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Brazil gone nuts

Getting through the in-tray

Getting through the in-tray

The Circumlocution Office in ‘Little Dorrit’, where everything became bogged down in bureaucracy,  represented Dickens’s visceral satire on Government. A century and a half later, it might be time for novelist José Sarney to pick up, in his own country Brazil, where Dickens left off.

Brazil is a bureaucratic blast, nowhere more so than in the field of taxation. Over thirty types of taxes mean that 2,600 man-hours are wasted on compliance each year by an average medium-sized company, as opposed to 334 in Mexico, another country in the Lost Continent south of the Rio Grande.

Sarney is particularly qualified to write the book as his 9 to 5 job used to be President of Brazil. The Foreword might be penned by one of his successors, Fernando Henrique Cardoso, who was responsible for the plethora of taxes but, in a lecture I attended in Sao Paolo some years ago, made clear that he thought it was time for almost all of them to go.

When all else fails - its time to Carnival!

When all else fails – its time to Carnival!

Meanwhile, it was announced last week, that successive governments had been cheated of around $2 billion in tax revenue over the last decade. And, thereby, hangs a cautionary tale.

The Finance Ministry has a department that hears appeals by taxpayers who feel they have been given a rum deal by the tax authorities. As a tax advisor, this sounds to me like good bureaucracy. The problem is we are talking Brazil.

It turned out that half the  ‘arbitrators’ were drawn from government and half from industry. In many instances, by paying between 1% and 10% of the foregone revenue to a non-tax-specialist law firm for ‘consultancy’ services, it is alleged the disputed amounts were miraculously decided in favour of the taxpayers. Somewhere in the labyrinth of  Brazilian law, that is probably called ‘bribery’; ‘corruption’ and ‘fraud’ also come to mind.

Brazil 2014

Brazil 2014

So, another bunch of suspects gets lined up alongside those already facing prosecution in the State-run Petrobras Oil scandal. It would be nice to say that, at least, the fifth largest country in the world could be proud of its football – what with a record five World Cups to its name. But, after their drubbing by Germany last year, they have grown remarkably quiet on that front.

Time for a President Pelé?

They shoot horses, don’t they?

And how much tax do you think you will have to pay this year?

And how much tax do you think you will have to pay this year?

“It’s under starter’s orders – and they’re off!”  2013 has scarcely made it out of the stalls and two stories are already vying for a place in the Winner’s Enclosure at the annual Let’s-Knacker-The-Taxpayer Steeplechase.

First to gallop off the page and nearly knock out my eye was the disclosure by the Wall Street Journal that the Indian Government has come knocking  on Vodafone’s door asking when it can expect to receive the $2.5 billion owed to it. Readers will recall that, after a  long-running dispute between the telecommunications company and the Indian Government over a withholding tax issue, the Government fell badly at the final Supreme Court fence.  However, a minor setback like this could not deter the Trustee of the biggest democracy in the world, and the Lok Sabha promptly passed retroactive legislation (to 1961, to really put the boot in) to ensure the Government would still win the race. Following international uproar last year, it was widely thought that the Indian Government had backtracked, but this was evidently not the case. The parties are now said to be locked in negotiation to try to find a way out of the impasse. It’s anybody’s bet what the outcome will be.

Next, The Economist informed its readers that MMX, a Brazilian mining giant, had been presented with a $1.8 billion tax, fines and interest bill representing 90% of its market value. This was in the wake of similar demands sent to other major companies. Brazil, as everyone knows, has more types of tax  than Heinz has varieties of food. It is almost impossible to get tax reporting right but that does not explain the telephone number amounts the tax authorities are chasing. It appears that the only way of dealing with these claims is by spending 15 years in the court system by the end of which, either a convenient tax amnesty comes along or the companies gamble on a favourable court decision.

Darling! The postman just delivered our 2012 Tax Return

Darling! The postman just delivered our 2012 Tax Return

Whatever the case, the governments of India and Brazil – members of Jim O’Neil’s BRIC Quartet – are suffering from sunstroke. The other two – Russia and China – less exposed to  sun, sand and democracy (sorry, Comrade Putin) are faring much better on the taxation front. India’s government, immobilized  for years by geriatric dementia is a well-known basket case – although the elevation of its disastrous Finance Minister to the presidency and replacement by an old  favourite of the business community, was supposed to offer the start of a cure. Brazil, on the other hand, has been trying to feel its way forward and find ways to cut the number of taxes. Faced with various regional problems, however,  President Dilma Rousseff has, so far, felt herself unable to deliver. In Sao Paolo a couple of years ago, I sat through an interminable speech by former President Fernando Henrique Cardoso.  He admitted that he had been to blame for the carnival of taxes when priorities were to bring inflation under control, get  the country moving and keep the military in their barracks (I made the last one up – but I’d wager  he would have liked to have said it) – but now it was time to scrap the lot and become a normal country. Deaf ears.

What is sad is that, countries that are so critical to the sustainability of the world economy in the next half century, are using every opportunity to give prospective investors the heebie-jeebies. It would appear that, no less important than reasonable tax rates (I hear former French President Bling-Bling is thinking of moving to London – sacrebleu!) is certainty about the tax to be paid.

What is interesting, however, is that evidently none of this makes it into macro-economic modeling. Now I admit I am on dangerous ground here. My last day of formal macroeconomic study was a third of a century ago and, when I raised this point with  none other than the editor-in-chief of The Economist at a conference a while ago, he took one look at my disappearing hairline (I am being kind to myself) and politely commented that, while I was clearly a young man, macroeconomics had moved on since my university days. He did add, however, that he agreed there was something in what I said (which was probably because he was desperate to get past me to the coffee).

It was none other than his own Economist ( how much name dropping can I do in one post – President of Brazil, Editor of The Economist?) that ran an article last week on – you guessed it – macroeconomic modeling. It turns out that macroeconomists managed to get through the entire 20th century – Great Depression, Milton Friedman and all – without factoring Banks into the basic equation. In a world where everything left out was ceteris paribus (the term meaning “other things being equal”  makes me tingle with nostalgia), banks were assumed to just be facilitators between lenders and borrowers. Blimey! In reality banks have been upsetting the apple cart for generations and, what with their showing in the recent Financial Crisis, it is a relief that they are now being included as independent factors. But what about taxation?  Tax is obviously there – always the something minus “t” to establish numbers and multipliers. But the idea that taxes are, or should be, neutral was abandoned years ago. The destabilising effect of wacko tax policies needs a place at the macroeconomic table. What India and Brazil are doing with their strong-arm tactics is not only not “ceteris paribus”, it is “casus belli” and many other impressive Latin phrases I can’t quite think of at the moment.

Dodgy business

Dodgy business

2013 has a long way to go and a lot of fences to clear. Ever since my very  first audit assignment at a Betting Company I have had my doubts about Horse Racing. But India and Brazil are famous for their fair play in Cricket and Football, respectively. For all our sakes, let’s hope they get their eye back on the ball. Carpe Diem (that’s another one for you).

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