federal District and the Municipalities may collect taxes The administrative-political autonomy, which is an essential characteristic of Brazil’s federative system, confers to each level of government the possibility of instituting taxes, fees (due to its police power or to the use of public services) and improvement charges (due to public works) With respect to social contributions, most of them may only be established by the Federal Government According to the Brazilian Constitution, the tax competence of taxing powers is as follows: The relative importance of each of the taxes that make up the Brazilian tax system may be better assessed by its share in the total tax burden Notwithstanding that most taxes have the primary goal of raising funds to finance government activities (fund raising taxes), some of them have characteristics that qualify them as economic or social policy instruments (regulatory taxes) • Intergovernmental Transfers To strengthen the administrative-political and financial autonomy of government levels, the Brazilian Constitution defines a system of “unconditional” transfers between the Union, the States and the Municipalities, which can be either direct or through creation of special funds (indirect) Regardless of their type, transfers always occur from higher to lower levels of government; that is, from the Union to the States and from the Union to the Municipalities or from States to their respective Municipalities Direct transfers, as constitutionally defined, are the following: − States and municipalities are entitled to keep total collection of income tax they withhold at source on income payments they make or on payments made by their autarchies or foundations they constitute and maintain; − Municipalities are entitled to 50% of the collection of tax on rural land property (ITR) levied on real estate within their territory; − Municipalities are entitled to 50% of the collection of tax on motor vehicles (IPVA) registered in their territories; − Municipalities are entitled to 25% of the collection of tax on the circulation of goods and transportation and communication services (ICMS) (3/4, at least, proportionally to the value added through operations carried out in their territories and up to 1/4 as provided in the State Law); − States and Municipalities of origin receive by transfer respectively 30% and 70% of the collection of IOF – Gold (as a financial asset) The following funds are used to carry out the indirect transfers: − Export Compensation Fund (FPEx): composed of 10% of the total IPI collection It is distributed proportionally to the amount of industrialized products exports Individual State participation is limited to 20% of the total receipts of the fund − Federal District and States Participation Fund (FPE): composed of 21.5% of the total IPI and IR collection It is distributed in direct proportion to State population − and size, and in inverse proportion to per capita income Municipalities Participation Fund (FPM): composed of 22.5% of the total IPI and IR collection It its distributed proportionally to the population of each unit 10% of the fund is set aside for the Municipalities of the capital cities − Regional Funds: composed of 3% of the total IPI and IR collection This revenue is directed to development programs in North (FNO), CenterWest (FCO) and Northeast (FNE) regions Thus, 47% of the income tax and 57% of the tax on industrialized products collected by the Union go to the States and the Municipalities as constitutional transfers through funds Thus, 47% of the income tax and 57% of the tax on industrialized products collected by the Union go to the States and the Municipalities as constitutional transfers through funds • Tax evasion Brazil is one of the biggest tax evaders in the world according to a ranking published in 2013 by Tax Justice Network The study shows that around 13.4% of the Brazilian’s gross national product (GNP) was evaded In Brazil, over USD 280 million was not correctly tributed in 2013 due to informal economy, black market sales, and tax evasion, as seen in the chart below: (Source: Tax Justice Network, 2013) The tributary supervision in the country is made by the Brazilian Federal Revenue In 2013, a total of 329,000 processes were raised by Receita Federal against possible evaders, a growth of 9.7% compared to 2012 These numbers show that the chances of being caught for this crime are growing The government body claims that more modern fiscalization techniques are being utilized to cross check violators' information Specialists state that some of the causes for Brazil's high level of tax evasion are a historically weak fiscalization and light punishments for the convicted companies and persons Also, it is a common practice among the Brazilian companies and population to claim that the amount of taxes paid is already too high compared to the quality of the services presented, such as healthcare and public transportation The punishments for tax evadors include: − Fine of variable value: 20% of the amount in question if the evader spontaneously − declares his fault, and around 75% if fiscalization detects the irregularity; Detention of six months to two years and a fine that varies from two to five times − the amount to be paid; If a