2013/2014 Survey Tax compliance in Brazil Operating in a complex environment
There is a widespread perception that, in addition to the entire tax burden, companies have an associated cost involving the entire tax calculation process, with a strong impact on its personnel and technological structure. Summary Sampling and methodology...4 Taxes and inspections...5 Administrative structure...6 Training and qualification...8 Costs of the compliance structure... 10 Tax processes... 12 Priorities and challenges... 14 Public Digital Bookkeeping System... 16 The business environment evaluated World Bank... 18
Human capital and strategic vision The critical factors for success, from the managers perspective Does the structure of the fiscal and tax areas of Brazilian companies match the complexity of the tax environment in the country or does it face challenges in terms of efficiency and productivity? Many managers that work in these areas and who, among their responsibilities, deal with the management of their divisions human capital, have this question in mind. Add to this scenario the trend that the tax area is increasingly being addressed strategically by companies. The result of these combined factors is the increasing significance of qualification and effectiveness of these teams. There is a widespread perception that, in addition to the entire tax burden, companies have an associated cost involving the entire tax calculation process, with a strong impact on its personnel and technological structure. The survey, Tax compliance in Brazil Operating in a complex environment, conducted by Deloitte, aims at identifying the profile and quantifying the cost of this structure and the efforts of companies to meet the current rules in the country. The study takes a new approach to the workforce employed for paying taxes that represent an important part of the so-called Brazil Cost. Human capital is a critical factor for the success of any organization, regardless of its area of operation. Within the tax structure a highly regulated environment and one of great potential risk this is no different. Deloitte hopes that this study will contribute to an understanding of the Brazilian panorama in this area and for the proposal of a management model that meets the challenges of the tax environment in the country. The study takes a new approach to the workforce employed for paying taxes that represent an important part of the so-called Brazil Cost. Tax compliance in Brazil 3
Sampling and methodology The survey, Tax compliance in Brazil Operating in a complex environment, was conducted by means of an online questionnaire between August and September of 2013 and had the participation of 124 leaders in the fiscal area of companies, in groups representing the most varied sizes and sectors. A little more than half the companies had foreign capital origins, notably from countries such as the United States, Japan, Germany, the United Kingdom, France, China and Sweden. The survey was completed, most of the time, by managers. Revenue range (2012) (in %) 9 20 21 Revenue range (2012) (in %) 31 34 Business sector composition (in %) 23 14 2 52 16 6 14 Up to R$ 50 million From R$ 50 million to R$ 100 million From R$ 100 million to R$ 300 million From R$ 300 million to R$ 500 million From R$ 500 million to R$ 1 billiono From R$ 1 billion to R$ 3 billion More than R$ 3 billion 35 Up to R$ 100 million From R$ 100 million to R$ 1 billion More than R$ 1 billion 23 Industry Services Agriculture and Livestock Other Origin of company capital (in %) 47 53 Profile of respondents (in %) 7 26 20 Foreign Brazilian 47 Directors / Superintendents Managers Supervisors Other Percentage of respondents that answered each item
Taxes and inspections The respondents emphasized that the federal tax authorities were the most rigorous during inspections. This perception reflects the weight and the computerization of the federal tax burden on companies. In second place, for a little more than half the respondents, are the state tax authorities that also have advanced significantly in electronic inspections and also because of the Tax on Circulation of Goods and Services (ICMS), which is the main tax in terms of collection volume in Brazil. Another aspect that increases the complexity of tax compliance is the need to establish branches in several Brazilian states, as well as the disputes between states involving fiscal benefits and tax credits, known as the tax war. However, when asked about the number of inspections made of companies over the last five years, the responding companies indicated that the state authorities engage in more audits, followed by the municipal authorities and, lastly, the federal authorities. This number indicates once again the strong operational nature of the ICMS, at the same time that it reflects the widespread computerization of federal taxes. Once information is transmitted through the internet, with more opportunity for crosschecking of data and processes, companies need, even more, to take a number of steps before a possible inspection. The numbers also show that large-scale companies are the focus of inspections. Which tax authority is most rigorous during inspections? (in %) 2 34 64 Number of Times a Company Was Inspected in the last five years* Federal State Municipal Small 2 1 4 Medium 5 7 3 Large 16 69 27 * Average Federal State Municipal Once information is transmitted through the internet, with more opportunity for crosschecking of data and processes, companies need, even more, to take a number of steps before a possible audit. Tax compliance in Brazil 5
