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Why taxes in Brazil, unlike any other country in the world, are considered so much more complex and different such for foreigners as for Brazilians?

"Brazil is different from all other countries in the world." This phrase is cited repeatedly by the foreign who are beginning to face the fiscal challenges of doing business in Brazil. And why do they say it? Aren’t they being exaggerated? After all, claims related to taxes are a reality worldwide.

During a meeting to discuss a business acquisition transaction, a newcomer investor, interested in buying a Brazilian group of companies, knew that about 40 employees in this group were exclusively allocated in the fiscal area. The news was a surprise and hinted that perhaps the target company was not as efficient as he thought it could be. Besides, the investor, a foreign group larger than the Brazilian one, had about eight tax professionals. A Brazilian who was in the room said that, in fact, that number of employees might not be enough to handle the administration of the taxes from a group of that dimension in Brazil.

This situation needs to be better understood. The scenario described is real and recurrent. Why is the Brazilian tax system considered so complex? Why is it necessary so many people to conduct the fiscal area? And why are taxes in Brazil, unlike any other country in the world, considered so much more complex and different such for foreigners as for Brazilians?

Answering these questions is not a simple task. We cannot say that, considered them individually, the Brazilian taxes are more complex than those of other developed countries such as the USA, UK, France or Spain. On the other hand, what we can affirm is that there is a complexity that comes from the high number of major taxes that are applied to a company's operations.

In order to illustrate this point, we have, for example, the corporate income tax which is composed of two different taxes: the income tax (income tax itself) and CSL (social contribution on profit). Both of them have a similar calculation, but different destination after have been collected by the federal government. The combined rate is 34%, similar to many other countries.

The issue is that, in addition to the income tax and CSL, there are others, PIS, COFINS, ICMS, IPI, ISS and the IOF, among others (such as II, CIDE and other taxes and special levies that are imposed to specific industry sectors, like the CFEM to a mining). The difference is that in the majority of the developed countries, there are, usually, the income tax and VAT (value added tax) or a consumption tax. These are the main taxes that usually affect the operations of overseas companies.

Thus, while the developed countries operate a system of basically two main taxes on transactions, the companies in Brazil have to deal with a framework consisting of at least eight taxes. Moreover, the taxes are treated in eight different levels of government: Federal, State and Municipal. Each of them, with different interests and different tax authorities, resulting in a huge legislative and management mess for the taxpayers.

Obviously, even the tax authorities have difficulties in dealing with so many taxes, and this is one of the reasons why there are so many gray areas in different laws. That's because even the tax authorities do not have the opportunity to focus and delve into a few issues taxes, which would prevent many administrative and judicial discussions, misunderstandings and different interpretations. These authorities need to tackle the various taxes and it causes lack of focus, therefore, lack of clarity and depth.

Regarding the different taxes, there are specificities and complexities. For example, PIS and COFINS cover almost all the revenues, with a combined rate of 9.25%, with credits on some allowed inputs. This rate is reduced to 3.65% with no credit, if there is an alternative system of income tax.

The ICMS, another example, is a state tax on value added to a major federal legislation and 27 specific legislation for each of the 26 states and the Federal District. If a sale is made from one State to another, this last State can not take credit for the ICMS if the first has given some specific types of tax incentives. It is just one of the battlefields of the so-called war tax.

Concerned to the IRPJ, as the last example, there is no consolidating tax in Brazil. Each company is an individual contributor, and there cannot be a combination of the results of a group of companies to offset profits with losses and revenues with expenditures. Actually, this is one of the main areas that need to be solved by the Federal Government. The Brazilian tax system is in urgent need of a fiscal consolidation, which would avoid the huge amount of litigation involving mergers, demergers and other corporate flows. This would eliminate many subjective discussions related to the business purpose of some transactions, the issue of the operations and services between companies within the same group, plus a host of other discussions that exist only because of the absence of fiscal consolidation. In time, most of the developed countries have a system of fiscal consolidation.

Of course, governments do not want to lose their revenue. However, the reduction in taxes is not the main claim of the companies. They want less complexity, less amount of taxes, less gray areas, fewer lawsuits. They want to have the ability to predict with reasonable safety, the rules they will be subject to. It is possible to achieve this reality. Brazil has evolved incredibly in many areas of the economy and the country is now in frank expansion, offering unique opportunities. Achieve a less complex taxation is a matter of political will and communication between tax authorities, taxpayers and tax experts.

Despite all these issues, the tax system should not be seen as a limiting factor for doing business in Brazil. It certainly is a challenge, but not a limitation. The newcomer international investors, and also the Brazilians ones, who understand the tax environment and discover the best way to structure and conduct business in this country, not only will remain in operation, but also will grow as much here.

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