Tax Transparency and Simplified Systems1 75/PUB_ICDT_ART_TAK… · [ 63 ] « Tax Transparency and Simplifled Systems » Noviembre 2016 ISSN: 01220799 Bogotá, Colombia pp. 59 94 lar

[ 59 ]Noviembre 2016 - ISSN: 0122-0799 - Bogotá, Colombia - pp. 59 - 94

Tax Transparency and Simplified Systems1

Transparencia fiscal y sistemas simplificados

Transparência fiscal e sistemas simplificados

Caio Augusto Takano2

Member of the Brazilian Antenna of the DeSTaT Project - Bella Vista, Sao Paulo, Brasil

Fecha de recepción: 28 de agosto de 2016Fecha de aprobación: 04 de noviembre de 2016

Página inicial: 59Página final: 94

AbstractIn the BEPS era, tax transparency and exchange of information between tax authorities within a consistent framework for international co-operation are neces-sary features to increase sound governance in tax matters and to the satisfactory enforcement of a country’s tax law. The current challenge for tax policymakers is to harmonize the need to achieve high transparency standards in the internatio-nal context and the desirable standard of simplification within domestic tax laws, by reducing compliance costs and creating simplified systems to assist small and

1 This article is inspired by the work carried out within the ambit of the Development, Sustainability, Taxation and Transparency Research Project (DeSTaT), gathering together the University of Oslo (Norway), the Vienna University of Economics and Business (Austria), the University of São Paulo (Brazil), the University of the Republic (Uruguay), the Colombian Institute of Tax Law (Colombia), the University of Cape Town (South Africa), and the East African School of Taxation (Uganda). Fostered by the Research Council of Norway, the Project investigates, among other matters, taxpayers’ rights in connection with transparency, considers the active involvement of taxpayers in tax procedures and traces a way to achieve sustainable tax governance for developing countries. This article was elaborated to be discussed on the seminar “PYMES y regímenes simplificados desde la perspectiva brasilera. comentarios criticos”, held by Instituto Colombiano de Derecho Tributario (ICDT) on February 10th, 2015, in Bogotá, Colombia, by both the Co-lombian and Brazilian Antennas.

2 PhD Candidate in Tax Law at the University of São Paulo – USP. Master in Tax Law at the University of São Paulo – USP. Specialist in Tax Law at Brazilian Institute for Tax Studies – IBET. Member of the Brazilian Antenna of the DeSTaT Project. Tax lawyer and consultant. I thank the Intituto Colombiano de Derecho Tri-butario (ICDT), particu larly Professor Natalia Quiñonez Cruz, and University of São Paulo (USP), particularly Professor Luís Eduardo Schoueri, both for the kind research support and insightful suggestions. All mistakes and inaccuracies are mine.

* Este artículo puede citarse de la siguiente forma: Caio Augusto Takano. Tax Transparency and Simplified Systems. Revista Instituto Colombiano de Derecho Tributario, núm. 75. Noviembre 2016. At. 59.

« Caio Augusto Takano »

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medium-sized enterprises (SME) to foster competitive conditions among other companies, regardless of their size. This paper focuses on the compatibility of such regimes with the new collaborative-based paradigm of the international tax regime and good tax governance features.

KeywordsSmall and mediumsized enterprises (SME), Simplified systems, Efficiency, Trans-parency, Compliance costs.

ResumenEn la era BEPS, la transparencia fiscal y el intercambio de información entre las autoridades fiscales dentro de un marco coherente para la cooperación interna-cional son características necesarias para aumentar la buena gobernanza en ma-teria tributaria y la aplicación satisfactoria de la legislación fiscal de un país. El desafío actual para los encargados de formu lar las políticas fiscales es armonizar la necesidad de alcanzar altas normas de transparencia en el contexto interna-cional y la norma deseable de simplificación dentro de las leyes fiscales nacio-nales, reduciendo los costos de cumplimiento y creando sistemas simplificados para ayudar a las pequeñas y medianas empresas, Para fomentar las condicio-nes de competencia entre otras empresas, independientemente de su tamaño. Este artícu lo se centra en la compatibilidad de tales regímenes con el nuevo para-digma basado en la colaboración del régimen tributario internacional y las buenas características de la gobernanza fiscal.

Palabras clavePequeñas y medianas empresas (PYME), Sistemas simplificados, Eficiencia, Transparencia, Costos de cumplimiento.

ResumoNa era BEPS, a transparência fiscal e o intercâmbio de informação entre as au-toridades fiscais dentro de um marco coerente para a cooperação internacional são características necessárias para aumentar a boa governança em matéria tri-butária e a aplicação satisfatória da legislação fiscal de um país. O desafio atual para os responsáveis de formu lar as políticas fiscais é harmonizar a necessi-dade de alcançar altas normas de transparência no contexto internacional e a norma desejável de simplificação dentro das leis fiscais nacionais, reduzindo os custos de conformidade e criando sistemas simplificados para ajudar às micro e

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« Tax Transparency and Simplified Systems »

Noviembre 2016 - ISSN: 0122-0799 - Bogotá, Colombia - pp. 59 - 94

pequenas empresas, para fomentar as condições de competência entre outras empresas, independentemente do seu tamanho. Este artigo centra-se na com-patibilidade de tais regimes com o novo paradigma baseado na colaboração do regime tributário internacional e as boas características da governança fiscal.

Palavras-chaveMicro e Pequenas Empresas (MPE), Sistemas simplificados, Eficiência, Trans-parência, Custos de conformidade.

SummaryIntroduction; 1. Effects of Complexity on Taxation and Tax Operating Costs: Why Should Tax Systems be Simplified for Small and Mediumsized Enterprises?, 1.1. Economic Reasons for Simplification, 1.2. Tax Policy Reasons for Simplification, 1.3. Legal Reasons for Simplification, 1.4. Concluding Remarks on Simplification within Tax Systems; 2. Simplified Systems and Exchange of Information in an In-ternational Context; 3. International Tax Transparency and Simplified Tax Sys-tems: A Brazilian Perspective, 3.1. Remarks on Brazilian Simplified Systems, 3.2. Framework of Brazilian Simplified System and International Tax Transparency; 4. Conclusion; 5. Bibliography.

