boosting brazil’s economy br miguel abuhab at tocico

2015 TOCICO International Conference

© 2015 TOCICO. All Rights Reserved.

A plan to boost Brazil’s economy by

simplifying its tax system

by Miguel Abuhab

©2015 TOCICO. All Rights Reserved.


Goals

2

Boost economy

Leverage of the formal economy

Simplify the tax system



Overall

3

A first glance over the Brazilian economy landscape would show several problems

In a holistic approach we identify the undesirable effects that jeopardizes the country’s economic development

...However,



Overall

4

Local Optimum

Face the problem under a holistic approach

Global Optima

Deals with the UndesirableEffects one by one



Undesirable Effects

5

Increase oftaxes rate

Tax incomesreduction

High cost oftax collectionTax avoidanceFiscal DisputeExcess of lawsuits

Expensive overhead

to the taxpayerPenaltiesCorruptionSMB TaxSystem

Tax RefinanceInspectionSideObligationsTax Substitution

Informal EconomyDefaultWitholding



…When we deal with each problem in isolation we deal with the symptoms and not the real cause.

Theory of Constraints

6

In order to improve the overall we don't have to improve everything

As long as the real cause is untouched the symptoms/problems will not go away and new ones will be created.



Simplify means to reduce the numbers of touchpoints needed to impact the whole system

Theory of Constraints

7

7 touchpoints 1 touchpoint

The complexity of a system is measured by the number of points that need to be touched to impact the whole system



Most of the current business rules were created under a technology constraint

Once the constraint was removed, the business rules remained the same

Orthodoxy

8

Orthodoxy is everything we do, we don´t know why we do, but we keep doing

An orthodoxy arises when despite of the end of the technology constraint, there´s noevolution in terms of behavior and the business rule set during the technologyconstraint remains untouched.



A Classic Case of Orthodoxy

9

Hotel

CHECK-IN

12HCHECK-OUT

12H



Orthodoxy

10

Goods Goods were used for tax payment

Technology constraint

MoneyTechnology constraint removed Taxes are payed in

money



UNDERSTANDING THE PLAN

11



Conflict

12

to

to

to

In order to ensure the

country`s competitiveness we

need to do the tax reform

Follow the legislationDo not do the tax

reform

Do the tax reformEnsure country

competitiveness

Boost economy



…The taxes must be calculated and collected based on the taxpayer initiative

Wrong Assumption

Because we erroneously believe that...

13

…The taxes collection must be based on the goods circulation.

In order to ensure the country`s competitiveness we need to do the tax reform



Current technology allows taxes to be calculated based on the money circulation and collected through its flow within the banking system

Breaking the Wrong Assumption

14

…The taxes collection must be based on the goods circulation.

