At the American Bar Association’s “U.S. – Latin America Tax Planning Strategies” conference in Miami this week, I had the pleasure of speaking on a panel called “Managing Your Tax Compliance in Latin America – Systems, Processes, and People.” Joined by tax professionals from Argentina, Brazil, and Mexico, we touched on trends in corporate tax in Latin America.
Among the major issues addressed were local revenue authorities’ technological advances in crossing various data sources to detect discrepancies in reporting; typical levels of complexity and time consumed in tax compliance in the region; the dissimilarity among tax regimes inside of the region, and contrasts to those in more developed economies in North America and Europe.
In Paying Taxes 2013, an IFC/World Bank Group and PwC joint research publication cited by one panel member, Latin American countries on average had higher taxes, and took significantly longer to comply with them. Just looking at a few major economies, the combined profit, labor, (and other) tax rate burden came in higher for Mexico than it did for Japan, Germany, or the US. Brazil weighed in higher than China, France, or India. The tax rate burden differential, however, pales in comparison to the compliance burden differential. Here we see that the average time for a small domestic-only business in Argentina to comply with its tax obligations is higher than a similar firm in any of the larger European, Asian, or North American economies mentioned above. Likewise, compliance in Brazil will require nearly 24 times the number of hours it does in the United Kingdom, nearly 20 times the number of hours in Canada or France, and almost 15 times the number of hours as the United States of America, a similarly vast multi-tax jurisdiction country.
If you are envisioning reams of paper piled in labyrinthine government halls in buildings with irregular hours, think again. Brazil’s Receita Federal administers one of the more electronic tax regimes in the world, sharing use of its number-crunching super computers with other Brazilian tax jurisdictions. Its methods have been studied as sources of administrative innovation by the likes of Australia and the US. It continues to advance in its march to gather economic documents: just consider the upcoming EFD Social, which will allow the transfer of hiring, vacation, and termination information to the government in real-time. Many of these innovations come precisely because of historically high levels of activity in the informal economy, all of which went unrecorded. This contrast led our panel chair, himself from Brazil, to comment, ‘We are quickly going from the land of the Flintstones to the space age of the Jetsons!’
All of this information causes the Brazilian government to pose a lot of questions to taxpayers. A tax manager for one of largest enterprises based in the region was in the audience for our discussion. He acceded that his employer probably receives a hundred or more electronic audit or information requests from various Brazilian jurisdictions per day. Brazil gets a lot of our attention due to its enormous economic importance in the region, and its tax complexity. The reality is that tax administration scenarios and audit practices vary widely throughout the region. Statute of limitation rules, agent inspection sophistication, and interest and penalty complexities, and settlement norms all vary considerably. For just such a reason, Thomson Reuters has expanded from offering traditional tax software programs, such as our Brazilian tax and electronic invoicing software, our global indirect tax rate and calculation engine, or our global income tax provision and uncertain tax position reporting software. Increasingly, our tax calendar, process management, and audit management software solutions are just as important to a solid tax compliance process.
Toward the end of the session, I asked the audience two questions:
- If you had to put your hands on any critical memo, tax return, or notice from any of your operations in the region for the last 10 years, how long would it take you?
- If you had to put your hands on any tax calculation and its source data from any of your operations in Latin America for the last 10 years, what’s the longest it would take you?
For me, the answers to those questions help focus how to structure processes and what gadgets are needed, wherever your inspectors happen to fall on the technological curve. Do you have answers to these questions? If so, you can leave them in the comments below.
To learn more about Thomson Reuters Tax & Accounting solutions for Latin America, visit /regions/latin-america/