Administrative structure Human resources in tax compliance This study considers three different administrative structures for the compliance area. The first (Structure I) is the simplest and most intuitive. It considers companies whose tax and accounting areas work together, without an internal tax consulting area. The second (Structure II) considers companies with combined tax and accounting areas, however, with a separate tax consulting area for promotion of a more strategic business perspective. In Structure III are companies with focused tax, accounting and internal tax consulting areas that naturally complement each other. Tax compliance structure models Structure I Structure II Structure III Internal Tax and Accounting without Internal Tax Consulting* Internal Tax and Accounting with Internal Tax Consulting* Segregated Tax, Accounting and Internal Tax Consulting* * The Tax area is understood as that responsible for tax calculation. The Internal Tax Consulting area is that responsible for tax strategy and planning for the company or group. The study shows that large companies are those with more mature administrative structures (Structure III). The number of employees is also larger when the areas are autonomous and have a strategic tax consulting perspective. Structures adopted by respondent companies Companies in the sample that adopted each structure Average number of employees in the tax compliance structure Structure I 57% 14 Structure II 8% 11 Structure III 35% 24 Models adopted by participating companies Structure I Structure II Structure III Small 63% 15% 22% Medium 67% 5% 28% Large 46% 3% 51% 6
The study reveals that the compliance structure of the respondent organizations is, much of the time, directed by a manager that reports to the financial director. This is an indication that Brazil has far to go in the sense of valuing this professional, whose responsibility, for the company and for society, is great. The view is still of a predominantly operational function. In other markets, such as the United States and Europe, for example, many companies have a vice-president for the tax area, conferring more influence and decision making power on this professional in the organization s strategy. Highest position in the Tax, Fiscal and Internal Tax Consulting areas (in %) 15 18 To whom do these leaders report? (in %) 5 13 22 Director Manager Coordinator 67 60 CEO / President CFO / Financial Director Controllerr Other Tax compliance in Brazil 7
Education and qualification The education of most leaders in tax compliance is in accounting. For organizations that have an internal tax consulting area, there is also a marked presence of law graduates, in keeping with the strategic approach of the area. The predominance of analysts in the tax area of companies 23% of them with graduate degrees shows that this base is essential for handling more numerous and complex processes. Academic education of the head of the tax compliance structure (in %) 3 1 16 13 Positions held by professionals in the area (in %) 2 7 23 6 8 However, the respondents spoke of some obstacles in relation to the quality of this education, even among those with graduate degrees. Education is often evaluated as theoretical and little focused on analytical ability. To deal with this issue, companies have invested in updating their professionals, a determining factor when dealing with an area that is going through constant changes in rules and regulations. Accounting Management Law Economics Engineering 67 Assistant Analyst Coordinator Supervisor Manager Director 54 Education by position (in %) Assistant Analyst Coordinator 8 42 23 9 45 10 50 68 45 Supervisor 1 Manager 4 Director 5 55 36 40 Uncompleted higher education Completed higher education Graduate education 44 60 55 8
Main difficulties in hiring new professionals (in %, multiple responses) The professionals in the market are very focused on operational aspects, but have limited analytical ability There are not a sufficient number of professionals for an adequate hiring process The professionals have limited experience in the use of the new technologies required in the Public Digital Bookkeeping System environment The professionals are not prepared for the new demands required by Brazilian tax legislation The professionals have theoretical experience, however, they do not have sufficient practice Other 9 29 33 36 44 48 Resources that the company uses for theoretical updating of professionals (in %, multiple responses) 0 Subscriptions to online periodicals 88 Outside seminars (refresher and short duration events) 83 Outside training, medium and long duration 55 Subscriptions to print periodicals 34 Internal training 28 E-learning 17 Outros 6 0 90 Tax compliance in Brazil 9
Costs of the tax compliance structure To survey the costs of the companies tax structure, the study took the number of employees in each position and educational level for each group of companies small, medium and large. This data was combined with the information on average salaries for these positions, surveyed by the Salary Survey conducted annually by Deloitte, and by the National Survey by Household Sampling (PNAD), conducted by the Brazilian Institute of Geography and Statistics (IBGE). The average cost of salaries was increased by 80% for social charges. The result of this data modeling is an estimate of the average cost by company, considering only the tax area, segregated by company size. Taking the average revenue of the organizations in each of these groups into consideration, the percentage of revenue relative to maintenance of this structure was calculated. The weight of maintenance of the tax structure declines as an organization gains scale, a natural result and even expected. However, the results also reflect the fact that the tax commitments of smaller and larger companies are the same, and quite often require staff equally qualified to deal with these issues. For small companies, however, it is even more costly to maintain a qualified professional for the tax area than for a large company. The significant growth in the number of employees in relation to company size is noteworthy (in terms of billing), but the higher growth rate for employees with graduate degrees, masters or doctoral, stands out. The results indicate that there is greater demand for highly qualified professionals. Cost of the tax structure Small Medium Large porte Average sales by company* R$ 27.9 million R$ 309.3 million R$ 1.6 billion Average cost of the Tax area by company* R$ 482,166 R$ 806,393 R$ 1,945,260 Cost of the Tax area as a share of company sales 1.72% 0.26% 0.12% * Estimated by the lower limits of the sales range responses ** Annual salaries plus charges are estimated Number of employees in the Tax area Small Medium Large porte Less qualification* 1.9 5.1 12.2 More qualification** 0.9 variation: 49% 1.4 variation: 174% 3.8 * Those with undergraduate training graduates and non-graduates ** Those with graduate degrees variation: 174% variation: 140% 10
