Tax policy must be based on the concept of a broad moratorium

The very exceptional circumstance that humanity is experiencing is an obstacle to reflections that allow us to understand the present time and produce some type of contribution. Our ignorance, impotence, anguish and fear prevail.

Apparently eating a wild animal infected by a virus was able to stop the world and cause suffering on a global scale. The real expression of an allegory of the Butterfly Effect, extracted from Chaos Theory, has never been so painful: “a butterfly flaps its wings in Beijing and produces an earthquake in San Francisco”.

Exploring the origins and spread of Covid-19 should only serve to understand the pandemic and support the development of prevention theories. Blaming people or governments is completely useless, if not a symptom of mental alienation. It would also promote unforgivable injustices.

The pandemic has complex and probably unverifiable causality, in the light of current science. The virus has no nationality. The problem is with humanity.

This picture brings out the intrinsically contradictory human nature, in which the selfishness associated with the survival instinct and solidarity, generosity and opportunism - often, delinquent - coexist, good and evil coexist. The hope is that the spirits of people of good will prevail.

I participated actively in the face of serious international and domestic economic crises, in the FHC Government. I know how much serenity, determination and creativity were required to overcome them. Well, none of them even touches the intensity, scope, unpredictability and persistence of the crisis arising from Covid-19.

From this confrontation, I extracted some lessons that can be of some use, even though punctual and modest in the face of a cyclopic crisis.

I risk, by imposition of solidarity, humbly subjecting them to debate. I do not intend to be right, but help in the limit of my knowledge and experience.

We are facing a catastrophe with equivalent consequences, mutatis mutandis, collision with an asteroid, a natural disaster on a planetary scale or a nuclear accident. It is not reasonable to deny the scale of the catastrophe. What is needed is to hope for the best, but prepare for the worst.

The suggestions are limited to the tax field, which, in the context, is merely subsidiary, since what counts as a priority, at the moment, is to save people, especially the sick, the vulnerable and the poor.

The first lesson to be observed is the flexibility of recommendation, creativity and collaboration.

I collect Charles Darwin's praise for flexibility in nature, translated into the ability to adapt, and which, at least in circumstances of extreme crisis, also applies to public management, including tax management: “It is not the strongest that survives, not the most intelligent, but the one that best adapts to changes ”.

Those responsible for tax policy cannot become prisoners of manuals, of no use in crisis situations. It is necessary to use creativity at the limit.

It would be tedious and useless to enumerate the creativity exercises practiced in crisis coping experiences that I lived. What was done was often unprecedented, not even raised in literature.

In the current crisis, the need for creativity is much higher. Dialogue, discuss problems thoroughly and do not stick to pre-existing models. It is the advice I can give to those on the front lines.

Collaboration is also an indispensable ingredient. Not only among federal entities, it is necessary to reach out to private tax professionals and taxpayers.

The second lesson concerns the imperative need to segregate the initiatives to face the crisis from those that will be adopted in the post-crisis. Trying to articulate these two classes of initiatives is to flirt with crucial mistakes.

Although it seems unsubstantiated, from the perspective of physics, the crisis has paralyzed time. This is fundamental evidence. It is as if there is only the present. Nothing more is known about the future.

Anyone who projects the future is wrong, based on pre-existing knowledge about interest rates, foreign exchange, GDP, fiscal balance, asset values, prices, etc.

What if an effective vaccine or treatment comes along? What if, in a scenario of greater misfortune, new waves of the virus or its mutation appear?

Since there is a minimum of civilization, humanity has never been compelled to social isolation for a period that no one can estimate.

When we leave these caves, as are we, physically and psychically? How will the world be? Will we renegotiate relations with the environment worldwide, including in terms of urban occupation and prevention of natural disasters? Will we come to understand that tackling poverty requires everyone's competition, regardless of the jurisdictions of the states? Will severe health barriers be put in place for the transit of people and goods, to the detriment of globalization? Will the current consumption patterns yield to the essentiality thesis? Will limits on growth be imposed, as the Club of Rome has been advocating since 1972? Will there be a digital revolution in work and service provision, with repercussions on urban mobility, international transport, entertainment, tourism? How will the public health policies?

