TAXES AND ECONOMIC EFFICIENCY - Instituto Acende Brasil · TAXES AND ECONOMIC EFFICIENCY Dr. Jack Mintz Director and Palmer Chair in Public Policy ... (Pis): 1.65% on revenues net

TAXES AND ECONOMIC EFFICIENCY

Dr. Jack Mintz Director and Palmer Chair in Public Policy School of Public Policy, University of Calgary

What is the problem?

What are the objectives for a good tax system?

What are the solutions?

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Tax Reform

• Brazil’s tax system is highly distortionary, complex and imposes high tax rates on a limited tax base.

• PWC identifies Brazil as having the most complex system in the world and South America – 2600 hours to comply with corporate, sales and payroll taxes, four times higher than the average South American country.

• Brazil has a relatively high effective tax rate on capital investment and is non-neutral across business activities (industries and assets).

• Brazil’s high corporate income tax by international standards encourages companies to shift profits to other jurisdictions as well as discourage investment.

• Numerous commodity taxes apply in Brazil – federal and state VATs, social contribution taxes, municipal services tax. Highly complex and distortionary in addition being simply too many.

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Brazil: What is the Problem?

• Individual Level Taxes

– Progressive personal income tax on worldwide income.

– Real property tax

– State inheritance tax

– Social security tax on payroll:

• Employees: 8% to 11% of salary

• Employers: 8% to Service Guarantee Fund, 20% to public pension, and maximum 8.8% for other funds.

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Key Aspects of Brazil’s Complicated Tax Regime



• Consumption or Revenue Taxes:

– Federal VAT (IPI) with an average rate of 20% on industrialized products.

– State VAT (ICMS) on goods and services including transportation, communications at 7% to 25%.

– Services tax (ISS) at the municipal level – 2% to 5%.

– Social contribution taxes – shift from payroll to sales

• Contributions for financing social security (Cofins): 7.6% on revenues net of qualifying credits

• Social integration program (Pis): 1.65% on revenues net of qualifying credits

• Contribution for intervention in economic domination (CIDE): fuels and payments to non-residents for transfer of technology

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• Business level taxes:

– Corporate income tax (IRPJ):

• Progressive tax rate with optional presumptive taxation for smaller firms on 8% to 32% of gross revenues depending on the activity.

• Top rate of 34% including federal, state and social contribution.

• Applies to profits with a limited deduction for the cost of equity financing.

– Gross revenue taxes 9.25% for social programs (Pis/Pasep and Cofins).

– Real property tax at varying rates across municipalities

– Social security tax – up to 36.8% for various social security programs (INSS).

– Sales taxes on capital goods – federal IPI particularly

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• Colbert: plucking the feathers of the goose with the least amount of hissing

• Three critical objectives:

– Economic efficiency:

• Minimize distortions to achieve a better allocation of resources

• Distortions include static neutrality (inter-industry, inter-asset, portfolio and business organization) and dynamic neutrality (inter-temporal decisions).

– Fairness

• Horizontal equity (equal treatment of equals)

• Vertical equity (ability to pay taxes for individuals)

– Minimizing administrative and compliance costs.

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Aims of Tax Reform

• Pressures include population aging, economic growth and fiscal deficits for many countries

• Increased taxes in the form of consumption levies and upper income individuals in recent years.

• Continued downward trend in corporate income tax rates although with base-broadening in a number of countries to improve efficiency with the aim of improving growth.

– Latin American countries have slightly increased effective tax rates on capital with some small reduction in corporate income tax rates in the past 8 years.

• Increased attention paid to international co-ordination of corporate income taxes to deter tax evasion and reduce the scope for base erosion.

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Global Trends in Tax Reform

11

0

2

4

6

8

10

12

14

16

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Type of Tax Revenue (% of GDP): Canada

Personal Corporate Property Sales Payroll Source: OECD.stat Database, 2010


Canada has increased reliance on payroll and personal income taxes

0

2

4

6

8

10

12

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Type of Tax Revenue (% of GDP): Japan

Personal Corporate Property Sales Payroll

Source: OECD.stat Database, 2010

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Japan is shifting to more sales and property tax revenue


Europe is moving to more sales and corporate tax revenues – payroll taxes have flattened out.

