Brazil Looks to Introduce VAT to Ease Compliance for Corporates

August 2017

Brazil is seeking to become the latest major economy to introduce a national VAT system to end the torturous system of multiple state taxes that is causing headaches for companies.

When it comes to tax policy, Brazil has a history of doing things its own way, often deviating from international standards and best practices. As the ninth largest economy in the world, and by far the largest in Latin America, multinationals have little choice but to lump the logistical headaches of Brazil’s wayward tax system to invest there. One such headache comes in the form of the country’s indirect tax regime, which includes numerous different taxes applied varyingly across its 26 states and federal district. As a result, it is among the most complex in the world.

"Brazil has identified its overly complex indirect tax regime as a major blocker for the growth of its economy," said Richard Asquith, vice-president of global indirect tax at Avalara. "For example, companies regularly complain of having to spend considerable effort on tracking and validating the integrity of individual invoices. The mixed, and overlapping federal vs. municipal taxes is also a distraction, and often leads to double and compounding taxes."

As Asquith’s firm points out, Brazil’s Ministry of Finance estimates that the average company spends 2,600 hours a year calculating, reporting and paying taxes.

All this may be about to change, however, as Brazil seeks to follow the lead of its fellow BRICS members, China and India, in implementing a nationwide VAT system.

It is seeking to consolidate its existing indirect taxes, including ICMS, ISS, IPI and COFINS, into one VAT regime, and introduce a single excise tax regime at the same time. The government hopes to reduce the time companies spend calculating, reporting and paying taxes to 600 hours a year.

Breaking with tradition, the new regime is expected to follow the OECD’s model for VAT. But, Asquith points out, there will probably be some innovative ideas around sales and purchase invoice matching.

"Brazil will look to perhaps improve its state-controlled electronic invoicing approval regime, Nota Fiscal Eletronica, which has been somewhat successful at reducing fraud," he said.

Based on the other South American countries and the existing ICMS (a state-level sales tax imposed on the physical movement of merchandise), the VAT rate in the new system is expected to be around 16%.

"If Brazil can widen its tax net, it could lower it a little," Asquith said. "A big issue will be financial services, which many reforming countries have tried to start making subject to VAT, e.g. China. At present, there are a range of financial transaction and withholding taxes in Brazil on financial services."

Corporates have welcomed the change, with some pointing out that the reforms are long overdue. 

"Today the whole purchase to pay process is impacted by both the mandated e-invoicing process that requires suppliers to wait for the issuance of the tax document by the government as well as the final tax integrity check on the buyer side that's inevitable if paying fraudulent or incorrect invoices is to be avoided," Markus Hornburg, vice president of global product compliance at Coupa Software, told International Tax Review. "This situation adds enormous burdens and cost on both the supply chain and the financial supply chain. The introduction of a centralised indirect tax scheme is going to greatly facilitate at the very least the tax handling in Brazil but will also streamline the supply chain processes. The results should be measurable savings across the full P2P process for all trading partners and increased, accurate and real time tax collection for the government. So everyone benefits after all."

The changes should also bring large compliance savings to companies as it will help them automate many processes that previously required armies of bookkeepers.

"The removal of municipal vs federal taxes will eliminate the indirect incentives regions can offer to inward investment," Asquith added. "And the simplification and improved transparency on taxation on the movement of goods across Brazil should boost the internal manufacturing base and encourage more outsourcing."

Details of the new VAT regime and implementation date are expected to be published next month. The regime is unlikely to be implemented before 2020, however, as regional negotiations could prove fraught and major constitutional changes will be required. While China’s VAT pilot was rolled out with military efficiency, India’s example proved far more fraught, with disputes between the states and central government causing years of delays.

Moreover, Brazil’s government has been beset by corruption scandals and much of President Michel Temer's political goodwill has been expended since his predecessor, Dilma Rousseff, was ousted last year in a storm of controversy. As such, the government may struggle to get the votes it needs to pass the plans.

The above article was published on www.internationaltaxreview.com on 23 August 2017 and has been republished with the approval of the Publisher.