There are many questions, the answers of which, however, no one knows. Most likely, we have a new normal.

In how long and for how long, however, will the new normal prevail, considering the atavistic tendency of the human being to erase from memory everything that is pain and interdiction of pleasure?

The only certainty we have is that these are times of complete uncertainty. In this context, absolute caution is the only rational option.

In a wise lesson, John Maynard Keynes pointed out, in the “Treaty on Monetary Reform” (1923): “The long term is a misleading guide to current affairs. In the long run, we will all be dead. Economists put themselves in a comfort zone, totally useless, if in stormy seasons they can only say that when the storm passes, the ocean will calm down again ”.

It is, therefore, imperative to concentrate all efforts to overcome the crisis at the present time, removing deviations in concentration resulting from speculations about the future.

If the demand for flexibility, creativity and collaboration prevails and if there is a conviction for mindfulness in the present, tax policy must be based on the concept of a broad moratorium, provided for in our legal system.

The National Tax Code (CTN), arts. 151-155, provides the moratorium hypothesis, with ample operational flexibility: general or individual, specification or not taxes or sectors, federal or national scope, applicability or not to certain regions, etc.

Anyway, it is a proper instrument for calamity situations, whose flexibility, however, does not exclude the imposition of penalties for cases of fraud or simulation, in its own favor or that of third parties.

The choice of terms, sectors or taxes includes discretionary acts based on tax morality, which requires firmness and discernment.

The moratorium establishes the rule of law, as opposed to a scenario, not unfeasible, of civil disobedience.

The moratorium must, however, go further to achieve processes and procedures as well. For them, time also stopped.

Should be suspended, while the pandemic lasts, administrative judgments, official releases, losses (except for cases of contraband or practices that tend to make sanitary policies unfeasible), collection of active debt, requirement of accessory obligations, procedural deadlines, etc. Negative certificates must be extended for an equal period.

The Union must set an example and call for the adoption of measures by all federal entities. In this movement there can be no concession to bureaucratic mentalities, which do not see the scale of the catastrophe.

Ordinance No. 543, dated 20.03.2020, of the Federal Revenue of Brazil partially accepts the recommendations regarding the procedural and procedural moratorium. However, more boldness is needed, including regarding the moratorium on taxes. Also, remove the pretension of launches regarding the controversial prevention of decay and the presumption of fraudulent interposition of people.

It is not the time for controversy. Nor is it the time to harass taxpayers in the midst of economic debate. At least, for humanitarian reasons. It is now up to us to fight for survival.

ETCO presents its 2019 Activity Report

On March 20, ETCO launched its 2019 Activity Report. The publication summarizes the projects carried out by the Institute last year to contribute to the promotion of competitive ethics and the strengthening of the business environment in the country.

In 2019, ETCO acted intensively in debates related to the tax theme. “The time is right,” explains the Institute's executive president, Edson Vismona, in the letter introducing the Report. "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 June, the Institute held a seminar on tax legal security, which was coordinated by the chairman of its Advisory Board, Everardo Maciel, and was attended by big names in tax law. The following month, he supported a seminar on tax reform held by the newspaper Economic Value.

ETCO also sponsored a study by the EY consultancy on Brazilian tax litigation, which was presented at an event followed by a debate with experts.

Another important topic was the defense of the legal market. In partnership with the newspaper People's Gazette, from Paraná, the Institute carried out the project #Dentro da Lei, which lasted seven months. The work included a forum for debates, in-depth reports and other journalistic actions on the damage of practices such as smuggling, piracy and counterfeiting of products.

The 2019 Activity Report also shows how ETCO expanded its participation in international events, with its presence at the Fifth Meeting of the Latin American Anti-Smuggling Alliance (ALAC), in Costa Rica, at the 13th Parliamentary Forum on Intelligence and Security, in Paraguay, and at the meeting of the Organization for Economic Cooperation and Development (OECD) Task Force to Combat Illicit Market, in France.

The publication can be read on the internet or in PDF format from this link.

