The illegal market represented by practices such as smuggling, piracy and counterfeiting of products harms Brazil in several ways. It compromises the businesses of companies that operate within the law, reducing their investments in the country and formal jobs. It reduces the collection of taxes necessary for the provision of quality public services. It exposes the population to products that do not pass due safety inspections, putting their health at risk. And it finances organized crime, which is increasingly dominating this market.

Many Brazilians, however, do not know or do not give due importance to these losses. To raise awareness of the problem, in 2019 ETCO joined the newspaper Gazeta do Povo, from Paraná, in carrying out the #Dentro da Lei project. The partnership made it possible to carry out forums, interviews, in-depth reports and other content on the theme from May to December.

The project involved important names in journalism, such as Alexandre Garcia, Augusto Nunes, Guilherme Fiuza and Rodrigo Constantino, and had the contribution of public agents, security consultants, researchers, representatives of the productive sector and professionals from different areas related to the problem.

Foz do Iguaçu, in Paraná, constitutes the main entry route for smuggled products from Paraguay, and the Gazeta do Povo has an important history of coverage of the topic.

The #Dentro da Lei project was conceived based on the recommendations summarized in the document 10 Measures against the Illegal Market, the result of work by the Center for the Study of Social Economic Law (Cedes) sponsored by ETCO.

The events and reports brought data and opinions on the damage that illicit practices produce in different segments, as well as suggestions to face this problem. A small sample of this information is presented below.

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Brazil lost R $ 60,8 billion in revenue in 2018 due to smuggling, enough to build:

 

 

Opinions of project participants

"The crime of smuggling deteriorates the formal labor market, inhibits investments, finances organized crime, generates foreign exchange evasion, loss of revenue and risks to the health and integrity of the consumer."
Ephraim Morais Son, federal deputy (DEM-PB) and president of the Mixed Parliamentary Front to Combat Smuggling and Counterfeiting

“The role of criminal organizations in the country has reached a dimension that no one else can ignore. We are living in an increasingly evident moment of threat to the democratic rule of law, because organized crime is unaware of the existence of authority. ”
Edson Vismona, executive chairman of ETCO

“It is necessary to conceive a type of taxation that allows to face the price of Paraguayan cigarettes in Brazil on an equal basis. Without reducing the aggregate tax burden, but making a redistribution to have a cigarette with a price compatible with what arrives from Paraguay. ”
Everardo Maciel, former Federal Revenue Secretary and chairman of the ETCO Advisory Board

"If the United States, with all its apparatus, is unable to control the 3 kilometers of border with Mexico, imagine our challenge with 17 kilometers."
Arthur Cazella, general coordinator of Combat against Contraband and Embezzlement of the Federal Revenue

“Outside the law, we are not a serious country. If you don't have a culture of doing things within the law, outside the law the country has no salvation. ”
Alexander Garciajournalist

 

“The #Dentro da Lei project disseminates, raises awareness, awakens, strengthens people's will to always act within the law, not to give up this line of action and this behavior.”
Luiz Bernardi, Federal Revenue Superintendent in Paraná and Santa Catarina

 

10 measures against the illegal market

The #Dentro da Lei project was based on the recommendations of a study carried out in 2018 by the Center for the Study of Social Economic Law (Cedes), with support from ETCO, which recommended a set of measures to face the illegal market in a broad and effective way. The work is available on the website www.dezmedidascontroilegal.com.br.

Check out the suggested measurement types:

1. Create an integrated system of intelligence agencies and entities to map possible routes for the disposal of products from the illegal market.

2. Define the duties of each Public Administration body to combat the illegal market.

3. Allocate specific resources to combat the illegal market.

4. Institute cooperation between supervisory bodies in different countries.

5. Stimulate socioeconomic development in border regions.

6. Strengthen punitive measures that are ancillary to the fight against smuggling.

7. Include smuggling and embezzlement crimes in the priority goals of the Executive and Judiciary branches.

8. Make criminal treatment for acts committed by criminal organizations more severe.

9. Rebalance the tax regimes that stimulate the illegal market.

10. Adopt special tax measures for regular debtors.

ETCO initiated in 2019 a project to contribute in the search for solutions to conflicts between the tax authorities and taxpayers. In this sense, the Institute hired the consultancy EY (Ernst & Young), one of the most important in the world, to carry out a study on the situation of Brazilian tax litigation and on the way in which other countries deal with this type of divergence.

