(Tiểu luận FTU) tiểu luận FTU TAX MANAGEMENT SYSTEM IN BRAZIL AND LESSONS FOR VIETNAM

FO
FACULTY OF ECONOMICS & INTERNATIONAL BUSINESs
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REPORT

TAX MANAGEMENT SYSTEM IN BRAZIL AND
LESSONS FOR VIETNAM
Course title: Taxation and tax system in Vietnam
Instructor: Dr. Vũ Thị Hiền
Group 9:
Name

ID

Nông Mai Anh

1611150004

Nguyễn Cẩm Hà

1611150016

Lê Hà Mai Trang (Leader)

1515150127

Đào Thị Trúc Loan

1511150084

Hanoi, September 2018

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Abstract
1. Introduction
2. Finding and analysis
2.1. Overview of Brazil economy
Brazil is the fifth largest country in the world and the largest in the southern
hemisphere, with 8.514 million km2 of contiguous area. It has over 15.7 thousand kilometers
of land borders and approximately 7.3 thousand kilometers of coastline (Atlantic Ocean).
The Federative Republic of Brazil consists of the Union, 26 States, the Federal District
and over 5,500 Municipalities. The country is divided into five territorial macro-regions –
North, Northeast, Southeast, South and Central -West – which group States with similar
physical, human, economic and social characteristics.
The current population of Brazil estimate for 2018 is 211,107,804 (estimated by
theworldometers.info), spread irregularly throughout the national territory. The Brazilian
population is predominantly urban, with approximately 81% of people living in cities and
towns.
The overall view of the Brazilian economy is marked by regional unbalances requiring
that the State play an effective role as redistributor agent - a determinant factor in the tax
model. The heterogeneous profile of the demographic distribution of the Brazilian population
presents the South and Southeast regions the main consuming centers in the country. At the
other end, the North region, almost completely immersed in the Amazonian landscape,
presents the lowest demographic density rate.
2.2. Overall Tax management system of Brazil 
2.2.1. Tax authority
The official body responsible for federal tax administration in Brazil is The Federal
Revenue Service, called Receita Federal do Brasil, or RFB, which is the official body

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subordinated to the Ministry of Finance. The structure of RFB consists of Central and
Decentralized units. The Central units deal with regulatory, supervisory and planning
activities, while Decentralized units consisting of the regional and local offices, enforce the
directives and guidelines established by the Central units.

(Source: The Brazilian Institute of Tax Planning IBPT)

The administrative structure of RFB has three main objectives:


to present to the taxpayer a unified tax administration, with equal procedures
applied throughout the country;



to confer the organization with a dynamic style of management, capable of
administering various taxes and maximizing the use of human and material
resources;

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

to define clear and efficient criteria of decentralization, granting local offices broad
autonomy in performing their activities.

2.2.2. Tax policy and regulation
 The Decentralized Tax System and Taxing Power of Brazil
In Brazil, the main directives for taxation are provided by the Federal Constitution,
which establishes the general principles of taxation, the limitations on the power to tax, tax
competence across levels of government as well as tax revenue sharing provisions.
Thus, the National Tax System is instituted by the Constitution itself, which establishes
that the Union, the States, the Federal District and the Municipalities may collect taxes. The
administrative-political autonomy, which is an essential characteristic of Brazil’s federative
system, confers to each level of government the possibility of instituting taxes, fees (due to
its police power or to the use of public services) and improvement charges (due to public
works). With respect to social contributions, most of them may only be established by the
Federal Government. According to the Brazilian Constitution, the tax competence of taxing
powers is as follows:

