Melanie Stetson Freeman/The Christian Science Monitor
Taxes account for 63 percent to 66 percent of the total price of the PlayStation 4 in Brazil.
ON-THE-GROUND"The ICMS tax is one of the most complicated taxes in the world, and the federal government has been trying for more than 20 years to change the tax from the state level. The federal government wants to convert this into a single federal tax like every other country in the world." -Júlio de Oliveira, Machado Associados
Brazil’s Senate is now discussing a resolution to slash interstate taxes as the international release of the PlayStation 4 game console highlights the country’s high tax regime.
Pressure is mounting on President Dilma Rousseff to reform Brazil’s convoluted tax code, which hyper-inflates the price of basic products and challenges even the best of companies to comply.
On average, firms in Brazil spend 2,600 hours a year filing, preparing, and paying taxes amounting to 68.3 percent of profit, according to the World Bank’s new Doing Business 2014 report. That compares to tax payments in the Latin American & Caribbean region averaging 30 hours and 47.3 percent of profit, while in among OECD nations it averages a mere 12 hours and 41.3 percent of profit.
The necessity to reform Brazil’s tax code came on display with the international release of Sony’s PlayStation 4, which went on sale Friday (Nov. 15) in the US for $399 – a bargain compared to its $1,850 price tag in Brazil. The main reason it costs so much here – and the main problem that Ms. Rousseff is expected to target – are interstate and intrastate taxes.
In the case of PS4, state value-added taxes known as Imposto sobre Circulação de Mercadorias e. Serviços (ICMS) add about $423. The federal excise tax known as Imposto sobre Produtos industrializados (IPI) adds $422. In all, taxes account for 63 percent to 66 percent of the total price, according to Júlio de Oliveira, a lawyer with Sao Paulo-based tax firm Machado Associados. (For Mr. Oliveira’s full breakdown of the price in Brazil for a PS4, see this PDF.)
“The ICMS tax is one of the most complicated taxes in the world, and the federal government has been trying for more than 20 years to change the tax from the state level,” says Oliveira, whose firm advises multinational companies such as Johnson & Johnson and Colgate on Brazilian tax code. “The federal government wants to convert this into a single federal tax like every other country in the world.”
Sony is unhappy with the taxes. The company’s Latin America general manager, Mark Stanley, said in a statement: “We want to emphasize that it isn’t in the interest of Sony Computer Entertainment America to sell PS4 units at this high retail price, as it’s not good for our gamers and it’s not good for the PlayStation brand.”
No doubt frustrating for companies like Sony, many of Brazil’s intrastate ICMS taxes are actually illegal. The Brazilian Supreme Federal Court (STF) declared laws and decrees conceding benefits pertaining to the ICMS as being unconstitutional.
Thing is, states benefit from the ICMS by using it as a bargaining chip to attract private investment. The ICMS tax rate varies from 7 percent to 12 percent for interstate transactions and from 17 percent to 30 percent for intrastate transactions, creating a “fiscal war” between states, according to Ernst & Young.
Reform is on the horizon. The Senate is now discussing Resolution #13/2012, which would slash the interstate rate of ICMS to 4 percent by 2025. The legislative bill does not need House approval, and so could come into force in 2014 – making it one of the most anticipated business reforms for next years, analyst Jefferson Finch of Eurasia Group tells the Monitor.
Other reforms are on business’s wishlists. Brazil’s largest levy is the value-add PIS/COFINS tax, which alone sucks up 39.1 percent of a company’s annual profit. The most time-consuming tax is the IRPJ on corporate income, which takes on average 736 hours to file, according to Doing Business 2014. Brazil’s tax code has shown almost no improvements since 2006; the sole reform was in 2010, when Brazil abolished a tax on check transactions.
Brazil’s confusing tax code is nearly impossible to comply with. Brazil’s biggest and most-respected companies, including miner Vale, oiler Petrobras, papermaker Fibria Celulose, and makeup-producer Natura Cosmeticos, are fighting billions of dollars in government tax claims. “Tax disputes are as Brazilian as string bikinis or samba,” The Economist has written.
“I am much more concerned with the poor quality of the taxes than the sheer size of them,” says José Roberto Afonso, a tax lawyer and technical consultant to the Brazilian Senate. “They compromise the competitiveness and social justice.”
One reason for Brazil’s high import taxes are to encourage domestic investment from international firms. This appears to be working in some cases. In October, Mercedes-Benz was only the most recent automobile manufacturer to announce it would open a new plant in Brazil to bypass the nation’s steep import taxes. Volkswagon, Audi, and BMW had already announced similar plans to tap into the world’s fifth-most populous country.
Sony also began locally manufacturing PlayStation 3 in Manaus this past May at a lower price. Sony’s general manager said in a statement: “Our primary focus right now is to ensure we are in full compliance with Brazilian import tax laws and look ahead the opportunity to locally manufacturing the PS4, which will significantly reduce the retail price.”
Brazil’s confusing tax code is ranked 159 among 189 countries worldwide, worst of the BRICS and far below regional neighbors Chile (38) and Mexico (118). According to Doing Business data, in economies where it is more difficult and costly to pay taxes, larger shares of economic activity end up in the informal sector where businesses pay no taxes at all.
That’s certainly true in Brazil, where the PlayStation 4, which comes on sale officially Nov. 29 here, is already on sale at Mercado Livre (the country’s equivalent to eBay). One of the sellers, an English teacher from Chicago, tells the Monitor that by acting as a border-runner for the console he could make enough money to cover airfare and visit family.