Brazil's tax environment is one of the most complex in the world; a fact confirmed by numerous recent studies. For instance, a report by TMF Group on global accounting and tax compliance found Brazil to be "the second most complex jurisdiction in the world” for financial reporting and compliance. Another study pointed out that since the promulgation of the Brazilian Federal Constitution in 1988, more than 360,000 amendments to the country’s tax regulations were introduced at the federal, state and municipal levels. This complex and multilayered environment means companies operating in Brazil face a barrage of new or changing obligations on a regular basis, which may even be incompatible with each other in practice.

Nevertheless, despite the recent political turmoil and economic downturn in Brazil, the country is still one of the world's largest economies and that should not be disregarded by any company intending to invest in Latin America. But how can companies overcome the difficulties and become successful in business given such an intricate tax system?

Even though it may seem obvious, companies should do all they can to adapt themselves to the Brazilian tax environment. If effective, this adaptation can provide competitive advantages that will positively affect the final prices of products or services. This is made possible by one of the main characteristics of Brazilian taxation, that it is a system focused on consumption rather than income. For example, there are more taxes paid on production and consumption than on income and estates. That said, companies should still pay close attention to the Brazilian tax system when it comes to making their businesses as competitive as possible. Here are two of the best ways of doing so:

Conduct periodic tax reviews

Taxes in Brazil can be divided into three main categories based on the government spheres: federal, state and municipal. Each sphere can create, modify or remove taxes based on its own financial needs. It is not difficult to predict the consequences: amendments to tax rules happen very often and its often very difficult cope with them all. Despite a company’s best efforts, it is therefore impossible to expect it to keep up with all the legal and procedural changes, let alone find alternative methods of dealing with them.

Hence, it is essential to engage a tax specialist to periodically review the methodology adopted to handle tax matters. Besides examining the completeness and correctness of the tax returns submitted by the company, the advisor can also propose more effective strategies, including the claiming of tax benefits. Legal departments and specialised lawyers should therefore focus not only on understanding the rules, but also on the analysis and critical review of those same rules.

Undertake preventative action

It is equally important for companies to employ a tax specialist to work on a prevention strategy that clearly defines the impact of any changes in regulations on the business. Moreover, it would be very beneficial for companies to implement a plan for monitoring and developing tax strategies to ensure compliance, optimise assets, increase competitiveness and identify opportunities for savings. For example, tax benefits and tax deductions on projects such as technology innovation are essential for the companies’ competitiveness nowadays.

Companies should think about creating a tax committee that would hold periodic meetings with senior company executives, the legal, tax and accountancy departments, and specialised tax lawyers to effectively monitor external changes (such as legal and economic developments) and the impact of internal plans for expansion or business changes.

Fight for your rights

Brazil is known to be one of the world´s most litigious countries in Latin America, and the majority of  companies face many   disputes with local tax authorities. Companies that do not have a solid tax compliance framework in place are doomed to failure or at the very least to fall behind the competition.

Below are examples of the main tax refund claims – well founded in fact and law – that warrant the attention of service companies operating out of Brazil:

  1. Contribution of 10% over the Length-of-Service Guarantee Fund (FGTS) by the time an employee is dismissed;
  2. Exclusion of service rax (ISS) from Social Security contribution over gross revenue (CPRB) tax base;
  3. Taxation of the pay slip and a substitutive model of deduction of the pay slip;
  4. New dispositions over the place of payment of the service tribute and the responsibilities of the service contractor (which municipality should charge the tax – the contractors or the contractees);
  5. Social Security contributions over general compensatory payments.

Brazil’s courts of law have been working on creating a more uniform and efficient tax system, on which the country’s Supreme Court will soon pass judgement. The Supreme Court’s decisions should occur within a system of "general repercussion", which means they apply to all identical lawsuits in Brazilian courts – an “erga omnes” effect. However, in tax discussions the court has often “modulated” the effects of its decisions – usually restricting the right to be refunded to the companies which had already filed a lawsuit, in an attempt to reduce the negative impacts on Brazil´s economy. It is therefore expected that the decisions about the topics above will be modulated as well. In other words, it is vital to take timely and appropriate actions on these topics to keep a company´s rights alive.

To sum up, doing business in Brazil can be complex, but with the right strategies in place, companies can reap the benefits of operating in Latin America’s biggest economy. Like any other nation in the world, Brazil has its strengths and weaknesses, and the key to success is to optimise the former and mitigate the latter. And when it comes to the complex issue of tax, remember: "When in Brazil, do as the Brazilians do."

 

This article was submitted by Leandro Henrique de Assis and edited by our team. If you are interested in contibuting to LACCA please send ideas for articles here.