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The relative importance of each of the taxes that make up the Brazilian tax system may
be better assessed by its share in the total tax burden. Notwithstanding that most taxes have
the primary goal of raising funds to finance government activities (fund raising taxes), some
of them have characteristics that qualify them as economic or social policy instruments
(regulatory taxes).
 Intergovernmental Transfers
To strengthen the administrative-political and financial autonomy of government
levels, the Brazilian Constitution defines a system of “unconditional” transfers between the
Union, the States and the Municipalities, which can be either direct or through creation of
special funds (indirect). Regardless of their type, transfers always occur from higher to lower
levels of government; that is, from the Union to the States and from the Union to the
Municipalities or from States to their respective Municipalities. Direct transfers, as

constitutionally defined, are the following:
 States and municipalities are entitled to keep total collection of income tax they
withhold at source on income payments they make or on payments made by their
autarchies or foundations they constitute and maintain;
 Municipalities are entitled to 50% of the collection of tax on rural land property
(ITR) levied on real estate within their territory;
 Municipalities are entitled to 50% of the collection of tax on motor vehicles
(IPVA) registered in their territories;
 Municipalities are entitled to 25% of the collection of tax on the circulation of
goods and transportation and communication services (ICMS) (3/4, at least,
proportionally to the value added through operations carried out in their territories
and up to 1/4 as provided in the State Law);
 States and Municipalities of origin receive by transfer respectively 30% and 70%
of the collection of IOF – Gold (as a financial asset).
The following funds are used to carry out the indirect transfers:

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 Export Compensation Fund (FPEx): composed of 10% of the total IPI collection. It
is distributed proportionally to the amount of industrialized products exports.
Individual State participation is limited to 20% of the total receipts of the fund.
 Federal District and States Participation Fund (FPE): composed of 21.5% of the
total IPI and IR collection. It is distributed in direct proportion to State population
and size, and in inverse proportion to per capita income.
 Municipalities Participation Fund (FPM): composed of 22.5% of the total IPI and
IR collection. It its distributed proportionally to the population of each unit. 10% of
the fund is set aside for the Municipalities of the capital cities.
 Regional Funds: composed of 3% of the total IPI and IR collection. This revenue is
directed to development programs in North (FNO), CenterWest (FCO) and

Northeast (FNE) regions. Thus, 47% of the income tax and 57% of the tax on
industrialized products collected by the Union go to the States and the
Municipalities as constitutional transfers through funds.

Thus, 47% of the income tax and 57% of the tax on industrialized products collected by
the Union go to the States and the Municipalities as constitutional transfers through funds.
 Tax evasion

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Brazil is one of the biggest tax evaders in the world according to a ranking published in
2013 by Tax Justice Network. The study shows that around 13.4% of the Brazilian’s gross
national product (GNP) was evaded. In Brazil, over USD 280 million was not correctly
tributed in 2013 due to informal economy, black market sales, and tax evasion, as seen in the
chart below:

(Source: Tax Justice Network, 2013)

The tributary supervision in the country is made by the Brazilian Federal Revenue. In
2013, a total of 329,000 processes were raised by Receita Federal against possible evaders, a
growth of 9.7% compared to 2012. These numbers show that the chances of being caught for
this crime are growing. The government body claims that more modern fiscalization
techniques are being utilized to cross check violators' information.
Specialists state that some of the causes for Brazil's high level of tax evasion are a
historically weak fiscalization and light punishments for the convicted companies and
persons. Also, it is a common practice among the Brazilian companies and population to
claim that the amount of taxes paid is already too high compared to the quality of the
services presented, such as healthcare and public transportation. The punishments for tax
evadors include:

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 Fine of variable value: 20% of the amount in question if the evader spontaneously
declares his fault, and around 75% if fiscalization detects the irregularity;
 Detention of six months to two years and a fine that varies from two to five times
the amount to be paid;
 If a company is considered guilty of this crime, the penalty is applied to every
person that directly or indirectly contributed to the practice of tax evasion.
 If the convicted person is a primary offender, the penalty is substituted by a fine of
ten times the amount to be paid. 
REFIS, the Brazilian Tax Recovery Program, is one of the biggest initiatives with the
purpose of avoiding evasion and raising the tax collection. It essentially consists in an
installment of the remaining debt. The first program of this kind was released in 2000, and
until the end of 2013, a total of four REFIS were launched by the Brazilian government. The
difference between them was, basically, the prize for companies to apply for and the number
of months wherein which each business will have to pay their debts.
2.2.3. Tax payers
 Individuals:
Residents of Brazil are taxed on their worldwide income, and non-residents are taxed
on their Brazilian-sourced income, while their income received from abroad is tax exempt.
The source of income is determined by the place where the income payer is located,
irrespective of where the work is performed.
 Enterprises:
Brazilian resident companies are taxed on worldwide income, while non-resident
companies are generally taxed in Brazil through a registered subsidiary, branch, or PE, based
on income generated locally. Other than that, non-resident companies can be subject to
withholding tax (IRRF) on income derived from a Brazilian source.
2.2.4. Tax reforms