The study was presented at an event in São Paulo, in November. On the occasion, ETCO's executive chairman, Edson Vismona, spoke about the impacts of the current system on good and bad contributors. "Today, the good taxpayer encounters all difficulties and is mistreated by the State, as if his interpretation of tax rules was always malicious", he said. “As for the average debtor, who benefits from the system's complexity and slowness, the worse the better. The more confusing the rules, the longer the tax process, the more time he has to use the advantage of not paying taxes to reduce his prices and gain market share. ”

The presentation of the work was the responsibility of EY partner responsible for the tax area, Érica Perin, who subsequently participated in a debate with tax law professors Roberto Quiroga and Breno Vasconcelos, from FGV Direito SP.

Based on the study, ETCO started an action agenda to highlight the theme in the national debate and encourage the search for solutions to the problem.

Check out a summary of the study and the views of the two tax experts.

Six study highlights

EY conducted the study Challenges of Brazilian Tax Litigation based on data from the government, the courts, Brazilian research and information gathered by its offices in six countries chosen as reference: Germany, Australia, United States, India, Mexico and Portugal.

The focus of the work was the federal tax litigation. Check out some highlights:

MORE THAN HALF GDP: The litigation stock has been rising and reached R $ 3,4 trillion in 2018, exceeding the equivalent to half of the country's GDP in 2018 (50,4%).

ALMOST 19 YEARS: The completion of a tax litigation process in Brazil takes an average of 18 years and 11 months, in the sum of the administrative and judicial stages.

MULTIFACTORIAL PROBLEM: The litigation is high, according to EY, for reasons that include the complexity of the legislation, the number of accessory obligations, the high tax burden, the impact of penalties and tax regularization programs.

A LOT OF CHANGE: Another factor pointed out by the study is the changes in the rules. Between 1988 and 2018, 16 constitutional amendments were approved and 390.726 tax rules were issued in the country.

CRIMINALIZATION: The study showed an increase in tax assessments with tax representation for criminal purposes against taxpayers. The participation went from 25,42% in 2017 to 29,48% of the assessments in 2018.

FOCUS ON LARGE COMPANIES: The Federal Revenue Service has increasingly focused on overseeing large taxpayers - from 68,62% in 2016, they now accounted for 82,05% of the assessments in 2018. In some cases, litigation is greater than the company's market value .

 

Good practices from other countries

 

1 Mexico: It allows negotiation between the taxpayer and the tax authorities during the inspection phase, authorizing the conclusion of a conclusive agreement.

2 U.S: It allows an agreement before or after the issuance of the infraction notice, with quick mediation and arbitration processes independent of conflicts.

3. Portugal: It provides the taxpayer with an arbitration system immediately after the issuance of the tax assessment notice.

4. Germany: It favors the dialogue between the tax authorities and the taxpayer during the inspection, enabling informal agreements that prevent the generation of litigation.

5. India: It undertook a tax reform in 2017 that did not place legal security as a central theme. Judicialization remains high, with tax lawsuits that can last 31 years.

6. Australia: It offers ample space for defense and negotiation between the taxpayer and the tax authorities in the administrative appeal phase, including mediation, case assessment, conciliation, conference and neutral assessment.

 

Opinions about the study

In a debate after the presentation of the work, tax law professors Roberto Quiroga (USP and FGV Direito SP) and Breno Vasconcelos (FGV Direito SP) praised the initiative of the study. Some comments they made:

Robert Quiroga

 

"We had some surveys on litigation, but we did not have an official compilation, made by one of the four main auditing companies in the world, which was backed up and will be released by an institution with the relevance of ETCO."
“EY brought a very important number: close to 8 thousand companies represent 60% of the tax collection and practically 80% of the tax assessments. So, actually, who are we filing? We are assessing the goose that lays the golden eggs. ”

Breno Vasconcelos

 

