Perfume turns to cologne and Crocs has an identity crisis to escape chaotic taxation

Prompted to define whether a certain food should be classified as a biscuit or cake for tax purposes, an English court ruled that it would only be possible to reach a conclusion if it was considered what happens to the product after its expiration. If it gets soft, it’s a biscuit; if it gets hard, it’s cake.

The example cited by professor Rita de la Feria, from the University of Leeds (England), in a hearing at the National Congress in Brazil on the tax reform at the beginning of 2020, illustrates a problem caused by the difficulty of systems in which different rates apply for each product.

In Brazil, there are also countless cases that generate disputes, increasing tax litigation, given the large amount of taxes on consumption and the numerous classification rules. Some of them with regional differences. Even in the federal case, the frameworks often vary according to the inspector responsible for the verification.

A leaf asked experts for examples of the distortions that contribute to making the national tax system chaotic.

There are some emblematic cases. Examples. The debate over the classification of food bars as cereal flakes or confectionery products, for IPI (Industrial Products Tax) purposes. The discussion to define Crocs as waterproof shoes or sandals with rubber or plastic straps, for the purpose of applying an anti-dumping duty on imports.

There are also companies that change the characteristics of their products to place them in a lower tax category. This is the case of what the consumer may have the function of perfume (IPI of 42%), but which appears on the invoice as eau de cologne (12% rate). Or moisturizers (IPI 22%) that can be classified as deodorants (7%).

Taxes can also guide investment decisions. For example, encouraging the construction of houses with labor and use of reinforced concrete, a service taxed with 3.65% of cumulative PIS/Cofins and up to 5% of ISS. The same work on a metallic structure would have an incidence of 12% of ICMS (in São Paulo), plus 9.25% of non-cumulative PIS/Cofins, as it would be classified as a good.

There are also a series of tax benefits that can offset logistics costs and make it more attractive to manufacture cars in Goiás and raise oxen in São Paulo, as some experts in the field say.

Although not exclusive to the country, these are issues that have gained a level of complexity here that is reflected in the country’s tax litigation billionaire, in cases that often drag on for decades without a solution.

“It’s as if each company had its own tax system, because it depends on where you are, who is going to buy, the characteristics of what you sell. It’s a system full of subjectivities. When we look at proposals that seek to simplify, end with With these differences, we see a huge advance”, says Marina Thiago, advocacy manager at Endeavor and the Movimento Pra Ser Justo, which advocates the merger of five taxes on consumption into an IBS (Tax on Goods and Services).

The IBS is at the center of two proposals for tax reform on consumption initiated by Congress and which provide for the uniform taxation of practically all goods and services.

While some specialists defend the benefits of this unification, others point out that Brazil needs a simplification of current tax legislation, more standardization and faster resolution of disputes, but without putting an end to current taxes and some differentiations.

Tathiane Piscitelli, professor at FGV Direito São Paulo, says that some tax benefits contribute to a lack of rationality in the system in Brazil, but says he is against the extinction of almost all of them, as defended in most of the reforms under discussion.

According to the specialist, it makes no sense for a sugary drinks company, whose raw material is sugar cane or mate, to be installed in the Manaus Free Trade Zone, just for the tax benefit. On the other hand, it would be important to direct benefits to areas such as basic food basket products and menstrual hygiene products.

“You have to attack this type of situation, so that there is a better distribution of the tax burden among those who produce and also to direct tax benefits to areas that really lack these benefits”, says Piscitelli.

Citing the differences about Crocs and the bars, she states that these are issues that could be resolved through procedural changes, such as creating arbitration chambers for Tax Law, without the need for broad and structural reforms such as those being debated in Congress .

Luis Carlos dos Santos, director of the tax area at Mazars, says that complexity is one of the main points that differentiate the Brazilian tax system from that of other countries. He also mentions the lack of standardization in the decisions of different public agents and the delay in resolving these issues, whether in the sphere of tax authorities or in the Judiciary.

An example, according to him, is the definition of what is an input for credit purposes in the non-cumulative PIS/Cofins — an issue that the Ministry of Economy’s project to merge the two taxes tries to resolve.