Brazilian tax litigation exceeds 50% of GDP

The Brazilian Institute of Ethics in Competition, ETCO and EY, presented, on 28/11, in São Paulo, the study “The Challenges of Tax Litigation in Brazil”, a mapping of the main challenges of this practice in Brazil and potential mitigating measures. The survey considers some relevant aspects of litigation compared to other countries: Germany, Australia, United States, India, Mexico and Portugal.

See the main conclusions of the study

During the event to present the study, the book “Legal Security and Taxation” was also launched, by journalists and writers, Oscar Pilagallo and Fernando Mello. The material was based on the analysis of renowned tax experts, Gustavo Brigagão, Hamilton Dias de Souza, Heleno Torres, Humberto Ávila and Roberto Quiroga Mosquera. On the occasion, EY's technical tax team detailed the main results of the study, which were discussed by tax experts Roberto Quiroga and Breno Vasconcelos, together with Edson Vismona, president of ETCO and Érica Perin, partner of EY for the tax area.

“For Brazil to attract investments, grow and provide public services to the population, it is necessary for the State to collect the taxes due to it and for companies to be secure in relation to current tax rules. Today, the country faces difficulties in both directions, which compromises business development ”, says Edson Vismona, president of ETCO.

Also according to the executive, the relationship between the Brazilian tax authorities and the taxpayer needs to change. “The government cannot regard taxpayers in good and bad faith in the same way. Today, mechanisms are already in place to identify so-called debtors, and there must be a differentiation in the treatment of cases, adds Vismona.

For EY partner Érica Perin, understanding Brazil's tax litigation is important for both taxpayers and the government. "The high stock of tax credits, the delay in resolving disputes and the inspection strategies for the efficiency of assessments have an impact on the budget of federal entities, on business activity and, in general, on the lives of taxpayers," he said.

The study “The Challenges of Tax Litigation in Brazil” revealed important points related to legal tax security, such as:

Union tax litigation already exceeds half of GDP

The Union's contentious tax credit stock, composed of tax credit from the Federal Revenue of Brazil (RFB) and the Attorney General's Office of the National Treasury (PGFN), reached R $ 3,4 trillion in 2018, according to data from the General Balance Sheet of the Union. This value is higher than the revenues made by the Union and reached 50,5% of GDP in 2018. If collected, it would make the net worth of the Union positive (since 2015, it has been negative).

Tax lawsuits last almost 20 years

The completion of a tax litigation process in Brazil takes an average of 18 years and 11 months, when the administrative and judicial stages are added. The time was calculated based on data from the (i) 2017 Annual Activity Report of the RFB; (ii) report on judgments of the Administrative Council for Tax Appeals (CARF), made available by the agency in 2015 at the time of Operation Zelotes; and (iii) the 2017 and 2018 Justice in Numbers Report of the National Council of Justice (CNJ).

Complexity leads to increased litigation

Among the factors that contribute to the high degree of litigation in the Brazilian tax system, the following stand out: complexity of the legislation; the amount of ancillary obligations; the extension of the country's territory and borders; the high tax burden; and aspects related to penalties, tax debt correction and tax regularization programs that end up making litigation an alternative for business financing.

Tax authorities increase focus on large taxpayers

In recent years, the IRS has increased its focus on inspection

large taxpayers, who represented 68,62% of the assessments in 2016 and increased to 82,05% in 2018. On the one hand, this strategy has an impact on tax collection. In 2018, the investigation of 1.882 collection distortions related to the largest contributors generated revenue of R $ 27,52 billion to Revenue - a record amount for this specific group.

On the other hand, it contributes to the increase in litigation and its weight in the companies' balance sheet. The financial statements of publicly traded corporations show a high representation of tax litigation in this group of companies. In some cases, it even exceeds the company's market value.

Good practices that work in other countries

The experience and practices adopted in other countries point to paths that

they can guide a reform to provide more legal certainty and reduce the generation of litigation in our tax system. The study analyzed six countries better positioned than Brazil (80th place) in the World Economic Forum's 2017/2018 Global Competitiveness Report ranking: United States (2nd), Germany (5th), Australia (21st), India (40th) ), Portugal (42nd) and Mexico (51st), chosen for presenting different models of conflict solutions or for their direct influence (Portugal) or economic similarities with Brazil (Mexico). India was included for also demonstrating a high level of litigation between tax authorities and taxpayers and for not tackling this problem in the deep tax reform carried out in 2017.

