After years of fighting losing battles with individuals and companies to pay tax debts that have soared to $526 billion, Brazil is turning to a new collection tactic: public shaming.
The country’s revenue service will soon begin listing on its web site the names of companies and individuals suspected of tax crimes, in what a spokesman described to Bloomberg Tax as its latest step to establish “the notion of tax transparency.” The first list hasn’t been published yet and the revenue service won’t say when it will be, other than to say it will be updated on the 10th of each month.
Tax lawyers expect it to include people and companies who haven’t been charged with crimes or even investigated, and are promising a court challenge. While the government says the nation’s freedom of information law allows it to release the names, “what is being done here is not releasing but amplifying the reach of the information, creating a shaming list for tax purposes,” Fernando Facury Scaff, a partner with the law firm Silveira, Athias, Soriano de Mello, Guimaraes, Pinheiro & Scaff in Sao Paulo, said in an email.
In June of last year, the revenue service admitted it is fighting a losing battle, pointing out that the finance ministry has only 2,000 prosecutors to deal with 4.5 million companies and individuals with tax debts. The $526 billion in uncollected tax amounts to half the nation’s public debt.
Under the 1980 law that set Brazil’s tax collection rules, companies can appeal assessments directly to the revenue service’s administrative appeals courts, where cases can drag on for four to five years. If a company loses, it can then take its case to the judicial system, which adds more years to the process. Aware of this, companies often appeal their assessments for as long as possible.
In addition, Brazil’s congress, under pressure from business associations, has since 2000 approved five fiscal recovery programs. Under these programs, companies with tax debts have received major reductions in fines and penalties if they agreed to pay their debts over a set time period.
Brazil is not alone in attempting to implement a “shaming” policy to penalize companies for not paying their taxes, China being one example. But China is contemplating a “carrot and stick” approach, under which the government will provide greater flexibility for companies with a good record of paying taxes on time and more punitive measures for tax law violators.
Focus on Large Cases
The revenue service this year has concentrated its efforts on a group of cases within the 50,000 largest that are judged to have the highest probability of success, with a goal of collecting $5.6 billion of the $34 billion those taxpayers owe by the end of the year, according to the service’s prosecutor general’s office. The $34 billion represents 12 percent of the amount owed by the 50,000 debtors, who together owe half the total uncollected taxes.
Companies argue that Brazil’s tax structure is perverse and immensely complex, with 50 local, state and federal taxes and a 34 percent income tax rate, and that they have every right to use whatever means at their disposal to reduce their tax load. Brazilian companies spend on the average 2,600 hours a year calculating their taxes, five times the average of the United States and other developed nations, according to a study conducted by the Brazilian Institute of Tax Planning (IBPT), which defends the interests of business.
Large companies would be the most affected by the new policy because of the complexity of their taxation and their executives will likely be targeted as well, attorney Alessandro Mendes Cardoso of the law firm Rolim, Viotti & Leite Campos in Rio de Janeiro, told Bloomberg Law in an email.
“A company’s reputation is stained publicly before it is judged, and in the end it could be found innocent,” said attorney Talita Fernanda Ritz Santana of the law firm Freitas Martinho in Sao Paulo. The policy is unconstitutional because companies and individuals are forcibly exposed to the public without the judiciary having examined evidence of their alleged crimes, she said.
Spokesmen for state oil company Petrobras, mining giant Vale S.A., the world’s largest iron ore exporter, and brewer Ambev, owner of Budweiser beer, all declined to comment on the shaming list. Brazil’s two leading business associations didn’t respond to requests for comment.
“It seems that the associations and companies are not commenting because there is not much information so far and the procedures to be adopted by the revenue service are not crystal clear,” said attorney Rafael Gregorin, a tax partner with the law firm Trench Rossi Watanabe in Sao Paulo.
The shaming list is the third measure instituted in 2018 to improve the revenue service’s collections. In January, President Michel Temer signed law 13,606, which permits prosecutors to place a lien without a court order on any asset owned by a company or individual with a tax debt. According to the law, once an asset such as real estate property has been identified by prosecutors, the debtor will have five days to pay his tax debt. If the debt is not cleared within this time period, a lien will be placed on the property preventing it from being sold.
Internet Channel for Whistle-Blowers
Also in January, the government created an Internet channel whistle-blowers can use to turn in companies or individuals for hiding income from the revenue service.
Two constitutional challenges of the law on the seizing of company assets without a court order have been filed so far, by the Brazilian Socialist Party and the Brazilian Association of Wholesalers and Distributors of Industrial Products.
According to the revenue service, the shaming list will include the name of the company or executive, the registration number of a company or the identity card number for an individual, the reason for inclusion on the list and any possible crime that may have been committed. Names can only be removed from the list if tax debts are paid or by judicial order. The policy allows the revenue service to list both a company and its top executives.
Tax lawyers noted that the shaming list is coming out as the government’s budget deficit is projected to reach $36 billion in 2019, the first year of Jair Bolsanaro’s presidency.
“These measures demonstrate the anxiety of the government to collect taxes at any cost,” said attorney Fabio Pallaretti Calcini of the law firm Brasil Salomao Matthes in Sao Paulo.