Let’s Get the Shopkeepers!

I am inspired today to completely de-mystify the Brazilian Corporate tax system, whose potential 90 different taxes seem to puzzle some people.

Well, yes, there are apparently 90 taxes you are potentially exposed to in Brazil, but for the purposes of the small business, this comes down to a mere 16 or so, and we simplify this even more by talking normally in terms of tax regimes, which are the various schemes one signs up to in order to give money to the various corrupt and incompetent authorities responsible for collecting and/or applying the taxes from said systems.

Tax System_800

Now, like everything in Brazil, the names for these regimes are designed to be made into acronyms so that the poor people have no excuse for not remembering which scheme is bleeding them dry. The three best-known regimes are the IRRUUT (Insane, Regressive, Ridiculous and Utterly Unsustainable Tax), the URTOR (Utterly Regressive Tax On the Rest) and the holy grail of tax systems, THEHG, which outside Brazil is called “normal”, but which here is only open to businesses who can afford to pay a multitude of office staff and accountants and of course the statutory federal, state and municipal bribes.

Before we continue, we should remember that this critical analysis is undertaken on the basis that outside of planet Brazil, nearly every business in the known universe, in the long term, one way or the other, will achieve an average true rate of net profits of somewhere between 5% and 15%. So for the sake of argument, we will use the figure 10%.

So let us start with the most common tax regime, the IRRUU. Under this system, the government guesses what your net profit is and charges you a percentage on what it says you should earn, by taxing your turnover.

Bloggs

The clever bit of the IRRUU is that the government, knowing that most businesses try (however inexplicably) to get away from paying this tax, and knowing how incredibly inefficient all Brazilian businesses are because they are protected from competition by tariff barriers and a tax system no-one in their right minds would accept, have turned the percentages up enough to compensate for the those who successfully evade the tax, by killing those who did not or cannot (although as always, there is a tax relief system which can be used to defray any taxes incurred. Anyone can apply for this by filing in the form and handing it to the tax inspector with a large sum of money in a brown paper bag).

Next we have an even cleverer regime. The URTOR is designed to catch those poor business who do not even make enough money to be caught by the IRRUU. If your business is unable to support you and your family, never fear – it could eligible for this. It is still based on your turnover, but now the rate plunges to only 8% – 10%. The relief this provides the struggling business can be clearly seen:

Fulanos

Finally, we will look at THEHG and we see why it is, all things considered, the Holy Grail.

Fulanas

So Fulana’s at least should be happy, except that all its salary oncosts will be double anyone else’s (this is something the government has decreed for those who opt for THEHG). But in fact this is no problem, because Fulana’s will be big enough to be eligible for the special scheme under which it may bribe all the people necessary for minimising inconvenient expenses, may be awarded big government contracts and allowed to pay fake suppliers (for only a very large fee), and may borrow vast sums of money destined for small businesses from state banks at low interest rates and divert this to the directors’ and owners’ own bank accounts. In this regime, everyone involved is happy – so no-one really cares what the book result is anyway.

So there we are – it’s all quite simple, isn’t? I was inspired to provide this overview by the news this morning that the government has decided that in order to address the issue illustrated in the diagram, the answer is to try to get the consumer to rat on shopkeepers who do not always issue a tax invoice. It is so deliciously insane, I was surprised it was not announced by Kenneth Williams. Forgive me. 🙂

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