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Brazil's Tax System Hits Entrepreneurial Spirit
Source: Financial Times
Source Date: Tuesday, February 26, 2008
Focus: Electronic and Mobile Government, Institution and HR Management, Internet Governance
Country: Brazil
Created: Apr 08, 2008

For several years Valdir Soares worked as a driver for two doctors in Sao Paulo. Then he had the chance to fulfil a dream: the shop where he bought spares for the motorcycle he rode to work came up for sale. Mr Soares and his wife jumped at the chance to become small entrepreneurs.

However, after just one year, he is back at driving again. "Business was good," he says. "But the rent on the shop went up and we needed more income. That meant hiring a mechanic to do repairs. When we looked at all the taxes and other costs, we saw it was impossible. A buyer came along for the shop and we got out."

Brazil's byzantine tax system is a huge impediment to doing business in the country.

A recent World Bank report found that it took a typical company in Brazil 2,600 hours a year to pay its taxes - putting the country in last place among 177 countries surveyed. In Ireland it took 76 hours.

Big companies employ armies of lawyers to guide them through the maze of regulations.

But faced with such complexity, many small businesses either go under or drift into "informality" - a term that is much used in Brazil as a euphemism for tax evasion.

As well as labour taxes and welfare contributions, companies must deal with state sales taxes - governed in Brazil's 27 states by 27 different sets of legislation - and a host of other municipal, state and federal taxes on sales, profits and payroll.

The country's tax burden has risen steadily in recent years to reach about 37 per cent of gross domestic product, as high as that of many developed countries but without the quality of services that those countries enjoy.

Fabio Pina of Fecomercio, a retail association based in Sao Paulo that is campaigning for tax reform, says: "Some taxes are paid to the (federal) union and passed to the states, others from the states to municipalities, others from the states to the union and back to other states.

"It is a monstrous and unnecessary toing and froing that is the legacy of a hundred years of passing tax laws on the fly."

Pressure is growing on the government to sort out the mess.

Last week, Guido Mantega, finance minister, said a reform would be sent to Congress by February 28.

Such reform has been promised since President Luiz Inacio Lula da Silva came to office in 2003. But now it has an extra incentive: in December, the government suffered a severe blow when the Senate rejected a bill to perpetuate the CPMF, a tax on financial transactions that would have been worth about RDollars 40bn (Dollars 23.4bn, Euros 16bn, Pounds 12bn) this year.

The current system relies heavily on sales taxes that are hidden from consumers at the point of sale, so the poor will pay proportionately more of their income than the rich.

Tax rates vary wildly: in the state of Sao Paulo the price of chicken, for example, includes 18 per cent in taxes. For a can of soft drink the rate is 47 per cent; for a can of beer, 56 per cent, according to Feirao do Imposto (Tax Market), a website that lists many such examples.

A comprehensive reform would mean unifying the 27 different state sales taxes, as well as uniting and simplifying other taxes and welfare contributions.

The biggest states, however - which would lose the most from any reform - are controlled by the opposition, making such change politically difficult.

The government's proposal is expected to go some way to simplifying the state sales tax, but to fall short of creating a unified value added tax. Other local taxes are likely to remain unchanged.

"Tax reform is a very difficult subject even at the best of times," says Joao Augusto de Castro Neves, a political scientist in Brasilia.

But these are not the best of times: the government is beset by the latest in a series of corruption scandals, which have driven a wedge between it and the opposition, and October will bring municipal elections in which many legislators will run for office, further complicating the delicate balance of forces that will be needed for such an ambitious reform.

"We really don't think anything of substance will happen," says Mr Castro Neves. If he is right, many would-be entrepreneurs such as Mr Soares will go on choosing menial jobs over job creation. *Brazil posted a current account deficit of Dollars 4.23bn in January, contrasting sharply from the Dollars 386m deficit in December, Dow Jones reports .


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