IntroductionIn an integrating world, marked by a globalized economy, countries can no longer believe in absolute tax sovereignty or that they can afford to organize their tax systems solely based on the will of their national legislature.3 Indeed, globaliza-tion carries a paradox: on one hand, states engage with each other in intense tax competition, as well as competition to attract foreign investment; yet on the other

3 Luís Eduardo Schoueri, Tributação internacional, en 111 Revista de Direito Tributário, Malheiros, São Paulo, (2010). Pág. 141. The discussion about tax sovereignty in international tax law has lately gained evidence in the BEPS context. As asserted by Pasquale Pistone, “BEPS is the leading force that moves the substantive side of international tax law, namely the one that concerns the boundaries of connecting factors to a taxing jurisdiction and the way in which it is exercised, towards convergence but without depri-ving States of the essence of their tax sovereignty”. Pasquale Pistone, Coordinating the Action of Regional and Global Players during the Shift from Bilateralism to Multilateralism in International, en Tax Law, 6 World Tax Journals (2014), Journals IBFD. Pág. 6. See also Dagan, Tsilly, International Tax and Global Justice (April 11, 2016). Available at SSRN: https://ssrn.com/abstract=2762110; Irma J. Mosquera Valde-rrama, Legitimacy and the Making of International Tax Law: The Challenges of Multilateralism, 7 World Tax Journal (2015), Journals IBFD; Yariv Brauner, What the BEPS? en 16 Florida Tax Review (2014); and also, notably, Professor K. Sadiq explored the debate on sovereignty in the BEPS context with regard to transfer pricing rules. Karrie Sadiq, A nation’s role in addressing base erosion and profit shifting: Sovereignty in relation to transfer pricing, en New Zealand Journal of Taxation Law and Policy, Vol. 19, No. 4, 2013, Pág. 343363.



hand, they must also co-operate in order to safeguard their own tax systems, as unilateral instruments to prevent tax evasion are clearly insufficient.4 In the current international context, a effective tax system5 is not only concerned with raising tax revenue, but also must be created in an “appropriate” manner, based on the prin-ciple of fair tax competition,6 in order to preserve its tax base.

As demonstrated by Brauner, one of the fundamental insights of the base erosion and profit shifting (BEPS) project, led by the OECD, is the need for a shift from the current international tax regime, based on competition between countries within a bilateral framework, to one based on international coordination and colla-boration as regards tax policies within a multilateral framework.7 In this sense, the BEPS project proves that no country alone – even among those with the strongest economics – is powerful enough to enforce its tax laws within the current compe-tition-based international tax regime8. Coordination between tax policies, rather than unilateral actions, has become decisive in enabling countries to enforce their tax laws in a satisfactory manner.9

In this context, building up consistent and sustainable tax governance plays a key role, establishing a framework for economic growth while encouraging a country to develop a competitive, yet collaborative and fair competition-based tax system. Accordingly, as suggested by Brodzka and Garufi, it is possible to identify three mains features of good tax governance, namely fiscal transparency, tax in-formation exchange and fair tax competition.10

Nonetheless, simplicity must also be on the agenda of tax policymakers. As many economics scholars have emphasized in the last century, an efficient tax system, i.e., a system that aims to be more neutral as possible, with regard to the freedom of competition of the taxpayer11, as so as to interfere the least with the allocation of capital12 and to guarantee that simi lar products are subjected to simi-

4 Claudio Sacchetto, A cooperação fiscal internacional: a troca de informações como instrumento de com-bate à evasão, en 22 Revista Direito Tributário Atual, Dialética, São Paulo, (2008). Pág. 81.

5 Effectivity in the sense of a tax system that is successful in achieving relevant tax revenue collection in terms of cost, compliance and administrative burden.

6 Alicja Brodzka y Sebastiano Garufi, The era of information and fiscal transparency: the use of soft law instruments and the enhancement of good governance in tax matters, en European Taxation, (Aug. 2012). Pág. 402.

7 Yariv Brauner, BEPS: An Interim Evaluation, 6 World Tax Journal, (2014). Pág. 14.8 Yariv Brauner, supra n. 3. Pág. 113.9 “The BEPS project’s most fundamental insight to date has been that international coordination of tax

policies is a condition for the success of any substantial reform; and that by definition, unilateral action, re-gardless of its substance, cannot succeed”. Yariv Brauner, supra n. 6. Pág. 3. In this sense, see also Daljit Kaur y Rachel Saw, The EOI Standard: Past, Present and Future, en Asia-Pacific Tax Bulletin, (January/February 2010). Pág. 14.

10 Alicja Brodzka y Sebastiano Garufi, supra n. 6. Pág.402.11 Luís Eduardo Schoueri, Direito tributário. Pág. 4546. Saraiva, São Paulo (4ª edición, 2014).12 Ricard Abel Musgrave, Fiscal systems. Pág. 248250. Greenwood Press, Connecticut (1981).

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lar tax incidences13, also must pursue simplicity, which involves the reduction of taxes, the simplification of the law and the decrease in compliance costs.14 In fact, the tax burden is economically relevant in the decision making of investors and business; complex tax law often jeopardizes legal certainty; and compliance costs may lead taxpayer to informality or may encourage tax evasion (besides others undesirable distributional effects15).

These ideas will be further developed, yet one shall remark that simplici-ty and efficiency are interwoven concepts that maintain an inherent relationship, in that an efficient tax system presupposes simplicity. Tax obligations that are too costly to the taxpayer or excessively complex ultimately encourage non-complian-ce and, therefore, undermine a fair and efficient tax collection. Subjectivism due complex legislations and loopholes in tax system also impairs legal certainty for taxpayer, for it will not be possible to ascertain whether their tax obligation was co-rrectly paid, overpaid or underpaid16.

