Tax lost to bank tax havens Auxílio Brasil of R$ 400, says study

The money that Brazil failed to collect in 2020 in unpaid taxes by multinationals and millionaires who make use of tax havens would be enough to make the R$ 400 Brazilian Aid promised by the government viable, reveals a study carried out by the Tax Justice Network Network), an independent organization created in 2003 in the UK and campaigning for changes in global tax systems.

Tax havens are countries or territories that offer low taxes to attract capital from people or companies looking to hide resources abroad or pay less tax than in their home countries.

They are used, for example, by Economy Minister Paulo Guedes and Central Bank President Roberto Campos Neto, as revealed by leaks from the Pandora Papers project, in October this year — both deny irregularities.

According to the study released on Tuesday (16) by the Fiscal Justice Network, and released first-hand to BBC News Brasil, Brazil lost US$ 8.17 billion (about R$ 44.6 billion) in taxes in 2020 .

The amount would cover almost all of the R$47 billion needed to readjust Bolsa Família by 20%, expand it to 17 million families and provide temporary assistance so that all beneficiaries receive a minimum of R$400 per month until December of 2022.

The amount would also be enough to vaccinate the entire population of the country twice, according to calculations by the Tax Justice Network.

The research comes at a time when Brazil is discussing ways to expand social spending through the reformulation of Bolsa Família, which will be renamed as Auxílio Brasil.

President Jair Bolsonaro’s government has been trying to finance this overhaul with a budget change that allows for more spending.

In recent weeks, a proposal has advanced in the Brazilian Congress to make the payment of court orders (debts of the Union with a final court decision) more flexible and to change the calculation of the spending ceiling.

These changes caused controversy in Brasília and noise in the financial market, with the devaluation of the real and a drop in the Ibovespa index. Critics of the government say the country is unable to increase social spending without cutting revenues — as this could lead to inflation and economic slowdown in the future.

Research carried out by the Fiscal Justice Network in partnership with ISP (International Public Services), a world union federation that represents public sector workers, suggests that Brazil could increase its tax revenue to make social spending feasible by adopting other strategies, such as combat to tax avoidance and evasion.

Still, for this to be feasible, it would be necessary to change the spending cap rule, which currently limits the increase in government spending to the inflation of the previous year. Furthermore, the fight against tax havens is limited at the national level, depending on international agreements to be possible.

Lost taxes in the world

According to the report “Current State of Fiscal Justice”, worldwide, US$ 483 billion (R$ 2.6 trillion) in taxes were lost in 2020, with US$ 312 billion due to the legal or illegal transfer of profits from multinationals to tax havens and $171 billion unpaid by millionaires who hide undeclared assets and income abroad.

This is the second edition of the survey, which was made possible thanks to an agreement by the OECD (Organization for Economic Cooperation and Development), which obliged multinationals headquartered in the group’s countries and with revenues above 750 million euros (BRL 4, 7 billion) to publish detailed financial reports for the countries in which they operate.

In the previous edition, referring to 2019, the value of fiscal losses was estimated at US$ 427 billion for the world and US$ 14.9 billion for Brazil.

According to those responsible for the report, the reduction in the value of the Brazilian fiscal loss between 2019 and 2020 —of the order of 45%— can be explained by the economic slowdown due to the pandemic; loss of value of the Brazilian currency, which reduces the amount reported in dollars; and possible exit of companies from the assessed universe, due to loss of revenue.

‘Wasted money’

For Gabriel Casnati, coordinator of international projects at ISP, partner entity of the Tax Justice Network in carrying out the study, the data reveals how much Brazil gives up resources that could be earmarked for public policies, such as income transfer programs for the poorest population.

“We are in a context of increasing social inequality and loss of the State’s ability to invest. This already came from a process prior to the pandemic, but with the health crisis it became even clearer,” said Casnati to BBC News Brasil.

“Currently, the public debate is centered on the search for resources for social policies and, in this sense, these US$ 8.17 billion are completely wasted money and that should be at the service of the country and used in public policies”, defends the ISP coordinator.

“In a context of austerity, stagnant economic growth, increasing poverty and hunger, this is money that would be very relevant, without having to increase the tax burden or resort to expedients such as defaulting on precatories.”

For Alex Cobham, economist and chief executive of the Fiscal Justice Network, if companies and wealthy people properly paid their taxes in Brazil and these resources were allocated to social policies, this would have a relevant effect in reducing social inequality.

“When you distribute it from the top to the bottom, this is the most powerful form of income transfer possible in terms of reducing inequality,” says Cobham. “It’s also very good for the economy, because the rich don’t tend to spend much of their income, while the poorest recirculate everything they get. So the multiplier effect is very large.”

‘Conflict of interests’

For Casnati and Cobham, the resources held offshore by Guedes and Campos Neto are not a problem unique to Brazil, but reveal the difficulty in developing policies to inhibit the practice of tax avoidance and evasion. This difficulty happens, according to them, because the same elites that make the laws are those that do not want to pay more taxes.

Offshores are companies and bank accounts opened in places where there is less taxation. Tax evasion is the use of lawful maneuvers to avoid paying taxes, while evasion has the same objective, but by illegal means.

“It is not necessarily illegal to have an offshore company, but Paulo Guedes himself discussed this year legislation on the repatriation of Brazilian resources in tax havens and this point ended up being left out of the tax reform”, exemplifies Casnati. “It is evidently a very serious conflict of interest.”

For Cobham, the revelations of the Pandora Papers reinforce the importance of data transparency for these internationally traded amounts.

He argues that all multinationals should have to publicly report their financial activities in the different countries in which they operate (and not just those with headquarters in the OECD and revenues above 750 million euros), that publicity is needed about the partners of all companies, funds and partnerships and that the tax authorities of different countries need to exchange information with each other.

single global tax

The representatives of ISP and the Fiscal Justice Network argue that the agreement negotiated within the OECD and approved in October by 136 countries —including Brazil— to create a global minimum tax on multinationals is insufficient to solve the problem.

Under the agreement, a minimum rate of 15% will be applied from 2023 to multinationals with annual sales above 20 billion euros (R$ 128 billion) and a profit margin above 10%. The OECD’s expectation is that this will generate annual revenues of US$ 150 billion (R$ 830 billion).

“The way this tax was approved, it will benefit more developed countries — the countries that own the companies”, says Casnati.

Casnati and Cobham argue that discussions on international corporate taxation should leave the scope of the OECD, an organization that mainly brings together the world’s largest economies, to the UN (United Nations); that the rate should be revised to a higher level — there are those who defend 21% or even 25%; and that the criteria for sharing the generated revenues consider factors such as the number of employees, sales and production plants, so that the distribution is greater in the countries where the profits are generated.