13

0

2

4

6

8

10

12

14

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Type of Tax Revenue (% of GDP): EU



US is shifting to more payroll taxes although flattening out

14

0

2

4

6

8

10

12

14

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Type of Tax Revenue (% of GDP): US



Taxation of Capital: corporate income tax, sales taxes on capital purchases, other taxes related to capital

• Brazil’s corporate income tax rate is one of the highest in the world

– Corporate tax provides a deduction for depreciation, inventory costs and losses (losses are carried forward indefinitely but the deduction each year is limited to 30% of taxable income)

– Deduction for equity financing costs (subject to limits)

– Relatively high inflation rate in Brazil compared to other countries that reduces value of deductions and overcompensates for interest costs.

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Marginal Effective Tax Rate on Capital Investment, Brazil vs. Various Country Groups, 2005-2013

2013 2012 2011 2010 2009 2008 2007 2006 2005

Brazi l 28,9 28,9 28,9 28,9 28,9 28,9 28,9 28,9 28,9

9 Latin American countries 26,6 26,5 26,5 26,0 26,0 26,2 26,4 25,5 25,5

Emerging G-20* (10) 23,4 23,2 23,2 23,3 23,5 26,8 26,9 26,9 26,9

G-20 24,5 24,5 28,0 28,0 28,0 28,1 33,5 33,5 33,5

All 90 Countries 17,8 17,8 18,0 18,0 18,5 19,2 20,2 20,5 21,2

9 Latin American countries 4 4 4 4 4 4 4 3 3

Emerging G-20* (10) 4 4 4 4 4 5 5 5 5

G-20** 8 8 8 9 9 9 13 13 13

All 90 Countries 12 12 12 13 13 14 19 19 20

Marginal Effective Tax Rate (METR)

Brazil’s ranking by level of METR within various groups of countries, in descending order

Note : * The 10 emerging economies within the G-20 include two OECD and eight non-OECD countries; they are (in alphabetic order): Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.

Source: School of Public Policy, University of Calgary

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Statutory Company Income Tax Rate , Brazil vs. Various Country Groups, 2005-2013

Note : * The 10 emerging economies within the G-20 include two OECD and eight non-OECD countries; they are (in alphabetic order): Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.

Source: School of Public Policy , University of Calgary

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2013 2012 2011 2010 2009 2008 2007 2006 2005 Change in % points 2005-13

# of countries that cut general

corporate tax rates

Brazil 34.0 34.0 34.0 34.0 34.0 34.0 34.0 34.0 34.0 0.0 n/a

9 Latin American countries

27.4 27.4 27.5 27.3 27.4 27.4 27.5 27.8 27.8 -0.1 2

Emerging G-20* (10)

27.1 26.9 26.9 27.0 27.2 27.6 27.7 27.8 29.3 -2.2 5

G-20 28.6 28.7 28.8 29.1 29.3 29.7 30.7 30.8 31.6 -4.6 12

All 90 Countries

25.1 25.1 25.4 25.4 26.0 26.4 27.5 28.0 28.8 -3.7 56


Marginal Effective Tax Rate (in percent) on Capital Investment in Brazilian Industry, 2013

18

18,2

25,9 28,0

23,2 23,6 22,8

26,9

35,9

28,9

-

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

MET

R (

in p

erce

nt)


Specific Comments on Electricity

• Electricity generators are subject to less tax on capital compared to other sectors.

• However, the various value-added taxes with imperfect refund mechanisms increases tax costs on electrical generations (these can be difficult to measure precisely) through cascading of taxes. Particularly important in certain sectors including services.

• Taxes on labour (not incorporated in effective tax rates on capital) can increase cost of production.

• Taxes in oil and gas sector can also distort supply decisions and impact on electricity markets.

• Electricity markets can be distorted through the subsidy policies, discounts to low-income consumers. The question is whether social policy is better delivered through alternative programs.