“The presentation of a study like this is a public good. We are talking about a service that ETCO, EY and ETCO associates are providing to society. ”
“We tend to hear a lot from representatives of the tax administration that the Brazilian taxpayer is bad. But when I ask companies that work here and abroad about litigation in other countries, the difference is clear. They say: "In Spain, I have a case, while in Brazil there are 3 tax cases". The data is really impressive. ”

 

 

ETCO has joined the newspaper Valor Econômico holding an event on tax reform. The Taxation seminar in Brazil took place in July and brought together important names from the political, economic and legal scene. They debated the positive and negative points of the two main tax reform proposals under discussion in the country at that time: PEC No. 45/2019, presented in the Chamber of Deputies, and PEC No. 110/2019, in the Federal Senate.

The seminar featured lectures by tax expert Everardo Maciel, former secretary of the Federal Revenue (1995 to 2002) and president of the ETCO Advisory Council, the executive president of the Institute, Edson Vismona, federal deputy Efraim Filho (DEM-PB), the economist Marcos Lisboa, president of Insper and former secretary of Economic Policy of the Ministry of Finance (2003 to 2005), of the assistant attorney general of the National Treasury, Phelippe Toledo Pires de Oliveira, and of the tax attorney Roberto Quiroga, professor of Tax Law at the University of São Paulo (USP) and FGV Direito SP.

The following is a summary of the points highlighted by each speaker.

 

Everardo Maciel

The targets should be other

Tax attorney Everardo Maciel criticized the reform proposals under discussion in the National Congress. In their assessment, they do not solve the most serious problems in the current system: high litigation, legal uncertainty and bureaucracy. And they do not address the main tax issues currently under discussion in the world: the erosion of tax bases, the taxation of the digital economy and the designation of new sources of Social Security financing.

Regarding PEC No. 45, it predicted consequences that could represent problems or generate resistance from society, such as: transferring taxation from large companies to 850 thousand contributors to the presumed profit regime and to civil construction; increase in the price of services such as health insurance and private school; emergence of new forms of tax evasion; increased litigation, including questions about its impact on the federal pact; and increased complexity during the transition period.

 

Edson Vismona

Valuing the good taxpayer and punishing the bad

ETCO's executive chairman, Edson Vismona, said he feared that attempts to radically change the tax system would not progress because it involved so many interests and legal discussions. He defended a reform that has as principle to value and to simplify the life of the good taxpayers and to increase the rigor against the bad ones. In the case of the former, he cited proposals such as the creation of a single tax register, the simplification of the processes of opening and closing companies, the elimination of the requirement for a negative certificate, the universal compensation of taxes, the annual consolidation of legislation and the setting of deadline for responding to tax consultations.

In order to combat bad payers, he defended the approval by the Senate of PLS ​​284/2017, which authorizes a more rigorous treatment for regular tax debtors; the reintroduction of a physical control mechanism for the production of the beverage industries to prevent tax evasion; and a review of taxation on the cigarette sector to reduce the advantage of smuggling, which already controls more than half of the market in the country.

 

Philippe de Oliveira

The principles of good reform

The Deputy Attorney General of the National Treasury, Phelippe Toledo Pires de Oliveira, listed some principles that he considers fundamental in tax reform: being economically sustainable; reassess the distribution of taxes between consumption, income and wealth; reduce the complexity and litigation level of the current system; respect the federative pact; review tax benefits; reform the tax collection process; and combat the tax evader and the persistent tax debtor.

"The judicial discussions of tax litigation sometimes take twenty years," he said, recalling that the delay ends up benefiting figures such as the debtor. “Most of the time, they are companies that have nothing in their name. So the problem is the timing in relation to the time of inspection and the time of collection, which the incumbent debtor will discuss administratively and judicially, postponing the payment until after ten years, when there will be no more equity. ” According to him, the approval of PLS ​​284/2017 would bring a quick solution to this problem.

