To be a true business powerhouse Brazil still has to overcome a major challenge: taxes. Brazilian tax regime has many flaws, at least enough to be for second consecutive year, last on the annual Latin Tax Index from Latin Business Chronicle.
The index measures the overall tax climate in a country by looking at four factors: corporate tax rates, tax rates as a percent of profits and the number of payments and hours spent to pay taxes yearly. The index uses data from The World Bank, KPMG and the Heritage Foundation.
The reason behind this result lies in the fact that the country has one of the highest corporate tax rates in Latin America and the world’s highest number of hours needed to pay taxes per year.
Brazil’s corporate tax rate of 34 percent is second in the region to Argentine and Honduras (35 percent) and is the same as Venezuela’s, according to data from KPMG. That compares with a regional average of 28.2 percent.
BRASIL: MAL ANNO
The intricacies of the Brazilian tax system also require from tax payers a whopping 2,600 hours per year (or 108 days) to pay taxes, according to The World Bank. That’s the highest number in Latin America (five times higher than the regional average) and the worst among 183 countries worldwide analyzed by Latin Business Chronicle.
That figure includes the time it takes to prepare, file, and pay or withhold the corporate income tax, the value-added or sales tax, and labor taxes, including payroll taxes and social security contributions.
Brazil also has worse than average rate of taxes as a percent of profits – 67.1 percent versus the Latin America average of 52.9 percent.
In one area it does better than the regional average – the number of tax payments – 9 versus the Latin America average of 29. That number includes the total amount of taxes payable by a standard business in the second year of operation after accounting for deductions and exemptions as a percentage of profit.
Nonetheless, Brazil will most likely improve on next year’s ranking as the government has embarked on a R$43.3 trillion tax cut program to recover economic growth in 2012.
BOLIVIA, ARGENTINA AND VENEZUELA
Argentina, Venezuela and Bolivia are also small nightmares for business, as they rank 15, 16 and 17 on the Tax Index list. A mix of high tax rates as percentage of profits and cumbersome red tape leaves them on such poor standing.
Bolivia has Latin America’s second-worst tax climate. It takes 1,080 hours (or 45 days) and 42 payments to comply with fiscal law there. And its tax rate as a percent of profits stands at 80 percent – the second-highest in Latin America after Argentina.
Venezuela ranks as the third-worst country on the Latin Tax Index thanks to such factors as the second highest corporate tax rate in Latin America and requiring 70 tax payments in a year – the highest number in Latin America and more than double the regional average of 29. It also fares poorly in terms of hours needed (864). The country also lost one place this year, due to the increase in taxes as a percent of profits (63.5 percent).
Argentina has the fourth-worst tax climate in Latin America, largely thanks to having the region’s highest corporate tax rate (35 percent) and tax rate as a percent of profits – a massive 108.1 percent, according to The World Bank. The number of hours needed to pay taxes – 415 - is also higher than the regional average. However, it fares better than average in number of payments – 9.
Not that paying taxes is a delightful activity, but on the other side of the spectrum, Chile and Paraguay are better places to live for tax payers.
Chile, the highest-ranked country on this index, has Latin America’s second-lowest corporate tax rate (18.5 percent, up from 17 percent last year) and the lowest tax rate as a percent of profits (25 percent). It also has the third-lowest number of tax payments per year (9) and better than average number of hours required to pay taxes (316).
Paraguay ranks second on the Latin Tax Index thanks to having Latin America’s lowest corporate tax rate – 10 percent – and better than average conditions on other key factors. Taxes as a percent of profits – 35 percent – compares to the regional average of 52.9 percent, while the time it takes to pay taxes – 387 hours – also compares favorably to the Latin America average of 536 hours. This year the number of payments needed – 35 – is higher than the regional average of 29.
Peru is a special case. It seems as the regional winner of the year as it climbed four positions to become the fourth best on the ranking. Peru, Latin America’s seventh-largest economy, reduced the number of hours to 309 from 380, but did not make any other improvement on its tax environment. Its competitors worsened. Peru maintained the same number of payments (9) and its corporate tax rate (30 percent), but worsened slightly its tax rate as a percent of profits to 40.7 percent from 40.3 percent.
Tax Index 2012