Access the main conclusions of the study here:

Folder-Contencioso_págs-simples_vfinal

What tax reform does Brazil need?

The October 2019 edition of the ETCO Magazine brings coverage of two seminars on taxation conducted by the Institute. The Taxation and Legal Security seminar, held in June, brought together great lawyers to discuss solutions to the problems of the Brazilian tax system and was coordinated by the chairman of the ETCO Advisory Council, Everardo Maciel. It featured presentations by tax attorneys Heleno Torres, Roberto Quiroga, Humberto Ávila, Hamilton Dias de Souza and Gustavo Brigagão.

The Taxation in Brazil seminar, held in July, in partnership with the newspaper Valor Econômico, had lectures by ETCO's executive president, Edson Vismona, Everardo Maciel, Roberto Quiroga, economist Marcos Lisboa of federal deputy Efraim Filho, and Phelippe Toledo Pires de Oliveira, Deputy Attorney General of the National Treasury.

Check here these and other articles from ETCO Magazine.

Light on tax litigation

The dispute between the tax authorities and taxpayers has been growing. The time in which these disputes are discussed in the administrative and judicial spheres remains extremely long. And Brazil appears in a very unfavorable situation, in terms of tax litigation, in a comparative analysis with developed and developing countries.

These are some of the preliminary conclusions of the study that ETCO commissioned consultancy EY (formerly Ernst & Young), to make a diagnosis and point out ways to reduce litigation between tax authorities and taxpayers, entitled Challenges in Brazilian Tax Litigation - Main Challenges of Practice of Tax Litigation and Potential Mitigating Measures in Brazil.

The work analyzed official government information, studies on the topic carried out in Brazil and information collected by EY offices in other countries and should be presented to society in October. The focus was on federal litigation.

“From 2014 onwards, we see a significant increase in the number of assessments, but that is accompanied by an increase in the content of tax litigation litigation”, says Natalie Branco, senior manager of Business Tax Services at EY. According to her, this shows that the greater rigor of the tax authorities is not necessarily resulting in an increase in cash for the Federal Government.

Taxes represent the main factor of legal uncertainty for Brazilian companies, according to a study carried out by FGV in the 2014 balance sheets of publicly traded companies. That year, the amounts discussed in tax lawsuits amounted to more than R $ 283 billion, about seven times the amount in litigation in labor lawsuits, for example.

Half of GDP

A first point that draws attention in the study is the speed of the increase in federal tax litigation, which has grown 51% in the last five years. In 2013, the stock at the federal level was valued at R $ 2,275 trillion, which was equivalent to 42,7% of GDP. Last year, it reached R $ 3,440 trillion, corresponding to 50,4% of the wealth generated by the country.

“It is evident that the divergences in the interpretation of tax rules and tax collection processes have reached an unsustainable level of dysfunctionality”, says ETCO's executive president, Edson Vismona. “This creates enormous legal uncertainty in the productive sector, removes investments, compromises the collection of the State and generates useless expenses for everyone. The taxpayer, if he does not accept the launch criteria, contests, and the State, which needs to receive it, runs out of resources. ”

The study will also provide details on a possible and worrying correlation between the criteria adopted by the tax auditors' bonus model and the increase in tax credits issued by the tax authorities. The amount went from R $ 122 billion in 2016 to R $ 206 billion in 2017, the first year of payment of the bonus. An increase of 68%.

In the same period, there was also an increase in so-called tax representations for criminal purposes, an instrument that takes the discussion of taxes to the criminal sphere. The abusive use of this device is considered a way to coerce the taxpayer to pay even the taxes that he considers undue.

"We defend that the tax authorities are strict with those who actually owe taxes," says Vismona. "But we vehemently repudiate practices instituted aiming only at the State's revenue interests or corporate interests." The ETCO president recalls that undue charges are an important cause of disputes between taxpayers and the IRS.