The actual challenge for a state within the current international landscape is to harmonize the goals from both simplification and good tax governance prac-tices, as simplification – notwithstanding positive to a tax system – may imply “partial opacity” of SMEs, affecting tax authorities’ access to information. Indeed, reducing tax reports and other ancillary obligations requirements to SMEs may impair the access of Tax Administration to some specific (and relevant) informa-tion regarding to these taxpayers or to information about other taxpayers held by them, thus potentially conflicting with international standards of transparency and exchange of information norms.

The first goal of this paper is to demonstrate the effects of complexity in ta-xation and to investigate the reasons why tax systems should be simplified, espe-cially as regards small and mediumsized enterprises (SMEs). A brief overview of the main arguments for simplification will be provided in Section 2, while Section 3 analyses whether simplified systems for SMEs have a negative impact on the international standards on transparency and exchange of information, or whether such systems undermine the co-operation and anti-evasion goals that tax trans-parency aims to accomplish.

13 Paulo Caliendo, Princípio da neutralidade fiscal: conceito e aplicação, en Princípios de direito financeiro e tributário: estudos em homenagem ao professor Ricardo Lobo Torres (Heleno Taveira Tôrres y Adilson Rodrigues Pires (coord.), Renovar, Rio de Janeiro, 2006). Pág. 537.

14 See Adam Smith, Book V, Chapter II, Part 2 (“Of taxes”). Also Luís Eduardo Schoueri, supra n. 10. Pág. 46.

15 Cedric Sandford (ed.), Tax compliance costs measurement and policy. Pág. 45. Fiscal Publications, Bath. (1995).

16 Vito Tanzi, Complexity in taxation: origin and consequences, en Direito tributário internacional aplicado. Volume VI (Heleno Taveira Tôrres coord., Quartier Latin, São Paulo, 2012). Pág. 31.



The second goal of this article is to further investigate the relationship bet-ween simplification and tax transparency. In this sense, the simplified systems provided for SMEs under Brazilian law offer an excellent opportunity to analyse the consistency of such regimes according to both their equity and constitutional goals and the international standard on transparency. Section 4 will discuss how Brazilian laws support favourable treatment of SMEs and the extent to which they achieve enhanced simplicity and formalisation, as well as whether such simplified systems are sustainable and justifiable in long run. Finally, section 5. outlines the author’s conclusions.

1. Effects of Complexity on Taxation and Tax Operating Costs: Why Should Tax Systems be Simplified for Small and Medium-sized Enterprises?

Simplicity has often been suggested as a goal in many tax systems designed by scholars of economics17 and Tax Law18. Those were undoubtedly influenced by Adam Smith in his Inquiry into the Nature and Causes of the Wealth of Nations,19 in which he sets out his four maxims of good tax practice while investigating the functions and objectives of taxation. With regard to complexity, two maxims are of special note, namely the principle of convenience and the principle of economy. According to the former, “every tax ought to be levied at the time, or in the manner, in which it is most convenient for the contributor to pay it”, while under the latter, “every tax ought to be so contrived as both to take out and to keep out of the poc-kets of the people as little as possible over and above what it brings into the public treasury of the state”.

These principles, whilst conceived in the era of liberalism, have still conti-nued to be referred to with reverence and respect by scholars today20, and do

17 Stiglitz suggests that any tax system should have “five desirable characteristics”: economic efficiency, administrative simplicity, flexibility, political responsibility and fairness. See Joseph Stiglitz, Economics of the Public Sector, Pág. 390409. W. W. Norton & Co. New York (2ª Edición, 1988).

18 Novoa argues that “la simplificación de los sistemas tributarios constituye uno de los grandes retos de la fiscalidad de nuestros días, ya que, por muchas razones, los ordenamientos fiscales se han ido convirtien-do en realidades cada vez más complejas”. See César García Novoa. El reto de la simplificacion de los sistema tributarios. en Princípios de direito financeiro e tributário: estudos em homenagem ao professor Ricardo Lobo Torres (Heleno Taveira Tôrres y Adilson Rodrigues Pires (coord.), Renovar, Rio de Janeiro, 2006). Pág. 319343.

19 See Book V, Chapter II, Part 2 (“Of taxes”).20 References to Adam Smith’s theory may be found in many studies in tax matters. It has been often referred

in economic studies about optimal tax system, as in Rozane Bezerra Siqueira, José Ricardo Nogueira y Ana Luiza Neves de Holanda Barbosa, Teoria da tributação ótima, en Economia do Setor Público no Brasil (Ciro Biderman y Paulo Arvate org., Elsevier, Rio de Janeiro, 2004). Pág. 174176. Also the four maxims of Adam Smith are the touchstone for the discussion about compliance costs or tax complexity. In this sen-se, see Cedric Sandford, Hidden costs of taxation. Pág. 23. Institute for Fiscal Studies, London. (1973); Vito Tanzi, Complexity in taxation: origin and consequences, en Direito tributário internacional aplicado.

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not deviate from what is still understood.21 The fundamental idea beyond these maxims is that “payment to comply with a tax”, which summarizes the indirect costs of taxation (the costs incurred by taxpayers or third parties in meeting the re-quirements imposed upon them in complying with tax law), is the antithesis of an efficient tax system. Indeed, if it is already burdensome for taxpayers to comply with taxes, much more dissatisfaction is caused by bureaucratic costs related to tax assessments by public authorities.22

This means that policymakers must not assume that taxpayers’ shoulders are “broad enough to support whatever burden falls on them”.23 As excessive com-pliance costs can affect the level of tax compliance, it is highly recommended that the procedure for paying taxes be simplified as much as possible, keeping the costs of collecting taxes at a minimum so as to protect taxpayers from additional and unnecessary burdens.24

Nonetheless, there is strong evidence of the increasing complexity within many tax systems lately, as noted in a recent study by Tanzi, both quantitatively (as determined from various studies and publications) and qualitatively (obser-ved from statements by tax experts and political figures from various countries).25 Thus, immediately a first question arises, namely why, in this case, are numerous tax systems complex.