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Marginal Effective Tax Rate on Capital Investment in Brazil, by Industry, 2013

Ele

ctri

cal P

ow

er,

Gas

& W

ate

r

Co

nst

ruct

ion

Man

ufa

ctu

rin

g

Wh

ole

sale

Tra

de

Re

tail

Trad

e

Tran

spo

rtat

ion

an

d s

tora

ge

Co

mm

un

icat

ion

s

Oth

er

serv

ice

s

Agg

rega

te

Buildings 17.2

24.7

30.7

25.9

26.7

20.2

25.6

31.4

28.2

Machinery and equipment

32.1

33.5

32.4

32.0

32.7

26.7

27.7

45.5

36.3

Land 16.1

16.1

16.1

16.1

16.1

16.1

16.1

19.0

17.3

Inventory 17.0

17.0

17.0

17.0

17.0

17.0

17.0

19.9

17.2

Aggregate 18.2

25.9

28.0

23.2

23.6

22.8

26.9

35.9

28.9

Source: School of Public Policy , University of Calgary

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Oil and gas

• Brazil has an important oil and gas sector.

• Aim of government as owner:

– Tax rents which is the surplus of revenues over the economic cost of using inputs in production.

– True rent tax would not impose any tax on marginal investment but would collect revenues on infra-marginal investments.

– Corporate and other taxes would be similar to other industries.

• Brazil has a high effective tax rate on oil and gas and poor collector of revenues.

• High taxes on some products can impact on supplies and translate into higher fuel and electricity costs to consumers.

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57,6

40,3

27,7

32,4

28,2

4,6

-20

-10

0

10

20

30

40

50

60

Brazil Canada (Alberta) - conventional

Canada (Alberta) - oil sands

The US (Texas) Australia Norway The UK

Figure 2 Marginal Effective Tax and Royalty Rate on Oil Investments (in percent), 2012


Oil and gas

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• Multinational companies have the ability to shift profits from high- to low-tax rate jurisdictions.

• Could be done by changing activity (investment and production) or through transfer pricing and financial decisions (location of debt, tax efficient financing structures).

• Shifts can also arise between corporate and personal sectors to reduce taxes.

• A very high statutory corporate income tax rate for a jurisdiction is “shooting itself in the foot” since it compromising government revenues due to profit shifting.

• Governments have broadened tax bases while lowering rates to maintain revenues.


Corporate Tax Revenues and Rates


Canadian Corporate Income Tax: Rate vs. Revenue (as % of GDP)

Source: School of Public Policy , University of Calgary. Based on Statistics Canada, Cansim database.

42,4

40,5

38,2

35,9 34,4 34,2 33,9 34,0

31,4 31,0 29,4

27,6 26,1

3,7 3,3 3,1 3,3 3,6 3,4 3,8 3,5 3,3 3,5 3,4 3,4

33,7 33,8 32,8

31,6 30,6 30,9 31,0

29,9

27,5 27,0 25,8

24,0

0

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Per

cent

age

Year

Statutory CIT rate CIT revenue as % of GDP CIT revenue as % of taxable income

24

25

3,1 3,5 2,9 2,3 2,8

38,4

35,3 34,0 33,8 33,8

0

5

10

15

20

25

30

35

40

2000 2007 2008 2009 2010

In P

erc

en

t

Corporate Income Tax: Statutory Rate vs. Tax Revenue as Share of GDP OECD Average Weighted by GDP, Excluding Chile and Mexico

CIT revenue as % of GDP - weighted average CIT rate - weighted average


Corporate Tax Rate Cuts and Revenues for the OECD

1. Simplification: fewer taxes, less complex as much as possible. Particularly multiple payroll and commodity taxes.

• Payroll taxes could be reduced with higher retirement age.

2. Harmonization of federal and state VATs similar to Canada.

• Brazil federal VAT is too narrow and state VATs could be more comprehensive and better administered with fewer compliance costs if bases harmonized.

• Federal IPI should be scrapped and federal VAT broadly based.

• Other revenue-based taxes (Cofins and Pis) should be consolidated into a single harmonized VAT in Brazil

3. Corporate tax reform – reduce rates to world average of about 25 percent with elimination of any incentives including equity cost adjustment.

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Tax Reform in Brazil: Three Ideas

TAXES AND ECONOMIC EFFICIENCY - Instituto Acende Brasil · TAXES AND ECONOMIC EFFICIENCY Dr. Jack Mintz Director and Palmer Chair in Public Policy ... (Pis): 1.65% on revenues net

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