The scenario is similar for companies that have professionals in the internal tax consulting area: the average cost per company declines as the company grows. The cost of the internal tax consulting area is even higher for smaller companies than the cost of the tax area this is a more strategic and qualified staff. For larger companies, however, the impact of the cost of the internal tax consulting area is less than that of the tax area. Considering the combination of the two areas, it is possible to identify the salary costs of this structure for each size company. For comparison purposes, the amount, for smaller companies, is quite similar to combined rates of the Social Integration Program (PIS) and Contribution to Social Security Financing (COFINS) taxes, which, in the simplified regime in Brazil, corresponds to 3.65%. Cost of Internal Tax Consulting structure Small Medium Large Average sales by company* R$ 24.5 million R$ 277.8 million R$ 1.5 billion Average cost of the Internal Tax R$ 443,673 R$ 605,746 R$ 1,140,821 Consulting area by company** Cost of the Internal Tax Consulting area as a share of company sales 1. 81% 0.22% 0.08% * Estimated by the lower limits of the sales range responses ** Annual salaries plus charges are estimated Weight of the compliance structure Cost of the tax compliance structure as a share of company sales Sales range Tax Internal Tax Consulting Total Up to R$ 100 million 1.72% 1.81% 3.53% From R$ 100 million to R$ 1 billion 0.26% 0.22% 0.48% More than R$ 1.6 billion 0.12% 0.08% 0.2% Tax compliance in Brazil 11
Tax processes The companies indicated that they currently manage an average of 68 tax processes, with a maximum of 783 processes declared by participating organizations. However, it is known that there are some companies in the market that have more than 3,000 ongoing processes. Tax processes are understood as ongoing inspections, infraction notice appeals, inquiries by authorities and tax compensation, among others. To calculate the average number of processes per employee in the tax, accounting and internal tax consulting areas, the study combined the total number of processes and the total number of employees involved, for each group of companies (small, medium and large). Just as they have a much higher total number of processes, the larger companies have a significantly larger number of processes per employee, which indicates, in addition to advantages of scale, the greater productivity of the sector. When segmented, the sample of large foreign companies shows an average of seven processes per employee, while Brazilian companies of the same size have an average of 2.1 processes per employee. These numbers reveal that larger companies, although they are proportionally subject to greater inspection, are able to obtain greater efficiency in tax management. Number of processes (of the sample total) Number of employees in the Tax, Accounting and Internal Tax Consulting areas (of the sample total) Number of processes (sample average) Small 167 262 0.70 Medium 983 544 1.70 Large 6,916 1,138 4.70 Total 8,074 1,958 2.20 12
Tax compliance in Brazil 13
Priorities and challenges The greatest obstacles mentioned by the respondents in relation to conducting business reflect aspects that are part of the so-called Brazil Cost. The participants indicated the need for modernization of the country s tax legislation and also emphasized infrastructure obstacles that impact the business environment. When asked about the difficulty in addressing the priorities surveyed, the respondents indicated that technological evolution of the Brazilian tax environment has not been accompanied by modernization nor by streamlining of the processes. Computerization, which could permit greater transparency and speed, has ended up making the process even more complex and susceptible to risks. This is because, due to crosschecking of data practically in real time, the chance for error is even greater, making electronic inspection even more unforgiving than field inspections. Greatest obstacles to conducting business* 1. Very frequent changes prevent a reliable degree of predictability; 2. High tax burden interferes with the ideal business model desired by companies; 3. Inadequate legislation does not favor the adoption of new technologies from abroad that require high royalties; 4. Tax aspects prevent the adoption of distribution models based on rational logistics; 5. Concentration of indirect taxes results in low transparency in the formation of product and input prices, making competition based on efficiency difficult.. * Consolidation of responses made by participants in this study. 14
Tax management priorities* 1. Accurate tax calculation; 2. Reduction of tax burden; 3. Efficient management of the tax processes; 4. Handling of ongoing inspections. Difficulties in achieving priorities* 1. Complexity of complying with electronic obligations, due to the high number of declarations required; 2. Difficulty in keeping up with the changes in tax legislation; 3. Aggressive actions by tax authorities in relation to tax planning; 4. Slowness and bureaucracy in the management of tax processes; increasingly detailed and complex audits; 5. Electronic inspections by tax authorities, in other words, crosschecking of data without necessarily having a field inspection; 6. The cost and complexity of maintaining paper and electronic files. Tax compliance in Brazil 15