company is considered guilty of this crime, the penalty is applied to every person that directly or indirectly contributed to the practice of tax evasion − If the convicted person is a primary offender, the penalty is substituted by a fine of ten times the amount to be paid REFIS, the Brazilian Tax Recovery Program, is one of the biggest initiatives with the purpose of avoiding evasion and raising the tax collection It essentially consists in an installment of the remaining debt The first program of this kind was released in 2000, and until the end of 2013, a total of four REFIS were launched by the Brazilian government The difference between them was, basically, the prize for companies to apply for and the number of months wherein which each business will have to pay their debts 2.2.3 Tax payers • Individuals: Residents of Brazil are taxed on their worldwide income, and non-residents are taxed on their Brazilian-sourced income, while their income received from abroad is tax exempt The source of income is determined by the place where the income payer is located, irrespective of where the work is performed • Enterprises: Brazilian resident companies are taxed on worldwide income, while non-resident companies are generally taxed in Brazil through a registered subsidiary, branch, or PE, based on income generated locally Other than that, non-resident companies can be subject to withholding tax (IRRF) on income derived from a Brazilian source 2.2.4 Tax reforms • The Military Regime (1964-1985) The first legacy comes from the military regime, when financial centralization was the main characteristic of the tax system and when the trend to raise taxes started The military regime, deepened a previous system of intergovernmental transfers aimed at addressing Brazil's enduring regional inequality As a result, regional economic disparity decreased slightly • Constitutional Process (1988-1994) The second legacy comes from the 1988 Constitution The Constitution made profound changes on the tax system, mainly by increasing resources to subnational governments rather than the federal government, thereby politicizing and constitutionalizing the system and influencing its further reform The 1988 Constitution also expanded the complex mechanism for intergovernmental tax transfers introduced by the military • Stabilization (1994-2003) The third legacy began with the launching of a stabilization plan, in 1994, which has succeeded in controlling Brazil's hitherto unstoppable inflation However, it raised interest rates to unprecedented levels, thus aggravating the debt burden As a result, Brazil and its neighbours remain heavily indebted and must constantly acquire new debt to cover interest and repayment on the old debt This situation led to a recentralization of resources at the federal level and to an unprecedented increase on federal taxes, relative to GDP, to fulfill debt commitments and to achieve budget surpluses (Source: Adapted from several database compiled by Anfaso, 2004) • Unsolved difficulties (2003-now) Many Tax Reform proposals was done to unify some of the taxes, however they all have not been approved, due to the following reasons: − slowly working politics; − lack of a consensus between the states and the Union over Tax Reform; − avoidance of change from groups that profit with the current taxation chaos Until now, there is no consistent project able to effectively correct the current Taxation System The governments and lawmakers insist on doing the reform in parts, what is actually mixing new regulations with the old ones, does not seem to be the best alternative Evaluation of the effectiveness and efficiency of Brazilian tax management system 5.1 Equity • Ability to pay In Brazil, families with lower income levels are proportionally more burdened by taxes than richer families In other words, the Brazilian tax model is regressive, and this is why societal income distribution is worsening The aspect that stands out the most is the amount of money collected through indirect taxes in the country, which represents 45 percent of all taxation and approximately 15.38 percent of the national GDP The indirect tax embedded in the price is the same for all purchasers who may have different income levels Thus, the amount of tax represents a different percentage of each purchaser’s income, which is contrary to the theoretical principle of ability to pay This is negative for Brazil’s socioeconomic environment, as it makes the system unfair and unequal • Service received Brazil is one of the countries that collect the most taxes around the world Yet, the country occupies the lowest positions when it comes to the return of taxes in benefits to the population The Government’s budget is too compromised with the public civil service, interests of the public debt and the Social Security Aside from the debts, the leftover money is poorly managed 5.2 Revenue Yield Regarding the tax Base Growth, Brazil has managed a remarkable 9.4 percentage point increase in tax revenue as a percentage of GDP between 1995 and 2012 (from 26.9% in 1995 to 36.3% in 2012) The level and the growth rate of the tax burden places Brazil at the top among Latin American countries and compares well with Southern European countries regarding the share of