Brazil is the world’s ninth largest economy and a country with a well-earned reputation of being perhaps the most complex tax environment on Earth. The sheer number of laws and mandates, the constant change and the risk of non-compliance resulting in significant penalties and fines is omnipresent. In this three-part blog series, we’ll look at the reasons behind the difficulties and explain how organizations are changing their approach to tax in Brazil to reduce their financial risks.
There is no denying Brazil’s importance in the global economy and the role it plays as a gateway to the Western Hemisphere for companies looking to conduct business on an international scale. If you are going to be a serious player in the Americas, you need to be in Brazil.
However, the complex nature of Brazil’s tax system has served as a detriment to many companies in establishing a solid foothold here and becoming a profitable, well-run operation. So much time, money and effort are spent in addressing tax regulations that it is having an adverse impact on business operations.
For background on what makes Brazil so different from many areas of the globe, let’s look at some key statistics. The numbers tell the story of a tax environment that is unwieldy, ever-changing and at times even ruthless.
- Constant change: There are more than 100 tax modifications made every day.
- Increasing standards: On average, there are 782 new standards introduced each business day.
- Cost prohibitive: The costs of managing tax compliance in Brazil has soared. Companies report that 37% of operational costs are related to tax modification.
- Financial penalties: Costs of non-compliance are increasing rapidly. The penalties in fines for being out of compliance in Brazil now total approximately $35 Billion US dollars annually.
- Process: It is currently estimated that 80% of companies in Brazil rely on manual processes to manage tax obligations. An unsustainable method based on rate of change.
Businesses have begun to realize that approaching tax the same way they do in less complex markets is a losing proposition. The layers of regulatory controls and oversight compounded by the rate of change demand a new direction. And because it’s fair to conclude that the system isn’t changing, it’s incumbent on businesses to change their approach. Many are reevaluating internal processes and controls as well as where tax should fit into their strategic operating plans.
Sovos recently hosted a webinar featuring João Cavalcanti, Director SAP Partner Solution Center from SAP; Uira Gomes, Global Tax Director from AB InBev and Paulo Castro, Brazil country manager, Sovos. The focus was on how to navigate the most stringent regulatory landscape in the world while undertaking the technology and compliance journey needed to meet the demands of modern tax environments. You can access the full webinar on-demand to hear directly from these experts on strategies, tactics and tools that will set you up for success. I would also encourage you to download the eBook for full explanations of these topic areas.
Now that we covered the root cause of the problem, in Part II we can look at new approaches that organizations are taking to better manage their VAT obligations in Brazil.