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 The Military Regime (1964-1985)
The first legacy comes from the military regime, when financial centralization was the
main characteristic of the tax system and when the trend to raise taxes started. The military
regime, deepened a previous system of intergovernmental transfers aimed at addressing
Brazil's enduring regional inequality. As a result, regional economic disparity decreased
slightly.
 Constitutional Process (1988-1994)
The second legacy comes from the 1988 Constitution. The Constitution made profound
changes on the tax system, mainly by increasing resources to subnational governments rather
than the federal government, thereby politicizing and constitutionalizing the system and
influencing its further reform. The 1988 Constitution also expanded the complex mechanism
for intergovernmental tax transfers introduced by the military.
 Stabilization (1994-2003)
The third legacy began with the launching of a stabilization plan, in 1994, which has
succeeded in controlling Brazil's hitherto unstoppable inflation. However, it raised interest
rates to unprecedented levels, thus aggravating the debt burden. As a result, Brazil and its
neighbours remain heavily indebted and must constantly acquire new debt to cover interest
and repayment on the old debt. This situation led to a recentralization of resources at the
federal level and to an unprecedented increase on federal taxes, relative to GDP, to fulfill
debt commitments and to achieve budget surpluses.

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(Source: Adapted from several database compiled by Anfaso, 2004)

 Unsolved difficulties (2003-now)
Many Tax Reform proposals was done to unify some of the taxes, however they all
have not been approved, due to the following reasons:
 slowly working politics;
 lack of a consensus between the states and the Union over Tax Reform;
 avoidance of change from groups that profit with the current taxation chaos.
Until now, there is no consistent project able to effectively correct the current Taxation
System. The governments and lawmakers insist on doing the reform in parts, what is actually
mixing new regulations with the old ones, does not seem to be the best alternative.
5. Evaluation of the effectiveness and efficiency of Brazilian tax management system
5.1. Equity
 Ability to pay
In Brazil, families with lower income levels are proportionally more burdened by taxes
than richer families. In other words, the Brazilian tax model is regressive, and this is why
societal income distribution is worsening.

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The aspect that stands out the most is the amount of money collected through indirect
taxes in the country, which represents 45 percent of all taxation and approximately 15.38
percent of the national GDP. The indirect tax embedded in the price is the same for all
purchasers who may have different income levels. Thus, the amount of tax represents a
different percentage of each purchaser’s income, which is contrary to the theoretical
principle of ability to pay. This is negative for Brazil’s socioeconomic environment, as it
makes the system unfair and unequal.
 Service received
Brazil is one of the countries that collect the most taxes around the world. Yet, the
country occupies the lowest positions when it comes to the return of taxes in benefits to the
population. The Government’s budget is too compromised with the public civil service,

interests of the public debt and the Social Security. Aside from the debts, the leftover money
is poorly managed.
5.2. Revenue Yield
Regarding the tax Base Growth, Brazil has managed a remarkable 9.4 percentage point
increase in tax revenue as a percentage of GDP between 1995 and 2012 (from 26.9% in 1995
to 36.3% in 2012). The level and the growth rate of the tax burden places Brazil at the top
among Latin American countries and compares well with Southern European countries
regarding the share of resources available to government. Nevertheless, the rise in the
Tax/GDP ratio has made little or no contribution to the reduction in poverty and inequality in
the country, except through enhancing the distributive capacity of government.
5.3. Economic Competitiveness
The high rates of the Brazilian Taxes drive investments away, especially foreign
investments. Investors are discouraged to put money in Brazil, as the high taxation inhibits
the earning of the company and delays the return of the investment. It is estimated that Brazil
could improve its investments in 10 to 15% for each percentage point dropped in the total
value of the country’s taxation. The high tax burden also makes it very hard for a company