resources available to government Nevertheless, the rise in the Tax/GDP ratio has made little or no contribution to the reduction in poverty and inequality in the country, except through enhancing the distributive capacity of government 5.3 Economic Competitiveness The high rates of the Brazilian Taxes drive investments away, especially foreign investments Investors are discouraged to put money in Brazil, as the high taxation inhibits the earning of the company and delays the return of the investment It is estimated that Brazil could improve its investments in 10 to 15% for each percentage point dropped in the total value of the country’s taxation The high tax burden also makes it very hard for a company that produces on Brazilian soil to compete in the world’s economy A good example is the “invasion” of the “Made in China” labels in the Brazilian market, causing the failure of many Brazilian producers Easy to know why: China has a tax burden of about 17% of the GDP, while Brazil has an index of 35% Moreover, it is generally known that Brazil is a country with an overly complex tax system, not only from the viewpoint of the governmental spheres with authority to create and collect taxes (Federal, State and Municipal), but especially because of the amount of existing taxes, which are far more numerous than those charged in any other jurisdiction Brazilian Tax System is composed of more than 60 different taxes and contributions, which are levied on different sources and collected by different institutions Aside from the taxes, companies must comply to more than 90 ancillary obligations These circumstances place Brazil at a significant disadvantage when compared to other countries in the world Nevertheless, it is important to point out that the initiative of a strong digital system for tax management and control, called SPED, is already giving rise to positive changes in the context of local compliance SPED stands for Public Digital Bookkeeping System Brazilian (Sistema Pỳblico de Escrituraỗóo Digital, SPED) The SPED is a new complex and sophisticated data requirement in which taxpayers should file on an annual or monthly basis all account and tax information available based on standard uniform electronic layout Such improvements are very important to place Brazil in the global arena as a territory with reduced space for illegitimate tax procedures, which are typical of an informal economy, and reduced time to comply with all major tax obligations, therefore strengthening competitiveness in relation to other countries and business partners 5.4 Administrative Efficiency • Public Administration The decentralized tax system does reveal some problems concerning the relationship among states or among those and federal government that reduce the overall efficiency of government’s tax administration: − Difficulty in exercising social control due to ambiguous relationship among various − levels of the government and their respective obligations The states would not be allowed to grant any tax incentive on their own - an attempt to extinguish the current tax disputes between states (the so-called tax war); − Limited initiative and state action in its power to levy taxes − Financial unfeasibility affecting a large number of states, as a result of problems of flows (excessive payroll obligations) and stocks (excessive debts as a proportion of annual income), including some leading states; Recently, the SPED initiative comprises a set of improvements in the Tax Administration’s structure, infrastructure, technology, systems and strategic approach • Private Administration According to “2018 Paying Taxes” report by World Bank and PwC, a Brazilian middlesized company takes 1956 hours doing tax services, the highest record among 12 South American countries Despite dropping by 80 hours (comparing to 2017), Brazil’s time to comply is still 8.2 times the world average As a direct consequence, Brazil is ranked 125th /190 place for doing business around the world (Doing Business 2018 Report – World Bank), being one of the least inviting countries in which to business in the world (Source Paying Taxes 2018 data) But not only time is lost in the process Companies in Brazil also disburse an amount of BRL 43 billion per year only to maintain the accountancy employees and equipment working to comply with the taxation bureaucracy That is an expense that does not enhance the products’ quality, only increases the companies’ costs and consequently the final price to the consumers Also, the rules that regulate the taxation system are changing all the time According to the Brazilian Institute of Tax Planning, the Federal, State and Municipal governments launch an average of 15 new standards every day The complex Brazilian Tax Legislation demands a lot of time and effort, which could be better invested in the business (Brazilian Tax Reform - The Brazil Business) • Visibility The installation of the SPED system has increased transparency of the taxpayers to the tax authorities via digital reporting Recommendation for Vietnam Having a lot of characteristics in common, ranging from subdivision structure, decentralized tax systems to the overall level of development, Vietnam and Brazil also face similar problems regarding their administration of