 

Marcos Lisboa

Distortions that need to be corrected

Economist Marcos Lisboa cited aspects of the current tax system that, in his view, constitute distortions to be corrected by tax reform. He defended a uniform rate for all sectors and substitution of fiscal incentives for public spending. “Do you want to benefit a sector, a company, do you bet on the project? Great. Taxation has to be the same for all sectors, so raise funds and, via the Assembly or Congress, make an allocation to support project A, B or C, which has transparency, has control of society. ”

He also argued that indirect taxes should be levied at the place of consumption, rather than at the origin of the goods, to promote more efficient allocation of resources and reduce the fiscal war. He acknowledged, however, that collection at destination favors tax evasion. He also recommended the reduction of corporate income tax and the taxation of the distribution of profits to shareholders, now exempt. Finally, he spoke about the need for measures to increase legal certainty and reduce tax litigation. "Today, it is dysfunctional."

 

Robert Quiroga

The escalation of tax litigation

Tax attorney Roberto Quiroga expressed doubts about the feasibility of a tax reform along the lines of the proposals under discussion in the National Congress in mid-2019. “One must be very careful with this combination of taxes and especially with the federative issue. It will be very difficult, in my view, to host a reform project in which the three spheres come together. ”

For Quiroga, one of the most urgent problems is the escalation of tax litigation. “Today, the size of Brazilian tax litigation is equivalent to half a GDP, close to R $ 3,3 trillion. These are topics of great theoretical discussion that end up being discussed in the administrative area and in the judicial area ”, he said. According to him, in addition to affecting the State's collection capacity, the situation penalizes companies, which need to present financial guarantees to be able to discuss issues in court - which generates costs and, as the volume of litigation increases, may compromise their ability to investment.

 

Ephraim Son

Changes should enhance the productive sector

Federal deputy Efraim Filho argued that tax reform should have PEC No. 45/2019 as its backbone, pending before the Chamber of Deputies. He acknowledged that the issue is difficult, as it involves many interests and raises complex issues from an economic and legal point of view. But he said he thought it possible and preferable to pass a deeper reform in the current legislature. "You have to conceive something new," he said. "Making a patch will not do any good, because a patch on rotten fabric tears."

Efraim also expressed the opinion that the reform should not only focus on the State's revenue interests, but must also value the private sector. “It is necessary to prioritize those who produce in Brazil. Whoever produces in Brazil can no longer be the villain of history. The productive sector today is seen with a presumption of guilt ”, he lamented. “The rules today are to facilitate collection. They are not to make life easier for the taxpayer, nor for simplification. ”

ETCO has been working to make the topic of tax legal security more present in the national debate. A work in this direction was the holding of the Seminar on Taxation and Legal Security, which brought together great names in law to discuss the causes and solutions for the growing insecurity of the national tax system. The event took place in June, in São Paulo, and was supported by the Brazilian Association of Financial Law (ABDF), the Association of Federal Judges of Brazil (Ajufe) and the Center for the Study of Law Firms (CESA).

The speakers were professors from the Faculty of Law of the University of São Paulo (USP) Heleno Torres and Humberto Ávila; lawyer and professor Roberto Quiroga, from USP and FGV Direito SP; ETCO attorney and counsel Hamilton Dias de Souza; and lawyer Gustavo Brigagão, president of ABDF. They addressed different aspects of the topic and participated in a debate with tax attorney Everardo Maciel, former secretary of the Federal Revenue and president of the ETCO Advisory Council, who coordinated the event.

The lectures were recorded on video and transcribed and are available on the ETCO website. They were also synthesized by journalists Oscar Pilagallo and Fernando Mello in the book Legal certainty and taxation, launched with the support of ETCO.

Check out a summary of the topics addressed by the speakers:

 

Heleno Torres

Security to attract investment

For Professor Heleno Torres, it is necessary to make Brazil a place where “people know exactly what taxes they must pay and what obligations they must fulfill and, at the same time, constitute a state of security, a state normality, where the business environment can favor new investments ”. He recalled that the current situation does not interest taxpayers or the tax authorities, who are unable to collect the amounts in dispute in the litigation.

Heleno highlighted the urgency of a reform of the consultation system to make it effective in resolving taxpayers' doubts and reducing conflicts. He defended an effort to standardize understandings in the judgment of tax cases, to avoid that equal cases have different results in different instances. And he talked about the need to control excesses of tax authorities. “The National Tax Code, for example, lacks a chapter on the inspection process and procedure, which gives taxpayers more candid rights over the limits of inspection and the action of the tax authorities in administrative relations,” he said.