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that produces on Brazilian soil to compete in the world’s economy. A good example is the
“invasion” of the “Made in China” labels in the Brazilian market, causing the failure of many
Brazilian producers. Easy to know why: China has a tax burden of about 17% of the GDP,
while Brazil has an index of 35%.
Moreover, it is generally known that Brazil is a country with an overly complex tax
system, not only from the viewpoint of the governmental spheres with authority to create and
collect taxes (Federal, State and Municipal), but especially because of the amount of existing
taxes, which are far more numerous than those charged in any other jurisdiction. Brazilian
Tax System is composed of more than 60 different taxes and contributions, which are levied
on different sources and collected by different institutions. Aside from the taxes, companies

must comply to more than 90 ancillary obligations. These circumstances place Brazil at a
significant disadvantage when compared to other countries in the world.
Nevertheless, it is important to point out that the initiative of a strong digital system for
tax management and control, called SPED, is already giving rise to positive changes in the
context of local compliance. SPED stands for Public Digital Bookkeeping System Brazilian
(Sistema Pỳblico de Escrituraỗóo Digital, SPED). The SPED is a new complex and
sophisticated data requirement in which taxpayers should file on an annual or monthly basis
all account and tax information available based on standard uniform electronic layout.
Such improvements are very important to place Brazil in the global arena as a territory
with reduced space for illegitimate tax procedures, which are typical of an informal
economy, and reduced time to comply with all major tax obligations, therefore strengthening
competitiveness in relation to other countries and business partners.
5.4. Administrative Efficiency
 Public Administration
The decentralized tax system does reveal some problems concerning the relationship
among states or among those and federal government that reduce the overall efficiency of
government’s tax administration:

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 Difficulty in exercising social control due to ambiguous relationship among various
levels of the government and their respective obligations.
 The states would not be allowed to grant any tax incentive on their own - an attempt
to extinguish the current tax disputes between states (the so-called tax war);
 Limited initiative and state action in its power to levy taxes.
 Financial unfeasibility affecting a large number of states, as a result of problems of
flows (excessive payroll obligations) and stocks (excessive debts as a proportion of
annual income), including some leading states;
Recently, the SPED initiative comprises a set of improvements in the Tax

Administration’s structure, infrastructure, technology, systems and strategic approach.
 Private Administration
According to “2018 Paying Taxes” report by World Bank and PwC, a Brazilian
middle-sized company takes 1956 hours doing tax services, the highest record among 12
South American countries. Despite dropping by 80 hours (comparing to 2017), Brazil’s time
to comply is still 8.2 times the world average.
As a direct consequence, Brazil is ranked 125th /190 place for doing business around
the world (Doing Business 2018 Report – World Bank), being one of the least inviting
countries in which to do business in the world.

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(Source Paying Taxes 2018 data)

But not only time is lost in the process. Companies in Brazil also disburse an amount of
BRL 43 billion per year only to maintain the accountancy employees and equipment working
to comply with the taxation bureaucracy. That is an expense that does not enhance the
products’ quality, only increases the companies’ costs and consequently the final price to the
consumers. Also, the rules that regulate the taxation system are changing all the time.
According to the Brazilian Institute of Tax Planning, the Federal, State and Municipal
governments launch an average of 15 new standards every day. The complex Brazilian Tax
Legislation demands a lot of time and effort, which could be better invested in the business.
(Brazilian Tax Reform - The Brazil Business)
 Visibility
The installation of the SPED system has increased transparency of the taxpayers to the
tax authorities via digital reporting.
6. Recommendation for Vietnam
Having a lot of characteristics in common, ranging from subdivision structure, decentralized
tax systems to the overall level of development, Vietnam and Brazil also face similar

problems regarding their administration of taxation that need to be tackled as soon as

