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Golden eggs and taxes, part 2

6Dez2016Dec6,2016
Tax
Folha de S.Paulo

Golden eggs and taxes, part 2

As stated in an article we wrote for Folha in 2015, the tax burden in Brazil had reached the ceiling. The country's taxpayers could no longer bear paying for public spending.

As a demonstration of the argument above, we used the story of the goose that laid golden eggs. What this fable teaches is that, through an excess of greed, the farmer (the government) ended up killing the goose (taxpayers) that laid the golden eggs (taxes).

Fortunately, the current government has stated there will be no tax increases. The solution is to act on the expenses side.

The taxpayer (goose) only lays one golden egg a day (taxes); therefore, there is no point splitting him open to get rich quick because the only thing inside him is his guts. The government (farmer) seems to have understood that it needs to reduce its expenses (costs with the shelter) instead of expecting its taxpayers (geese) to pay more taxes (golden eggs) to support its excesses.

It is now, however, time to raise another alert. Adding fiscal pressure on taxpayers to go after the government through, often controversial, tax litigation is of no help. Exaggerated patrimonial restriction measures can also annihilate them or make their survival impossible.

Returning to the tale: when there is lack of feed in the shelter (recession), the goose gets weakened and is unable to lay an egg every day (falling production and profit margins). Squeezing it does not help. This is what is currently taking place.

Regulations were drawn up to make the collection of tax credits more effective. The intent is to leverage collection not through an increase of the tax burden, but by going after amounts already owed by taxpayers (some of which are controversial), using fiscal pressure mechanisms (asset listing, tax precautions, judicial safeguards, online attachment, etc.).

The current federal tax litigation is estimated to run at around R$ 2.75 trillion: a) R$ 1.5 trillion of debt registered in the Federal Debt Roster and under judicial collection; b) R$ 700 billion in tax inspections; c) R$ 300 billion in legal disputes with suspension of tax credit requirements.

Of that total, only around 35% corresponds to the value of the original taxes; the rest is comprised of SELIC (Special Clearance and Escrow System) interest, the highest in the world, and fines for non-payment (again, the highest in the world).

This tax credit is unpayable and irrecoverable, for one simple reason: interest and fines are monstrous and make any kind of patrimonial restructuring impossible for taxpayers. A taxpayer who is behind on his taxes for a period of, say, five years, would have to pay them with the addition of 60% in SELIC interest, and what can amount to 200% in fines.

It is also pointless to impose greater strictness in the administrative tax litigation decisions, as former Treasury Minister Joaquim Levy did in July 2015, during the re-opening of the CARF (Administrative Council of Fiscal Resources). After complaining of the fall in federal collection, he said that approximately R$ 100 billion would be needed to pay for the public debt. That statement set the tone for how administrative decisions would be issued since.

Therefore, watch out! The goose (taxpayers) that laid the golden egg (tax revenues) can be killed not just by increasing the tax burden, but also by squeezing it to try to make it lay an egg every day and make up for lost ones, precisely during one of the worst recessions in Brazil's recent history.

ROBERTO QUIROGA MOSQUERA, partner at Mattos Filho, is a tax law professor at USP (Universidade de São Paulo) and a professor at the Master's Program at Fundação Getulio Vargas – FGV School of Law.

JOÃO MARCOS COLUSSI is a partner at Mattos Filho. He represents clients in court and administrative proceedings.