Schoueri describes three reasons for this complexity: (i) excessive number of ancillary tax obligations under Brazilian tax system, especially the obligation to keep documents and accounting books for long periods of time (often longer than 5 years), (ii) legal distinctions made in order to enforce the principle of equality and (iii) social complexity itself. In a complex economy, the more opportunities that tax policymakers have to impose taxes, the better the options that arise to identify the more appropriate moment for tax incidence so as to accomplish different objecti-ves of taxation (such as the allocative or inductive objective).26

For this reason, the lumpsum taxes (so advocated by scholars of econo-mics27), which offer indispu table advantages as regards simplification, could not

Volume VI (Heleno Taveira Tôrres coord., Quartier Latin, São Paulo, 2012). Pág. 3032; and Luís Eduardo Schoueri, Direito tributário, supra n. 10. Pág. 4849.

21 Luís Eduardo Schoueri y Mateus Calicchio Barbosa, Transparency: from tax secrecy to the simplicity and reliability of the tax system, en 5 British Tax Review, Sweet & Maxwell, London (2013). Pág. 678.

22 Luís Eduardo Schoueri, supra n. 11. Pág. 46.23 H. David Rosenbloom, Where’s the pony? Reflections on the making of international tax policy, en Bulletin

for International Taxation. IBFD, Amsterdam (2009). Pág. 538.24 Alicja Brodzka y Sebastiano Garufi, supra n. 5. Pág. 401.25 Vito Tanzi, supra n. 16. Pág. 3237.26 Luís Eduardo Schoueri, supra n. 11. Pág. 4950.27 See Edwin R. Seligman. Essays in taxation. Macmillian, New York (décima edición, 1931). Pág. 66. Also

Ciro Biderman and Paulo Arvate assert that a lumpsum tax is the best option for a taxation that provides for economic efficiency and carries no distortive effect in the economy (as would not influence investors



be successfully implemented in contemporary tax systems, as such taxes would simply not adequately take into account the complexity of contemporary so-ciety or even the characteristics of an individual tax system. For example legal systems (such as the Brazilian system) which provide for the ability-to-pay prin-ciple, impose subjective considerations as to the taxpayer’s economic situation as a requirement to imposing taxes. Such systems have a tendency to be more complex, as defining income and determining whether, when and to whom to re-cognize income and expenses for tax purposes unquestionably fuel the growth of complexity.

Furthermore, as Rosenbloom asserts, national tax systems reflect the his-tory, culture, values and needs of the countries that adopt them,28 so that it is not surprising that some level of simplification is sacrificed so that a tax system will adequately respond to the needs and values of a nation (such as the ability-to-pay principle and measures set forth to enforce the principle of equality) and to foster the success of tax policy measures, through taxation.

Thus, complexity arises as a consequence of the various attempts by le-gislative and executive branches to respond to the heterogeneity of different tax systems of distinct countries, with diverse needs and values.29 In the Brazilian context, the inherent difficulties of the federative model of government and the complexity which arises as a consequence of legal systems that fight against fa-vouritism or corruption, must be also taken into account when investigating the Brazilian tax system.30

Tanzi also raises an interesting issue as regards the effects of the passing of time on the increase in complexity within a tax system. He hypothesizes that, over the years, the many small changes (which the author refers to as “honey bee changes”) may “significantly modify a tax system with respect of their allocative efficiency, their contributions to public revenue, their equity and tax incidence, and their administrative and compliance costs”.31

Therefore, if complexity unavoidably emerges due to the very complexity of society, to the passing of time and also to the other objectives and functions of

and business organization), although such tax may be very difficult to implement. See Economia do Setor Público no Brasil (Ciro Biderman y Paulo Arvate org., Elsevier, Rio de Janeiro, 2004). Pág.XII and XIII.

28 H. David Rosenbloom, supra n. 23. Pág. 535.29 As Bird asserts: “The sad truth is that taxation is complicated mainly because the world is complicated.

Complex and differentiated language is needed to cope adequately with the reality of the heterogeneity of the world and the taxpaying public”. Richard Bird, Transparency and taxation: some preliminary reflections, en Transparência fiscal e desenvolvimento: homenagem ao professor Isaias Coelho (Eurico Marcos Diniz de Santi coord . [et al], Quartier Latin, São Paulo 2014). Pág. 184.

30 Luís Eduardo Schoueri, supra n. 11. Pág. 50.31 Vito Tanzi, supra n. 16. Pág. 2425.

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taxation (such as the inductive function of taxes),32 then a second question that arises concerns the effects of complexity on a tax system and why tax policy-makers and scholars ought to be concerned about it.

For a comprehensive answer to these questions, some remarks on the pers-pectives of economics, tax policy and law are in order.

1.1. Economic Reasons for SimplificationMoody, Warcholik and Hodge suggest that the performance of the economy is “dramatically” affected by the level of complexity in tax law.33 As Payne argues, tax complexity offers a “triple threat” to the tax system, as (i) it increases compliance burdens, adding to waste and frustration, (ii) it increases the subjectivity of the tax system and (iii) it encourages tax evasion, which undermines taxpayer trust and confidence in the system, even that of “the leftwing devotees of taxation”.34 Such effects have been the subject of concern by economists and the literature of eco-nomics35, as they have an impact on the level of competitiveness of private com-panies – either within the domestic or international market, as well on the revenue and distributive policies of the public sector.

