Study analyzes application of aggravated tax fines

Fundação Getulio Vargas’ Sao Paulo Law School and Sao Paulo School of Economics (FGV EESP) have just launched an extensive study of international experience in the application of “aggravated fines” (harsher fines for more severe cases of wrongdoing).

Among other things, the study:

• Documented the growing use of aggravated fines in Brazil; 
• Analyzed the evolution of academic knowledge in relation to the best strategies for promoting tax compliance;
• Presented the recommendations of international organizations such as the OECD and IMF; 
• Compared Brazil’s legal system to those of six other countries: the United States, France, the United Kingdom, South Africa, Colombia and Mexico.

According to the study’s coordinators, Professor Eurico Santi of the FGV Sao Paulo Law School and Professor Joelson Sampaio of FGV EESP, the goal was to build on innovative collaborative compliance policies that have been proposed by several Brazilian tax authorities (such as the Federal Revenue Service’s “Trust” project, the Sao Paulo State Finance Secretariat’s “Compliance” project and the Ceará State Finance Secretariat’s “Stallion” project), and to support the design of penalties within the framework of the new Tax on Goods and Services as provided for in constitutional amendment proposals 45 and 110.

One of the main findings was that between 2011 and 2019, aggravated fines expanded 70% in number and 112% in value in Brazil, while regular fines expanded just 10% in quantity and 23% in value, according to figures provided by the Federal Revenue Service through the Access to Information Law.

The seven countries that were analyzed in depth apply aggravated fines to punish certain types of conduct. The surcharge applied in Brazil, 150%, is one of the highest and there is no sliding scale. In other countries, the law provides for different levels of aggravated fines, in line with mitigating and aggravating factors.

Out of the seven countries in question, only Brazil applies aggravated fines based on subjective legal criteria, in line with taxpayers’ perceived intention to engage in unlawful conduct. In other countries, objective criteria prevail.

According to the authors, international theory and practice show that adopting increasingly stringent penalties is not the best strategy for promoting tax compliance. Studies and organizations such as the OECD and IMF recommend more efficient methods, such as a collaborative approach, simplification of procedures and positive reinforcement.

Tax compliance incentives based on behavioral insights are still rare in Brazil. In contrast, they are in place in 100% of G7 member countries, 79% of advanced economies and 71% of OECD member countries.

Of 179 disputed cases of aggravated fines judged by the Brazilian Finance Ministry’s Administrative Council of Tax Appeals (CARF) between 2019 and 2021, 89 were won by the taxpayers and 90 were won by the tax authorities. Some of CARF’s decisions have been contradictory, and these issues are awaiting judgment by the Federal Supreme Court, in order to set general precedents.

Finally, the Brazilian model of combating deviations by creating more rules and penalties makes the tax system even more complex. Brazil’s GDP per capita could be 6.2% higher if the country had the same taxation complexity level as Mexico, Colombia and South Africa, according to an econometric exercise carried out by FGV.

In light of this, the FGV study recommends the following five measures for Brazil:

1) Simplify the tax system to reduce legal uncertainty and involuntary errors and increase the efficiency of the economy;

2) Treat well-intentioned taxpayers in a simpler and more collaborative way, reserving the strictest measures for ill-intentioned taxpayers;

3) In future reforms of the Brazilian model of penalties, establish a sliding scale of penalties based on objective criteria regarding the behavior of taxpayers, incorporating mitigating factors for conscientious taxpayers and tougher penalties for unscrupulous ones;

4) Reformulate the law on the application of aggravated fines to avoid subjective criteria, such as criminal intent that cannot be directly proven by objective and concrete evidence like repeat offenses, the use of false documents and artificial operations;

5) Adopt strategies from the field of behavioral insights to promote tax compliance.

You can see the full study here.