taxation that need to be tackled as soon as possible Studying the shortcomings of Brazilian tax system and the solutions from Brazil’s government, we suggest that Vietnam should learn lessons from Brazil’s case to improve our tax system in several ways as mentioned below 6.1 Reduce proportion of revenue from income tax Brazil is not yet a developed country, though it has several characteristics of one One of which is high SSC Social Security taxes are used by the Federal Government to pay social security benefits, which is designed to support retired individuals, widows and widowers, and disabled people The high rate of SSC in Brazil to some extent reflects the country’s level of development Regarding Brazil’s revenue structure, revenue from income, profit and capital gain stays fairly stable at around 20%, while that of social security contribution is much higher, achieving nearly 26% (see Table below) Unit Total tax Brazilian Real, Millions 2012 2013 2014 2015 2016 1,564,067.10 1,728,920.37 1,835,066.19 1,918,710.48 2,015,517.42 321,462.99 360,548.68 381,870.49 401,111.69 453,549.22 revenue Tax on income, profits and capital gains Percentage in 20.55% 20.85% 20.81% 20.91% 22.50% 402,437.33 441,880.14 478,642.12 497,791.48 523,803.41 25.73% 25.56% 26.08% 25.94% 25.99% total revenue Social security contribution (SSC) Percentage in total revenue (Source: OECD.Stats) In the case of Vietnam, income tax is the main revenue sources of the taxes on salary and wages, and accounts for a relatively high percentage compared with other revenue sources, including SSC For example, in 2011, revenue from income tax accounted for 74.83% of total revenue from salary and wages, while other revenues accounted for only 25.17% Considering the case of Brazil, to enhance Vietnam’s level of development as well as welfare of the population, actions must be taken to increase the relative importance of SSC in the revenue from salary and wages while decrease the proportion of income tax, which will in turn raise both equity and efficiency of the tax system 6.2 Simplify the tax payment procedure In Brazil, SPED, the digital system for tax management and control, plays an important role in reducing space for illegitimate tax procedures, and reducing time to comply with all major tax obligations It helps strength competitiveness in relation to other countries and business partners Vietnam should innovate its digital payment procedure, which is still relatively complicated It reflects the ineffectiveness in the operation of Vietnam’s tax system, which is a waste of national resources in both terms of time and money Simplify tax paying procedure, especially with the help of digital system, will bring a higher satisfaction for taxpayers 6.3 Offer tax incentives to rise country’s competitiveness The high rates of the Brazilian Taxes deter investors from putting money in Brazil, as they face the risk of reducing in earning and return on investment It is estimated that Brazil could improve its investments in 10 to 15% for each percentage point dropped in the total value of the country's taxation The world is now flat – enterprises seek the place where they can generate the largest amount of revenue, and it is obvious that high tax rates make Brazil not a promising land This can be a lesson for Vietnam Our country is on the way to international integration, drawing great attention from multinational and transnational companies Several tax reforms have brought positive changes in the doing business environment Tax incentives play an important role in creating competitive advantages for Vietnam when it comes to attracting foreign investment 6.4 Raise public awareness In Brazil, the civil servant representatives in each fiscal region are appointed to participate in the National Program of Taxpayer Education (PNEF) Their main task as regional representatives of the Federal Revenue Service is to work with State representatives in carrying out coordinated taxpayer education activities within the scope of their jurisdictions In Vietnam, there should be more propaganda of the law on tax on social media so that Vietnamese residents have clearer understanding about the meanings and the roles of the tax system The myopia of “high due, heavy tax” has long been in the mind of Vietnamese people since the country was a French’s colony It easy to fall into the belief that taxation is a tool of the ruling class to take control over and exploit the working classes It leads to a consequence that people will try many ways to evade and avoid paying taxes, which harms the state’s budget as well as Government’s planning and investment to develop the country Conclusion References ... proportion of income tax, which will in turn raise both equity and efficiency of the tax system 6.2 Simplify the tax payment procedure In Brazil, SPED, the digital system for tax management and control,... Brazilian Taxes deter investors from putting money in Brazil, as they face the risk of reducing in earning and return on investment It is estimated that Brazil could improve its investments in. .. Decentralized Tax System and Taxing Power of Brazil In Brazil, the main directives for taxation are provided by the Federal Constitution, which establishes the general principles of taxation, the