Indeed, complex tax systems often mean higher compliance costs for taxpa-yers and higher administrative costs for tax administrations,36 therefore increasing overall “tax operating costs”, to use the terminology employed by Sandford.37 This is particu larly worrying within a context of present growth in the phenomenon of the privatization of tax management,38 in which public costs and the responsibili-ties for operating the tax system are borne mainly by the private sector.

As compliance costs are horizontally inequitable and with a marked ten-dency towards regressiveness,39 such costs are not evenly spread (yet they are

32 See Luís Eduardo Schoueri, Normas tributárias indutoras e intervenção econômica. Forense, Rio de Ja-neiro (2005).

33 J. Scott Moody, Wendy P. Warcholik y Scott A. Hodge, The rising cost of complying with the Federal Inco-me Tax, en 138 Tax Foundation: Special Report (Dec. 2005). Pág. 2.

34 James L. Payne, Explaining the persistent growth in tax complexity, en Politics, taxation and the rule of law: the power to tax in constitutional perspective (Donald P. Racheter y Richard E. Wagner eds.. Kluwer Academic Publishers, Boston. 2002). Pág. 173.

35 See Christian R Jaramillo Herrera. Presumptive Income Taxation and costly tax compliance. Department of Economics, University of Michigan. Pág. 4. <http://wwwprof.uniandes.edu.co/~chjarami/jaramillo_pre-sumptive_taxes_20050330.pdf>. (March, 2005).

36 Vito Tanzi, supra n. 16. Pág. 31.37 “The public and private costs taken together may be referred to as tax operating costs”. Cedric Sandford,

Michael Godwin y Peter Hardwick, Administrative and compliance costs of taxation. Pág. 22. Fiscal Publi-cations, Bath. (1989).

38 José Juan Ferreiro Lapatza, La privatización de la gestión tributaria y las nuevas competencias de los Tri-bunales Económi co-Administrativos, en 37 Revista Española de Derecho Financiero (1983). Pág. 8193.

39 Cedric Sandford, supra n. 20. Pág. 146.



“fixed”40), falling disproportionately on small firms, i.e., a smaller enterprise bears a heavier tax burden than larger firms, as such costs represent a greater share of its business turnover.41 And so, as stated by Sandford, it follows that “where small firms are competing in the same market with large firms (as in most retailing, for example) they are being put under a statecreated competitive disadvantage”. He further concluded that “compliance costs then become a factor helping to push small firms out of particu lar markets”.42 Although these remarks were made based on studies and surveys from the 1980s, there is no evidence that such conclu-sions would be any different today. In fact, a later study by Evans confirmed the results of over 60 studies carried out since 1980 regarding compliance costs, in-cluding in respect of their regressive nature.43

Even among large enterprises, compliance costs also have a negative impact, as they represent significant losses of operating capital. Schoueri gives an interesting example, reporting a study by the Federation of Industries of the State of São Paulo (Federação das Indústrias do Estado de São Paulo, FIESP) which indicated that compliance costs for industries in 2013 were approximately 1.16% of their business turnover – almost twice the value of investments made in R&D in that year.44

In smaller firms, such effects are expected to be more intense, as such firms proportionally suffer from the loss of working capital required to comply with their tax obligations more so than larger companies. In an early study regarding com-pliance costs, Müller found that most records maintained by small businessmen were kept primarily for tax purposes and that those accounting records would not serve any of purpose in the operation of the firm, as costs for an accountant would be drastically lower if not for the numerous tax requirements.45 This means

40 The author recognizes that such costs may be influenced by other market factors. For example the entrepreneur’s ability to obtain better prices from suppliers may influence the real cost of an asset that taxpayers overall need to comply with their taxes (such as computers or specific electronic systems), and, thus, indirectly affects the burden of compliance. Nonetheless, by use of the term “fixed”, the author seeks to oppose such costs to other types of tax burdens that somehow consider the ability to pay or subjective aspects of the taxpayer.

41 Thus, it is asserted that small firms have “inverse economies of scale” in relation to compliance costs. Na-jeeb Memon, How to tax small businesses in the informal economy: a comparative analysis of presumptive income tax designs, en Bulletin for International Taxation (May 2010). Pág. 292.

42 Cedric Sandford, Michael Godwin y Peter Hardwick, supra n. 37. Pág. 200.43 Chris Evans, Studying the Studies: An overview of recent research into taxation operating costs, en 64

eJournal of Tax Research (2003). Pág 129.44 Luís Eduardo Schoueri, supra n. 11, p. 491. Also concerns the study by Latin Business Chronicle, which

pointed that Brazilian taxpayers spend about 2,600 hours (or 108 days) to pay taxes per year, according to The World Bank – the highest number in Latin America and the worst among 149 countries worldwide. <http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/AnnualReports/English/DB14FullReport.pdf> (28 August, 2016).

45 Fred J. Müller, The burden of compliance. Pág. 57. Seattle Bureau of Business Research, N.C.: Washing-ton State Department of Commerce and Economic Development. (1963).

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that in addition to incurring high compliance costs, such costs will not benefit the business.

Furthermore, complexity increases the subjectivity of the tax system, as there are countless potential differences in the interpretation of rules, despite the efforts of legislators to reduce ambiguity in the law. This means that, even though such legal provisions were most often established to provide objective criteria for dis-tinctions made on the basis of the principle of equality, the countless possibilities for interpretations of such rules46 – by either taxpayers or the tax authorities – un-dermine certainty as regards how taxes will affect taxpayers’ businesses (activi-ties or investments) and also creates a gap whereby tax authorities or judges may grant different treatment to some taxpayers – commonly the richest and those with the best lawyers or capacity for lobbying – and not to other taxpayers in equal situations.

However, such unpredictability in the tax consequences of economic activi-ties imposes major difficulties for national enterprises seeking to compete in an in-ternational context.47 In addition to high compliance costs, this means a not very promising scenario for national enterprises – both to compete abroad and to at-tract foreign investment – which unquestionably will affect the particu lar country’s economy.