 

Robert Quiroga

Protection against State discretion

For Professor Roberto Quiroga, legal security in the tax field requires recognition of the inequality in the balance of forces between the State and taxpayers. “Of course, we have to look at the state side. But the legal security we are talking about is the security that the constitutional text gives to the taxpayer. Against state will ”, he justified.

Among the reasons for insecurity, he cited the confusion in the jurisprudence of several important issues caused by the lack of conceptual basis for decisions of the judgment bodies, including the CARF (Administrative Council for Tax Appeals) and the Supreme Federal Court. He cited the example of the taxation of profits abroad, appreciated by the Supreme Court. “[The STF] decided nothing. It just confused everyone. There were ten different votes. ”

Quiroga also criticized the instrument for modulating the effects of higher court decisions. “It creates such a condition that I don't know what the interpretation I'm going to give and when it will be valid. Whether for the future, the past or the present. ”

 

Humberto Avila

Three conditions for legal certainty

In his lecture, Professor Humberto Ávila stated that it is only possible to achieve legal certainty when the rules are understandable, stable and predictable. And that Brazil presents problems in these three basic conditions. According to him, a large part of the insecurity observed in the country is due to the Judiciary's lack of determination to demand more quality in the Legislative decisions.

“Do you know why in Brazil the legislation is bad? Because the Federal Supreme Court does not declare the laws unconstitutional because they are bad, ”he said. “We have to recover the didactic role of the courts and begin to declare the unconstitutionality of rules that are contradictory, that are too vague, too ambiguous. Because the taxpayer has to guide his conduct based on some direction. ”

Ávila condemned the practice of federated entities of instituting or increasing taxes through regulations, and not laws, as required by the Constitution. He also criticized changes in orientation in jurisprudence that produce retroactive effects, violating taxpayers' rights.

 

Hamilton Dias de Souza

Risk of more insecurity with disruptive reform

Hamilton Dias de Souza, a tax attorney, said that a tax reform with profound changes to the Constitution and the federal pact, which he called disruptive, could bring more legal uncertainty, not less. “When there is a disruptive tax reform, changing all concepts, we can all imagine what will happen. How long will it take for all these things to settle and how will businesspeople, taxpayers, how can we all organize our lives? ”He asked.

For Dias de Souza, proposals such as the migration of taxation to the destination of products and services, the application of IPI to primary products and the creation of a new tax on “special consumption” can generate new focuses of legal uncertainty in the tax system.

The tax official said he preferred a path of occasional changes and listed some principles that the tax reform should obey to improve the business environment and bring more legal security to the country: simplification, harmony of the rules of the administrative / tax process, transparency and neutrality.

At the end of his lecture, the event coordinator, Everardo Maciel, asked him if the IBS proposed in PEC 45 could be compared with Simples, in order to respect the constitutional principle of the federation. Hamilton showed the distinction between the two tributes. “Simples does not absolutely prevent the existence of a normal institution of taxes by the Union, states and municipalities - not least because it is optional”, he replied. And he reaffirmed his view on the unconstitutionality of IBS.

 

Gustavo Brigagao

Taxation of the digital economy and VAT

ABDF President Gustavo Brigagão spoke on two topics: the challenge of taxing services and companies in the digital age; and the proposal to create a Value Added Tax in Brazil (VAT).

He cited three reasons that hinder the taxation of digital companies: the fact that they do not need a physical presence in the country where the service is provided; have most of their value concentrated in intangible assets; and generate revenue from information provided to them by the users themselves.

Brigagão cited different proposals that countries and international organizations are discussing to face this challenge, but said that there is still no satisfactory answer anywhere in the world.

The ABDF president defended the adoption of VAT to solve some of the main problems of the current model, such as its complexity and cumulativity, and recalled that it is present in 165 of the 193 countries in the world. “I would very much like to be able to tell foreign investors that we have a form of taxation that is compatible with what they know. And today I can't say that ”, he lamented.