The STJ (Superior Court of Justice) defined that everything essential for the development of economic activity should be considered an input. But he left the definition of what is essential to the tax authorities.

It is common, according to the specialist, to have a different interpretation between two states or even at the federal level, depending on the location where a particular consultation is carried out.

“We have situations in which the customer considers a certain item to be creditable, for ICMS or PIS/Cofins purposes. Another company in the same industry will consider this same item [como passível de crédito], but the tax authorities question it, issue a notice of infraction”, he says.

“How to explain to the investor why his competitor company, which does the same thing, was not fined? You hear the expression that Brazil is a tax madhouse because of these issues.”

João Eloi Olenike, executive president of the IBPT (Brazilian Institute of Tax Planning), cites the IPI legislation as one of the most complex issues in the system. There are more than 400 pages, each with different classification categories.

Obtaining lower taxation is an individual task that requires the company to modify the product, technical reports and consult the tax authorities. This often ensures that you sell the same as the competitor while collecting less tax.

“You don’t need to change 100% of the composition of the product. Good planning is to adapt it so that the Internal Revenue Service understands that it can be classified with a lower tax rate. And that the final product is not so different from the one with higher taxation” , says the expert.

According to Olenike, the idea of ​​differentiating rates should be based on the constitutional principle of selectivity, that is, the essentiality of the product. This is a concept that changes over time, and the State is not interested in promoting changes that reduce tax revenue. The microwave oven, for example, is still taxed as a luxury product (30% of IPI).

“The population is the one who has to say what is superfluous or not. It’s not the technicians from the Federal Revenue, nor the legislators.”

Renata Mendes, leader of Pra Ser Justo, says that the simplification provided for in the PECs (Proposals to Amend the Constitution) presented by the Chamber and the Senate in 2019 would have the benefit of reducing by about 70% the time that companies spend to investigate and pay the taxes. The PIS/Cofins government project would also bring, to a lesser extent, some benefit.

For her, limiting tax benefits and differentiated rates is important for a tax reform to have permanent effects, at the risk of leaving gaps to meet demands that end up mischaracterizing these changes, something that has already been seen in other countries.

“Each decision to exempt some sectors or type of property will later generate a series of challenges. If you leave many exceptions and exemptions, it is very likely that in a short time we will reach a system very similar to what we have now.”

Discussions on taxation of goods and services

• Product framework

granola bars

Doubt: are they cereal flakes (exempt) or confectionery (IPI of 5%)?

Ruling: they ended up taxed at 5% when they were classified as confectionery products

Breadcrumbs

Doubt: Whole bread is exempt from PIS/Cofins. What about breadcrumbs (made from ground bread)?

Decision: The STJ judged that the exemption was not relevant, as the food does not make up the basic food basket

imported crocs

Doubt: are they waterproof shoes or shoes with an upper in plastic or rubber straps

Decision: They are not waterproof, therefore anti-dumping tariff applies

• Product or production system change

Hygiene and beauty products

Companies change product composition to “transform” perfume (IPI of 42%) into eau de cologne (12%) and moisturizers (IPI of 22%) into deodorant (7%)

Construction

Everything that is produced at the construction site is taxed less because it is a service. Prefabricated structures, with a higher tax, are deprecated, which reduces the sector’s productivity.

Jaffa Cakes

Product that has a soft base covered with orange jelly and a chocolate coating

Doubt: cake or biscuit?

Solution: It depends on what happens when you run out of time: if it gets soft, it’s a biscuit; if it gets hard, it’s cake

Potato Pringles

Doubt: are they french fries?

Solution: No, because the analyzed product only had 42% potato.

Tampon book (book with absorbent)

Doubt: German company decided to sell sanitary pads with a book cover —and two pages to show how it’s used— to benefit from the minimum tax rate for the latter product, after a campaign for tax reduction

Solution: Courts are still debating whether it is book (exempt) or absorbent

Sources: IBPT (Brazilian Institute of Tax Planning), Movement to be Fair, Carf (Administrative Council of Tax Appeals), STJ (Superior Court of Justice), CCiF (Centre for Tax Citizenship), Rita de la Feria and Tathiane Piscitelli (FGV São Paulo Law).