1.2. Tax Policy Reasons for SimplificationComplexity also matters for tax policy purposes. As asserted by Sandford, more informed decisions could be reached by policymakers if the existence of complian-ce costs were recognized, if their characteristics were known and their magnitude could be measured.48 Indeed, a significant part of the problem of tax noncom-pliance can be attributed to the complexity of tax laws and high compliance costs, especially as regards voluntary compliance.49

Thus, tax policy must aim to facilitate compliance, assuring that those who should be in the system indeed are in the system and that they comply with tax law. Therefore, taxpayers must be found. If they are required to register, the re-

46 Regarding this issue, Karl Larenz asserts that there is no such thing as an “absolutely correct interpreta-tion” of legal text. Karl Larenz. Metodologia da ciência do direito. Pág. 443. Fundação Calouste Gulben-kian, Lisboa. (4ª edición, 2005).

47 Such conclusion was also reached by Paulo Ayres Barreto when analysing the consumption taxes in Bra-zil. See Paulo Ayres Barreto, Tributação sobre o consumo: simplicidade e justiça tributária, in Tributação e desenvolvimento: homenagem ao professor Aires Barreto (Eurico Marcos Diniz de Santi ed., Quartier Latin, São Paulo, 2011). Pág. 531.

48 Cedric Sandford, supra n. 37, p. xiv.49 John Hasseldine, Linkages between compliance costs and taxpayer compliance research, en Bulletin for

International Taxation (June 2000). Pág. 303.



gistration process should be as easy as possible, and taxpayers must be properly assisted in order to make taxpayer compliance with the system as easy as possi-ble.50 Overly complicated tax systems and high compliance costs encourage eva-sion and are often associated with larger informal sectors, more corruption and less investment,51 especially concerning to small and medium-sized enterprises. As demonstrated by Jane E. Larson, many economists (especially those influen-ced by the work of Hernando de Soto) explain informality as “a product of irratio-nal or oppressive governmental regulation that makes entry into the formal market too burdensome or costly” 52. High compliance costs and hard to interpret legisla-tion arising from tax will certainly impose major obstacles to a taxpayer to unders-tand statutory provisions of Tax Law and comply with their tax obligations. Those taxpayer which may be not able to overcome such obstacle (due the regressive nature of compliance costs or due financial limi tations to hire a tax specialist) may have no other choice than operate their business aside from formal sector.

With regard to tax policy, complexity essentially offers two kinds of challen-ges, both related to compliance costs, namely (i) the loss of potential revenue and (ii) distortions in the desired outcome of distributive or allocative policies. Informa-lity leads to losses of revenue and taxpayer filings that could help a tax administra-tion to understand the extent and nature of the potential tax base and to properly allocate its resources to improve tax collection, as well as to ensure that everyone bears “at least a roughly fair share of the tax burden”.53

Also, studies suggest that compliance costs also have a negative impact on the outcome of distributive or allocative policies. Strümpel, the author of the first known specific study of compliance costs outside the United States, noted that the regressive nature of compliance costs is inconsistent with the goals of progres-sive income taxation and equality of a tax system, as the regressiveness of such costs “also raises serious questions as to the capacity of modern income tax legis-lation to put into effect any ideas of equity on which it may be based”.54 In his con-clusions, Strümpel stated that a rational tax policy must be aware of the “hidden costs of taxation”, as the indirect tax burden is fully or partially balanced by evasi-ve behaviour of taxpayers and, thus, also reduces the possible effects of tax poli-cies based on equity.55

50 Richard Bird, supra n. 29. Pág. 172173.51 PricewaterhouseCoopers/The World Bank. Doing Business 2014: Understanding Regulations for Small

and MediumSize Enterprises Paying Taxes. Pág. 101. The World Bank and the International Finance Corporation, Washington. (11ª edición, 2013).

52 Jane E. Larson, Informality, Illegality, and Inequality, en 20 Yale Law & Policy Review (2002). Pág. 157.53 Richard Bird, supra n. 29. Pág. 174.54 Burkhard Strümpel, The disguised tax burden, en 19 National Tax Journal (1966). Pág. 7077.55 Burkhard Strümpel, supra n. 54. Pág. 77.

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1.3. Legal Reasons for SimplificationCompliance costs, despite being a concept of economics, matter also from a legal perspective. The effects thereof are not neutral on the legal system, but rather may affect the structural fairness of a tax system and thereby impair the princi-ple of equality. This is particu larly relevant regarding the establishment of ancillary obligations for taxpayers, specifically those legal duties imposed on taxpayers or third parties in order to aid in tax assessment, by providing information or filing re-turns with the tax authorities, or acting as collection agents on behalf of the tax authorities. Whilst necessary, such obligations are the main cause of compliance costs for taxpayers and, therefore, tax authorities should not be free to introduce new ancillary obligations into the system without a convincing reason for doing so.

Taxpayer rights to equality and to free enterprise can be undermined by ex-cessive compliance costs.56 Indeed, with regard to equality, the regressive effects of such costs means that small taxpayers will proportionately bear a heavier tax burden than do larger taxpayers. If equality implies relativity,57 not forbidding the law to provide for different treatments of citizens, but rather requiring reasons and reasonable criteria for such distinct treatments,58 the principle of equality is jeopar-dized if there is no convincing reason beyond the establishment of new tax rules or ancillary obligations.

The statement by Neumark is thus correct that costs related to tax as-sessment, collection and auditing, either those borne by the tax authorities (admi-nistrative costs) or taxpayers or third parties (compliance costs) ought not exceed the minimum needed to satisfactorily meet the goals of taxation.59 This is the ben-chmark for identifying whether such costs are justified.