Two decades

The study will also analyze the delay in the processing of tax cases in different instances, which is around twenty years.

Among the several reasons that explain the high degree of litigation, we highlight the large number of changes in the rules regarding taxes that happens in Brazil. A survey carried out by the Brazilian Institute of Planning and Taxation and cited in EY's work accounted for 390.726 federal, state and municipal tax rules created between 1988, the year in which the Federal Constitution was promulgated, and 2018. An average of 774 rules per business day - or 1,92 XNUMX per hour.

The research also makes a comparison of the Brazilian situation with that of six other developed or developing countries - Germany, Australia, United States, India, Mexico and Portugal -, chosen for presenting characteristics similar to Brazil or for representing good examples of tax legal security . “Other countries have alternative conflict resolution measures that impact the number of assessments discussed by taxpayers and the stock of tax litigation, as will be shown in the study”, says the senior manager at EY.

The work will also bring proposals that can be considered to reduce litigation in the Brazilian tax system, including a mapping of the projects under discussion in the Legislative and in the Federal Revenue that are moving in this direction. “We did this research to contribute to the discussions about the change in our tax system that should occur in the coming months”, justifies the president of ETCO. "Tax reform must also carry the flag of legal certainty."

Experts discuss solutions for the illegal market

The Brazilian Institute of Competition Ethics (ETCO) today held a seminar to discuss measures such as the review of taxation formats, bilateral relations with neighboring countries, among other fronts, to combat illegality.

For Edson Vismona, president of ETCO, the equation is simple: high profit and low risk. “A good initiative to tackle the problem on the demand side was the creation of the Ministry of Justice Working Group to assess the possibility of a review of the tax system in the cigarette sector, the most affected by illegality, with 57% of the Brazilian market dominated by organized crime ”.

Luciano Timm, president of the National Council to Combat Piracy (CNCP), stressed that this Working Group indicated that the topic needs to be further investigated. “The Ministry of Justice listened to other government bodies to support the view on the subject. There is a need to collect more economic studies to check whether taxation results in an increase in cigarette smuggling, ”he said.

Adriano Furtado, director general of the Federal Highway Police, said that “we have been acting in the inspection through integration with other agencies so that smuggling is less and less attractive to organized crime. "

João Francisco Ribeiro de Oliveira, general director of Operations for the Federal Highway Police said that “smuggling, especially of cigarettes, directly finances criminal organizations. To combat this crime, the integration and sharing of intelligence between different government agencies is essential ”.

Efraim Filho, federal deputy (DEM-PB) and president of the Mixed Parliamentary Front to Combat Smuggling and Counterfeiting said that “the biggest challenge is to change culture, and to change culture is to change man. Society cannot be tolerant of selling contraband products. This ends up inhibiting the activity of companies from different sectors, many of which are already rethinking their operations and investments in the country. Loses the job market, government and society. It is a game of lose and lose, in which only the offender wins ”.

The event also included Alan Dias, delegate of the Federal Police Chief of Police Crimes Repression and Bruno Paes Manso, author of the book A Guerra - The rise of the PCC ”.

Why does the Senate need to approve PLS 284/17?

Brazil needs to end the notorious industry of heavy duty debtors. The opportunity to accomplish this feat is now in the hands of the country's 81 senators, more precisely in the vote on Senate Bill 284/2017, which authorizes the creation of tougher rules against this perverse figure that corrodes the business environment and the tax collection of the Brazilian State.

Stubborn debtor is the name given to a defrauding type who sets up his company with the purpose of not paying tax. He uses this illicit advantage to practice prices below cost and gain market quickly. In addition, its strategy consists of using tricks to prolong the legal proceedings as much as possible, while diverting profits to other activities, keeping its business registered in the name of "oranges". When the State ultimately wins the case, it fails to collect the debt and the criminals start the same scheme again.

Regular debtors operate mainly in high-tax segments. In the fuel sector, its debts already exceed R $ 60 billion; in the case of tobacco, they exceed R $ 32 billion; in the case of beverages, R $ 4 billion. In these three areas alone, there are more than R $ 96 billion, about 10% of the annual savings expected with the pension reform.