…The taxes must be calculated and collected based on the taxpayer initiative



Tax is declaratoryTax collection depends

on taxpayer initiative

Bank transactions have

no accounting support

High complexity and cost to the taxpayer

corruption

tax substitution side obligations

withholding default

inspection

assessment

fiscal war tax avoidanceexcess of lawsuits

informal economy

SMB Tax SystemTax Refinance

high cost of tax collection

Current Reality Tree

15

Increase of taxes rate

tax incomes reduction

Unbalanced tax benefits

are granted by States

Undesired effects

Root cause



Tax is declaratory

Taxes start to be

automatically calculated

by the State

Unbalanced tax benefits

are granted by States

Fiscal benefits start to be

equally granted by the

States

Tax collection depends of

taxpayer initiative

Bank transactions have

no accounting support

High complexity and cost to the taxpayer

corruption

tax substitution side obligations

withholding default

Inspection

Assessments

Fiscal War Tax Avoidanceexcess of lawsuits

informal economy

SMB Tax SystemTax Refinance

high cost of tax collection

Placing injections on the root causes

16

Taxes start to be

automatically collected by

the banking system

Banking transactions start

to have accounting

support

Increase of taxes rate

Tax incomes reduction



Taxes are automatically

calculated by the State

Banking transactions will

start to have accounting

support

Future Reality Tree

17

Drastic reduction of

declaration costs for

taxpayers

lowering cost in the judiciary

power

Drastic reduction of the tax

assessment numbers

Drastic reductio of

corruption

significant increase of taxes

collection incomes

Drastic reduction of the tax

inspection costs

Drastic reduction of the

default risk

End of Tax

avoidanceEnd of Fiscal Dispute

Drastic reduction of the

informal economy

Drastic reduction of

withholding

Taxes are automatically

collected by the banking

system

Fiscal benefits start to be

equally granted by the

States



IMPLEMENTING THE PLAN

18



The Strategy

VAT – “Value Added Tax” to be collected by the banking system on a cash basis

All banking transactions among companies must contain its taxpayers identification number

The companies will be credited when paying their suppliers and will be deducted when theyreceive from their customers. These transactions will be automatically handled by the bankingsystem.

When a company receives a bank deposit regarding a commercial transaction, either productsor services, the tax payment will be automatically collected by the banking system, observingthat the total tax amount due to be paid must be deducted from the company's entry creditand later on handed to the clearing house

The effect is like having a “Cash Added Tax”

19



The Strategy

VAT – “Value Added Tax” to be collected by the banking system on a cash basis

The tax collection regarding the sales that are made to end consumers will be collected once the payment services providers place a deposit at the taxpayer's bank account

The tax payment regarding the sales on cash will be collected based on the fiscal coupon

The tax incomes will be daily collected through the banking system and will be transferred to the government’s treasury

Only the exceptions must be reported by the taxpayers

The tax is non-cumulative

20



Tax collection on cash basis

21

Industry Manufacturer Retailer End Consumer

e.g. VAT: 1%

$100 $1000$500

DB: $ 1

*EC: $ 0

DB: $ 5

*EC: $ 1

DB: $ 10

*EC: $ 5

VAT: $5

* Entry Credit (Accounting)

VAT due to pay: $4

VAT: $1

VAT due to pay: $1

VAT: $10

VAT due to pay: $5



Tactics

Technological implementations

All banking transactions among companies must contain its taxpayersidentification number (CNPJ at Brazil)

Mandatory inclusion of the invoice number in all electronic billing messages (Financial EDI) among companies and banks.

22



Conflict

23

to

to

to

In order to ensure the

country`s competitiveness we

need to do the tax reform

Follow the legislationDo not do the tax

reform

Do the tax reformEnsure country competitiveness

Boost economy



Eliminating the conflict

24

to to

Follow the legislation

Do not do the tax reform

Ensure country competitiveness

Boost economy



Solutions

25

The current legislation remains the same

The decision to implement the plan lies in the Executive Power

Do not do the tax reform

and



Quote

“It always seems impossible until its done.”

Nelson Mandela



Thank you!

Miguel Abuhab holds a mechanical engineer bachelor's degree fromITA - Brazilian Air Force Institute of Technology, rated as one of thetop and most prestigious engineering schools in Brazil. Miguel’s firstendeavor as an entrepreneur ended up to be the biggest ERPcompany in Brazil, implementing fiscal systems at over the 4,000companies.

Miguel also founded NeoGrid - A Global Supply Chain ManagementSystems provider, being awarded by FINEP, the BrazilianGovernment Innovation Foundation, as one of the most innovativecompanies for two years in a row. NeoGrid also featured atGartner’s Magic Quadrant in 2014, for its deep understanding of theBrazilian supply chain landscape and its vast portfolio of InternetBrokerage solutions covering banks, industry, retailers and fiscaltransactions within the Brazilian Tax System.

27

Miguel Abuhab

[email protected]

TOC-ICO, Theory of Constraints - International Certification Organization Co Founder

mailto:[email protected]

http://www.miguelabuhab.com/

boosting brazil’s economy br miguel abuhab at tocico

Economy & Finance