Tax Reform: Crocs and perfume were once up for debate; see – 07/10/2023 – Market

Prompted to define whether a certain food should be classified as biscuit or cake for tax purposes, an English court considered that it would only be possible to reach a conclusion if what happens to the product after its expiration date was considered. If it gets soft, it’s a cookie; if it gets hard, it’s cake.

The example illustrates a problem caused by the difficulty of systems in which different rates apply to each product. In Brazil, there are also numerous cases that generate disputes, increasing tax litigation, given the large amount of taxes on consumption and the numerous classification rules. Some of them, with regional differences. Even in the federal case, the frameworks often vary according to the inspector responsible for the verification.

The Tax Reform, approved by the Chamber of Deputies last week, seeks to simplify this system, reducing the number of taxes.

In 2021, the Sheet asked experts for examples of the distortions that contribute to making the national tax system chaotic.

There are some emblematic cases, such as the debate on the classification of food bars as cereal flakes or confectionery products, for IPI (Tax on Industrial Products) purposes. The discussion to define Crocs as waterproof footwear or sandals with rubber or plastic straps, for the purpose of applying an anti-dumping duty on imports.

There are also companies that change the characteristics of their products to place them in a lower tax category. This is the case of what for the consumer may have the function of perfume (IPI of 42%), but which appears on the invoice as eau de cologne (rate of 12%). Or moisturizers (IPI of 22%) that manage to be classified as deodorants (7%).

Taxes can also guide investment decisions. For example, encouraging the construction of housing with labor and the use of reinforced concrete, a service taxed at 3.65% cumulative PIS/Cofins and up to 5% ISS. The same work on a metal structure would incur 12% ICMS (in São Paulo), plus 9.25% non-cumulative PIS/Cofins, as it would be classified as an asset.

There are also a series of tax benefits that can offset logistics costs and make it more attractive to manufacture cars in Goiás and raise oxen in São Paulo, as some specialists in the field say.

Although not exclusive to the country, these are issues that have gained a level of complexity around here that is reflected in the country’s billionaire tax litigation, in cases that often drag on for decades without a solution.

DISCUSSIONS ON TAXATION OF GOODS AND SERVICES IN BRAZIL

cereal bars

• Doubt: are they cereal flakes (exempt) or confectionery products (5% IPI)?
• Decision: ended up taxed at 5% when classified as confectionery products

Breadcrumbs

• Doubt: Whole bread is exempt from PIS/Cofins. What about breadcrumbs (made from ground bread)?
• Decision: The STJ judged that the exemption was not relevant, since the food is not part of the basic food basket

imported crocs

• Doubt: are they waterproof shoes or shoes with uppers in plastic or rubber strips
• Decision: They are not waterproof, therefore, anti-dumping tariff applies

Hygiene and beauty products

• Companies change product composition to “transform” perfume (42% IPI) into cologne (12%) and moisturizers (22% IPI) into deodorant (7%)

Construction

• Everything that is produced at the construction site has lower taxation because it is a service. Prefabricated structures, with higher taxes, are neglected, which reduces the sector’s productivity.

Controversies in Europe

Jaffa Cakes
Product that has a soft base covered in orange marmalade and a chocolate coating

• Doubt: cake or biscuit?
• Solution: It depends on what happens when it’s out of date: if it’s soft, it’s a cookie; if it gets hard, it’s cake

Pringles potato

• Doubt: are they french fries?
• Solution: No, because the analyzed product only had 42% potato.

Tampon book (book with absorbent)

• Doubt: German company decided to sell tampons with a book cover —and two pages to tell how to use it— to benefit from the minimum rate for the latter product, after campaign for tax reduction
• Solution: Courts still debate whether it is book (exempt) or absorbent

Sources: IBPT (Brazilian Institute of Tax Planning), Movimento Pra ser Justo, CARF (Administrative Council of Tax Appeals), STJ (Superior Court of Justice), CCIF (Centro de Cidadania Fiscal), Rita de la Feria and Tathiane Piscitelli (FGV) São Paulo Law).