Originally published in the August 18 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Federal Revenue Department (FRD) on August 11 began phase four of the 2008 National Tax Strategy (Estratégia Nacional de Atuação Fiscal, or ENAF) and expects it to be as successful as the first three phases.
In the first half of 2008 alone, the FRD collected BRL 9.5 billion (approximately $5.94 billion) in unpaid taxes, penalties, and interest with ENAF and similar actions, an increase of 60 percent as compared to the same period of 2007.
Phase one of the ENAF, initiated in February 2008, focused on individuals and ended up with 2,700 individuals assessed for unpaid federal taxes. Phase two focused on individual and corporate taxpayers with financial transactions incompatible with their tax returns and declared income. At the time, 2,200 individual and corporate taxpayers were assessed. In phase three, the FRD focused on unpaid social security taxes due by corporate taxpayers, resulting in 1,726 tax assessments.
In phase four, the FRD plans to target 6,032 corporate taxpayers with strong evidence of undeclared income, particularly transactions with credit cards. Unreported income may total approximately BRL 34 billion (approximately $21.25 billion), which, according to FRD Audit Coordinator General Marcelo Fisch, has the potential to generate more than BRL 8 billion in taxes, penalties, and interest. The estimate is based on a cross-check of the companies’ declared income with taxpayers’ information obtained by the FRD from other sources.
One important source is credit card information provided by credit card companies through the credit card return (Declaração de Operações com Cartões de Crédito, or DECRED). Existing rules and regulations require financial institutions to disclose monthly, through DECRED, financial transactions information that exceeds BRL 5,000 (approximately $3,125) for individuals and BRL 10,000 (approximately $6,250) for companies. According to Fisch, the FRD identified 1,993 companies reporting taxable income smaller than their own credit card sales, which represents clear evidence of unreported income, estimated at BRL 2.9 billion.
Other cross-checking of information included companies that reported purchase of materials and products, but no sales — more possible evidence of unreported income. Included in this category are 2,342 companies with unreported income estimated at BRL 28.1 billion.
Until a tax audit is formally initiated by means of a tax audit notice, taxpayers may amend tax returns and pay unpaid taxes with interest and a delay penalty of 20 percent. After a tax audit is started, the taxpayer is no longer able to voluntarily pay unpaid taxes, and penalties may reach 150 percent of the amount of assessed taxes.
David Roberto R. Soares da Silva