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possible. Studying the shortcomings of Brazilian tax system and the solutions from Brazil’s
government, we suggest that Vietnam should learn lessons from Brazil’s case to improve our
tax system in several ways as mentioned below.
6.1. Reduce proportion of revenue from income tax
Brazil is not yet a developed country, though it has several characteristics of one. One
of which is high SSC. Social Security taxes are used by the Federal Government to pay
social security benefits, which is designed to support retired individuals, widows and
widowers, and disabled people. The high rate of SSC in Brazil to some extent reflects the
country’s level of development.
Regarding Brazil’s revenue structure, revenue from income, profit and capital gain
stays fairly stable at around 20%, while that of social security contribution is much higher,
achieving nearly 26% (see Table below).
Unit

Total tax

Brazilian Real, Millions
2012

2013

2014

2015

2016

1,564,067.10

1,728,920.37

1,835,066.19

1,918,710.48

2,015,517.42

321,462.99

360,548.68

381,870.49

401,111.69

453,549.22

20.55%

20.85%

20.81%

20.91%

22.50%

402,437.33

441,880.14

478,642.12

497,791.48

523,803.41

revenue
Tax on
income,
profits and
capital gains
Percentage in
total revenue
Social

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security
contribution
(SSC)
Percentage in

25.73%

25.56%

26.08%

25.94%

25.99%

total revenue
(Source: OECD.Stats)

In the case of Vietnam, income tax is the main revenue sources of the taxes on salary
and wages, and accounts for a relatively high percentage compared with other revenue
sources, including SSC. For example, in 2011, revenue from income tax accounted for
74.83% of total revenue from salary and wages, while other revenues accounted for only
25.17%.
Considering the case of Brazil, to enhance Vietnam’s level of development as well as
welfare of the population, actions must be taken to increase the relative importance of SSC in
the revenue from salary and wages while decrease the proportion of income tax, which will
in turn raise both equity and efficiency of the tax system.
6.2. Simplify the tax payment procedure
In Brazil, SPED, the digital system for tax management and control, plays an important
role in reducing space for illegitimate tax procedures, and reducing time to comply with all
major tax obligations. It helps strength competitiveness in relation to other countries and
business partners.
Vietnam should innovate its digital payment procedure, which is still relatively
complicated. It reflects the ineffectiveness in the operation of Vietnam’s tax system, which is
a waste of national resources in both terms of time and money. Simplify tax paying
procedure, especially with the help of digital system, will bring a higher satisfaction for

taxpayers.

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6.3. Offer tax incentives to rise country’s competitiveness
The high rates of the Brazilian Taxes deter investors from putting money in Brazil, as
they face the risk of reducing in earning and return on investment. It is estimated that Brazil
could improve its investments in 10 to 15% for each percentage point dropped in the total
value of the country's taxation. The world is now flat – enterprises seek the place where they
can generate the largest amount of revenue, and it is obvious that high tax rates make Brazil
not a promising land.
This can be a lesson for Vietnam. Our country is on the way to international
integration, drawing great attention from multinational and transnational companies. Several
tax reforms have brought positive changes in the doing business environment. Tax incentives
play an important role in creating competitive advantages for Vietnam when it comes to
attracting foreign investment.
6.4. Raise public awareness
In Brazil, the civil servant representatives in each fiscal region are appointed to
participate in the National Program of Taxpayer Education (PNEF). Their main task as
regional representatives of the Federal Revenue Service is to work with State representatives
in carrying out coordinated taxpayer education activities within the scope of their
jurisdictions.
In Vietnam, there should be more propaganda of the law on tax on social media so that
Vietnamese residents have clearer understanding about the meanings and the roles of the tax
system. The myopia of “high due, heavy tax” has long been in the mind of Vietnamese
people since the country was a French’s colony. It easy to fall into the belief that taxation is a
tool of the ruling class to take control over and exploit the working classes. It leads to a
consequence that people will try many ways to evade and avoid paying taxes, which harms
the state’s budget as well as Government’s planning and investment to develop the country.

Conclusion
References

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