Therefore, from a legal perspective, simplification of the legal framework for SMEs through the creation of a simplified system is a consequence of the princi-ple of efficiency and the principle of equality. Such a system could bring SMEs to the desired minimal standards of compliance costs (keeping to a minimum – yet necessary – level of expenses related to materials, experts, accountability, etc.), providing real conditions for competition in the domestic or international market, even against larger enterprises. Reducing compliance costs for SMEs hinders dis-tortive economic effects from legal obligations of taxpayer and also minimises the regressiveness of the system – and thus inequality.

56 Caio Augusto Takano, Os limites impositivos aos deveres instrumentais tributários, en 27 Revista Direito Tributário Atual. Dialética, São Paulo. (2012). Pág. 293304.

57 Klaus Tipke. Princípio da igualdade e idéia de sistema no direito tributário, en Direito tributário: estudos em homenagem ao prof. Ruy Barbosa Nogueira (MACHADO, Brandão coord. Saraiva, São Paulo, 1984). Pág. 519.

58 Luís Eduardo Schoueri, supra n. 11, Pág. 336.59 Fritz Neumark. Principios de la imposición. Pág. 440. Instituto de Estudios Fiscales, Madrid. (1974).



Finally, complexity also matters for the legal framework of a tax system, as it can encourage tax evasion. Indeed, the negative consequences of tax eva-sion are well known. On one hand, honest taxpayers are subjected to a higher tax burden than that which could be considered fair; on the other, the evading taxpayer obtains illicit economic advantages, enabling such taxpayers to offer better prices on the market.60 Such situations leads to distortions of competition, as taxpayers themselves benefit from the precariousness of tax collection and the audits system in order to obtain competitive advantage over their rivals. Such rivals might not be able to bear such competition in long run and, thus, would be obliged to withdraw from the market61 or even pursue to tax evasion schemes in order to survive.62

Such arguments indicate that complexity in taxation often means grounds for tax evasion. Thus, simplified systems also may be helpful to tackle domestic tax evasion and prevent tax base erosion, as they promote high standards of transpa-rency and voluntary compliance through formalisation of SMEs.

1.4. Concluding Remarks on Simplification within Tax Systems

“Both persons required to comply with the laws and those that must apply them are fallible, and their ability to deal with complexity is not infinite”.63 Therefore, complexity in taxation ought to be acknowledged by tax policymakers as a key issue to overcome in building a sustainable tax system. Overly complex tax sys-tems often leads to tax evasion and high compliance costs, which may jeopardize fairness and efficiency of those legal systems.

Realistically, although some level of complexity in the tax system is unavoi-dable in order to accomplish equity goals (i.e., the “use of the income tax system as a vehicle for numerous social policies that are unrelated to raising revenue”64), this should not mean that simplification shall not be pursued at all. In order to mi-tigate the negative effects of complexity, simplification measures must be on the agenda of policymakers and must be implemented as possible.

60 Aliomar Baleeiro. Uma introdução à Ciência das Finanças. Pág. 198. Forense, Rio de Janeiro. (17ª edi-ción, 2010)

61 Luís Eduardo Schoueri, supra n. 11. Pág. 363.62 Ives Gandra da Silva Martins, Obrigações acessórias no interessa da fiscalização e da livre concorrência

entre empresas – Direito assegurado ao fisco pelas leis suprema e complementar, en 105 Revista Dialé-tica de Direito Tributário. Pág. 137. Dialética, São Paulo. (2004).

63 H. David Rosenbloom, supra n. 23. Pág. 538.64 Joel Slemrod. The etiology of tax complexity: evidence from U.S. state income tax systems, en Public

Finance Review, vol. 33 n. 3. Pág. 281. Sage Publications (2005).

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Notably with regard to compliance costs, its impacts on economic business follow an inverse relation with the economic size: negative effects of complexity are heavily felt by small and medium enterprises, hindering at times their poten-tial to economic growth. This means that domestic enterprises may face more ad-verse conditions regarding taxes to compete in the market of its own country than multinational enterprises.

Thus, simplified systems for SMEs should not be regarded as a “favour” from tax authorities or policymakers, but rather as a claim of the principle of equali-ty, providing conditions of competitiveness regardless of the size of the business and minimizing the regressiveness and horizontal inequity of compliance costs. In the author’s view, gains concerning structural fairness and administrability are also possible through the reduction of tax evasion and informality rates with such regimes.

2. Simplified Systems and Exchange of Information in an International Context

The notion of tax transparency – understood by the OECD and the Global Forum as the broad access of tax authorities to a taxpayer’s personal data65 – increasin-gly plays a significant role in the current process of transformation of the interna-tional tax regime,66 in which effective co-operation and exchange of information between tax authorities of different jurisdictions are conceived as key elements to counter harmful tax competition and tax base erosion caused by aggressive tax planning of multinationals enterprises,67 allowing tax administrations to better un-derstand the mechanics of structures used by taxpayers in their tax planning.

Yet, the challenge is to reconcile the interests of all countries involved in the exchange of information procedures, especially between developed and develo-ping countries. Some major concerns about the current development of exchan-ge of information network are: (i) protection of the tax interests of the requested states, as it is unclear whether and to what extent a legal obligation of Requesting

65 Luís Eduardo Schoueri y Mateus Calicchio Barbosa, supra n. 21. Pág. 670. See also Global Forum on Transparency and Exchange of Information for Tax Purposes. Terms of reference to monitor and review progress towards transparency and exchange of information for tax purposes. Pág. 3. OECD Publishing, Paris. (2010).

66 As Brauner argues, the BEPS project proves that the actual competitionbased paradigm of international taxation has failed and BEPS project introduced some interesting insights regarding a reform, recognizing the need for innovative solutions and somehow addressing to a shift to a future multilateral, collaborative regime. Yariv Brauner, supra 3. Pág. 56115.