Its unfair competition makes it impossible for companies that collect their taxes correctly and exclude investments. It was identified as one of the causes of the decision of large multinational groups in the fuel distribution sector to leave Brazil.

And why has it been so difficult to end this plague in the country? Basically, because the Brazilian legal system does not differentiate the debtor from other types of debtors and the malicious ones end up taking advantage of protection mechanisms that exist to guarantee the legitimate rights of debtors in good faith.

It is important to note that the problem here is not simply the duty imposed. Every company is subject to go through difficult times and run out of cash to pay taxes or other debts. Sometimes, it may happen that you fail to collect taxes properly, for a period, in order to catch up on debts in the future. But that understanding cannot be applied to the incumbent debtor.

Article 146-A of the Federal Constitution, approved by a constitutional amendment in 2003, authorized the State to create special taxation and inspection regimes for cases that cause competitive imbalances, making its adoption conditional on the approval of a specific complementary law by the Federal Senate. That is the purpose of PLS ​​284/2017, which has been in the House for two years, was approved by the Commissions on Economic Affairs and Transparency, Governance, Inspection and Control and Consumer Protection, and is ready to go to plenary.

The PLS makes an objective distinction between the three types of debtors: the eventual debtor, for whom nothing changes, the repeated debtor, who will also continue to have the current legal protections as long as he does not use the tax advantage to practice unfair competition, and the debtor stubborn, target of the law.

“He is a criminal, and not a businessman, who organizes himself in order not to pay taxes and thereby obtain a competitive advantage, among others. To this end, it systematically violates the legal system, practicing numerous illicit acts, commonly through the use of oranges, address registration and false partners, invariably possessing insufficient assets to satisfy tax, labor obligations, etc. ”

The objective of PLS ​​284/2017 is to quickly stop the criminal action of incumbent debtors. The focus is on the defense of competitive ethics and legality, which are fundamental for business investment and economic development. “Once the contuma of the conduct is determined, it must be strictly and exemplarily repressed, by means of legal sanctions that prevent the continuation of the agent's activities (interdiction of the establishment, revocation of registration in the taxpayer register), of preserving the Erárlo and the market, which has free competition as one of its fundamental principles, as an inseparable link of free initiative. ”

The project enumerates a series of measures that could be adopted specifically against regular debtors, such as the maintenance of uninterrupted inspection in the establishment; special control over tax collection, economic, equity and financial information; the compulsory installation of production, marketing and stock control equipment; among others.

The current text initially limits the scope of the law to the sectors of fuels, tobacco and beverages, which are the most affected by unfair competition from regular debtors, and has the support of the Brazilian Institute of Ethics in Competition (ETCO) and the main representative entities of these segments.

The topic is urgent. Brazil can no longer allow dishonest economic agents to continue destroying the business environment. Profit through illicit practice harms all Brazilians who depend on tax-financed public services. The solution lies with the Federal Senate.

Taxation Seminar in Brazil

ETCO, in partnership with the newspaper Valor Econômico, held on Tuesday (July 23), in São Paulo, the Taxation in Brazil seminar.

The event brought together renowned experts to discuss how tax reform can contribute to Brazil's growth. Access here the exclusive articles covering the event, published on July 30, in a special section of the Valor Econômico newspaper:

Illegality advances and funds violence

In an interview, Edson Luiz Vismona, chief executive of ETCO, tells how smugglers and heavy debtors benefit from the tax system.

Tax review is crucial to the country

Brazilian system is put in check by experts during Taxation seminar in Brazil

Read more…

"We don't need to unify taxes"

Roberto Mosquera defends minor changes with more significant economic results

Read more…

Smuggling is an evil to be fought

Tax review should prioritize productive sector and focus on weakening the illegal market

Read more…

"History in Brazil is a big mistake"

Belief that foreign models can be reproduced here is a mistake, says tax expert

Read more…

Fiscal balance challenges lawmakers

Sustainable and harmonious taxes will favor more advantageous negotiations

Read more…