Public Digital Bookkeeping System Expectations and Perceptions The advent of computerization, by means of the Public Digital Bookkeeping System (SPED), has forced companies to invest in systems and train personnel to adapt to the new regulations. In fact, the new system allows greater transparency in the processes, a gain in terms of the maturity of the democratic system in our country. In this context, the initial perspective was that there would be a reduction in costs for companies, due to aspects such as greater speed in processes and even reduction of paper. However, in the opinion of the respondent companies, this effort in practice did not result in a reduction of costs, mainly because of the costs of implementing and maintaining the Enterprise Resource Planning (ERP) systems. Stage of SPED Implementation in the Sampled Companies a (in %) Impact of SPED implementation (completed or in progress) (in %) Change in costs after SPED implementation (in %) 2 1 4 2 5 19 13 78 38 40 13 55 Completed In progress Not applicable Not done 30 Very significant (high financial and human investment) Significant (moderate financial and human investment) Moderate changes Major changes made Changes were few Not significant (there were no significant financial or human investments) Stayed the same Increased Declined 16
An example of the mismatch in how the computerized system can contribute to optimizing the process of tax calculation is continuation of the five-year statute of limitations for federal government audits. In a system in which quick accountability is possible, as well as subsequent crosschecking of data, this time during which a company is vulnerable to inspections and inquiries could be reduced without damaging the transparency of the tax process. The largest investments necessary for SPED implementation (in %, multiple responses) New software Implementation of new versions of ERP systems More qualified professionals New hardware New information technology professionals 24.6 31.1 41.8 48.4 76.2 New professionals in the tax area 22.1 Have savings from the reduction in printed paper compensated for the investments made to implement SPED? (in %) Considering the new SPED environment, do you believe that 5 year statute of limitations should be (in %) 4 24 34 62 76 No yes Reduced Stay the same Increased Tax compliance in Brazil 17
An evaluation of the business environment Brazil from the perspective of the World Bank Brazil was in 116th place out of the 189 economies surveyed by the World Bank for its 2014 Doing Business ranking, which ranks countries according to the ease of doing business. The survey addresses aspects such as time to open companies and payment of taxes criteria in which the country is even farther behind than its overall position. In a comparison with countries of Latin America and the Organization for Economic Cooperation and Development (OECD) - an international intergovernmental agency of 34 countries, both industrialized and emerging, Brazil shows a high number of days needed for opening a company and of hours dedicated to paying taxes. Even though the number of taxes in Brazil is lower than the Latin American and OECD averages, Brazil devotes more time to their calculation. This is an indication of a complex tax environment that can inhibit foreign investment in the country. The time needed to open a company is critical when dealing with the creation of opportunities for entrepreneurs and emerging companies the engines of the more established economies of the world. The question of cost of manpower is also a problem for the country: contributions and taxes on salaries are particularly high for companies operating in Brazil in comparison to the other countries of the world. With less bureaucracy (the internet can be a strong ally in this process) and more legal and regulatory predictability, Brazil can create a regulatory environment more attractive to investment - and even increase its tax collections. Precious Time Companies in Brazil devote 2,600 hours annually to calculating 9 taxes that account for 68.3% of their profits Opening Companies Brazil is in 123rd place in this item Payment of Taxes Brazil is in 159th place in this item Brazil Latin America and the Caribbean OECD* Brazil Latin America and the Caribbean OECD* Number of procedures 13 9 5 Duration (days) 107.5 36.1 11.1 Payments (number) 9 30 12 Time (hours per year) 2,600 369 175 Cost (% GNP per capita) 4.6 33.1 3.6 Minimum paid-in capital (% GNP per capita) 0 3.6 10.4 Taxes on profits (% of profits) Salary contributions and taxes (% of profits) 24.9 20.5 16.1 39.6 14.7 23.1 Other taxes (% of profits)) 3.8 12.1 2 Total tax rate (% of profits) 68.3 47.3 41.3 *Organization for Economic Cooperation and Development Source: Doing Business 2014 report, World Bank 18
Tax solutions for your business strategy Local market knowledge, international recognition Know about our awards at www.deloitte.com.br Tax compliance in Brazil Operating in a complex environment Project leadership: Marcelo Natale Tax Partner Deloitte Brazil Cristina Arantes Berry Leader Tax Partner Deloitte Brazil Report production: Deloitte Strategy, Brand & Marketing Survey coordination: Deloitte Research Art: Mare Magnum The contents of this report and all results and analyses related to Tax compliance in Brazil Operating in a complex environment were produced by Deloitte. Reproduction of any information contained in this report requires authorization by Deloitte, with the obligation to cite the source. For more information, contact Deloitte by email comunicacao@deloitte.com or by telephone (11) 5186-6686.
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