 

Lectures are gathered in book

ETCO launched, in November, the book Taxation and legal certainty - the importance of an efficient safety net (93 pages). The work presents and contextualizes the content of the lectures given by tax experts Heleno Torres, Roberto Quiroga, Humberto Ávila, Hamilton Dias de Souza and Gustavo Brigagão at the event on the theme held in June by the Institute, under the coordination of Professor Everardo Maciel.

The book written by journalists Fernando Figueiredo Mello and Oscar Pilagallo is aimed at a wider audience. He can be downloaded in PDF from the ETCO website or obtained for free by email eco@etco.org.br (subject to availability of copies).

Brazil has one of the most complicated tax systems in the world. The latest edition of the World Bank's Doing Business report, released in October 2019, once again showed the country in the last place in terms of time spent by companies to meet their tax obligations, among 190 nations surveyed. There are 1.501 hours of work per year, compared to 158,8 hours on average in rich countries.

But our tax system is not only the most laborious, it is also one of the most insecure - an aspect that has worsened in recent years, as can be seen by the increase in Brazilian tax litigation, which signals the divergences in the interpretation of tax rules and their application . A study we commissioned in 2019 from EY, one of the largest and most important consultants in the world, showed that litigation continues to grow and that the stock of tax credits under discussion in administrative and judicial bodies already exceeds half of the country's GDP ( R $ 3,4 trillion).

For this reason, in 2019, ETCO defined tax legal security as one of its priority themes. The timing is right. After the approval of the pension reform, the focus is on other fundamental issues to unlock the economy, attract investments and boost the country's development. Tax reform is one of the most discussed initiatives.

In addition to sponsoring the study and presenting it to society at an event attended by renowned tax experts, ETCO held two other seminars on the topic: one on Tax Legal Security, coordinated by Professor Everardo Maciel, president of our Advisory Board, who also we turn it into a book; and an event in partnership with the newspaper Valor Econômico to debate the tax reform proposals under discussion in the National Congress.

Another priority theme to which we paid great attention in 2019 was the defense of the legal market. Unfortunately, our best companies, those that fulfill their obligations in an ethical and responsible manner, continue to suffer greatly from unfair and criminal competition represented by practices such as smuggling, piracy, counterfeiting, adulteration and other fraud in the offer of products and services. .

In one of our main activities in this area during the year, we joined the newspaper Gazeta do Povo, from Paraná, in carrying out the project #Dentro da Lei. For seven months, the initiative mobilized authorities, opinion makers and public security experts in forums , in-depth reports and other journalistic actions focused on combating these practices and the importance of defending a stance of legality and competitive ethics as the foundation of our development.

With the same objective, we also participated in international events, such as the Fifth Meeting of the Latin American Anti-Smuggling Alliance (ALAC), in Costa Rica, the 13th Parliamentary Forum on Intelligence and Security, in Paraguay, and the meeting of the Combat Task Force to the Illicit Market of the Organization for Economic Cooperation and Development (OECD), in France.

An important part of our performance in 2019 was aimed at opening dialogue with the new governments of Brasília and the states. We participate in countless events, meetings and public hearings with authorities who have assumed functions in areas related to our field of activity, taking them to our flags and offering our contribution in projects to strengthen the business environment in the country.

Details on these and other activities that we developed in 2019 can be found throughout this publication.

Good reading.

Founded in 2003, ETCO-Brazilian Institute of Ethics in Competition is a Civil Society Organization of Public Interest that promotes integrity in the business environment. We believe that fair competition is one of the main foundations of economic development and the construction of a stronger and more just nation. Our mission is to identify, discuss, propose and support initiatives to strengthen ethics and reduce illicit practices that cause market imbalances. ETCO is maintained by companies and associations committed to the cause of fair competition.

How we operate

STUDIES: We sponsor research and analysis to better understand the causes of misconduct and guide in the search for solutions.

ACTIONS: We present proposals and support initiatives to prevent illicit practices, improve laws and ensure compliance.

EDUCATION: We do and support seminars, publications and campaigns to raise public awareness about the importance of complying with the law and the harmful consequences of unfair competition for the country.