67 “ …from a practical tax administration viewpoint, one of the most powerful anti-avoidance provisions in DTAs [income tax treaties] is the ability of the tax authorities in each contracting state to exchange infor-mation about taxpayers”. Kevin Holmes. International tax policy and double tax treaties: an introduction in principles and application. Pág. 391. IBFD, Amsterdam. (2007).



State exists toward its information suppliers (including the tax secrecy of the re-ceived information);68 (ii) protection of fundamental rights of taxpayer, especially the due process of law and privacy, so long as there are no effective mechanisms in Exchange of information procedures to ensure the respect of such rights;69 (iii) costs incurred by developing countries as Requested State to provide the infor-mation and also the possible lack of suficiente expertise to do so;70 (iv) the imbal-ance between the information flows between the two countries, which implies a inequitable distribution of financial costs of maintaining the information exchange framework;71 and (v) proportionality on the exchange of information for tax purpos-es between States.72 Moreover, some states that levy its income tax on territorial basis may not be stimu lated enough to incur the costs for exchange of informa-tion in the absence of an obvious and direct benefit on its tax revenue, in despite of possible gains regards tackling tax evasion.

Despite the ongoing discussion on the issues mentioned above, transpa-rency and exchange of information between tax authorities within a consistent framework of international cooperation are significant features to build good go-vernance in tax matters. Besides the purpose of tackling tax avoidance, opacity and money laundering, the exchange of information also plays a role in building an efficient tax system regards income tax levied on worldwide basis and providing for fair tax competition. As countries are not allowed to enforce their tax law out-side the limits of their own territory (in order to not violate the sovereignty of other states),73 relevant information about taxpayers may not be accessible in tax autho-rities’ domestic databases and, thus, potentially affects tax collection and the fair share of the tax burden among compliant taxpayers. States may encounter obsta-cles to collect the income of its resident taxpayer earned abroad if such state has no mean for identify that income..

Therefore, exchange of information plays a fundamental role not only in the ability of states to successfully carry out coordinated actions to tackle harmful tax competition, but also in the protection of their tax base, through the possibility to enforce their own domestic tax laws regardless the location of their taxpayers.

68 Tonny SchenkGeers, International Exchange of Information and the Protection of Taxpayers. Pág. 159. The Netherlands, Kluwer (2009).

69 Luís Eduardo Schoueri y Matheus Calicchio Barbosa, supra n. 21. Pág. 681.70 Miranda Stewart, Transnational tax information exchange networks: steps towards a globalized, legitimate

tax administration, en World Tax Journal. Amsterdam, IBFD (2012). Pág. 177178.71 Luís Eduardo Schoueri y Matheus Calicchio Barbosa, supra n. 21. Pág. 672.72 Sérgio André Rocha. Exchange of TaxRelated Information and the Protection of Taxpayer Rights: General

Comments and the Brazilian Perspective, en Bulletin for International Taxation. Pág. 504. Amsterdam, IBFD (september 2016).

73 Alberto Xavier. Direito Tributário Internacional do Brasil. Pág. 657. Rio de Janeiro, Forense. (7ª edición, 2010).

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In such context, transparency is a key element, as it is “inherently related to exchange of information, as data can only be exchanged once it is available”.74 And the accessibility of information in most cases depends on mechanisms that ensure transparency regarding relevant information about the taxpayer, especia-lly those located in other jurisdictions. Information that, not rarely, would not be ob-tained otherwise.

Not surprisingly many countries – whether or not members of the Global Forum on Transparency and Exchange of Information for Tax Purposes75 – have adhered to the exchange of information standard.76 In this regard, the 2014 Annual Report by the Global Forum on Tax Transparency pointed to a “widespread ac-ceptance that all jurisdiction need to implement the international standard of trans-parency and exchange of information if international tax evasion is to be tackled successfully”.77

A comprehensive study of the framework or the effectiveness of such stan-dard is beyond the scope of this paper.78 Nonetheless, one issue deserves espe-cial attention: the institution of simplified systems, whilst unquestionably positive for the reasons highlighted above pursuant to the goals of efficiency, equity and fairness, also concerns the effectiveness of key principles of the exchange of in-formation standard, namely the availability of information and powers to obtain it (access to information).

74 Alicja Brodzka y Sebastiano Garufi, supra n. 6. Pág. 397.75 The Global Forum on Transparency and Exchange of Information for Tax Purposes was created by the

OECD in 2000 to provide a forum for achieving and implementing high standards of transparency in the exchange of information in an equitable manner, whilst still allowing for fair competition between all juris-dictions (including nonOECD jurisdictions), and institutionally reports to the G20 on its restructuring and progress.

76 The exchange of information standard was developed by OECD member countries and also non-members working together in the OECD Global Forum on Transparency and Exchange, establishing as the following key principles of transparency and information exchange for tax purposes: (i) exchange of information on request where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of the treaty partner, (ii) no restrictions on exchange caused by bank secrecy or domestic tax interest requi-rements, (iii) availability of reliable information and powers to obtain it, (iv) respect for taxpayer rights and (v) strict confidentiality of information exchanged. Daljit Kaur y Rachel Saw, supra n. 8, Pág. 15.

77 OECD, Annual Report of the Global Forum: Tax Transparency 2014: Report on Progress (2014), pág. 16, available at: http://www.oecd.org/tax/transparency/GFannualreport2014.pdf. (accessed August 28th, 2016). Nonetheless, it is worth noting that such widespread acceptance of the new standard of exchange of information and its legitimacy pursuant nonG20 contries, especially developing countries were ques-tioned by some scholars. As asserted by Ricardo García Antón, “both the BEPS Project and the mutual assistance in the exchange of information have been set up under the auspices of the OECD following the G20’s mandate, which obviously does not represent the vast majority of countries of the world and, therefore, raises concerns of legitimacy for nondeveloped countries”. Ricardo García Antón, The 21st Century Multilateralism in International Taxation: The Emperor’s New Clothes?, en 8 World Tax Journal, Págs. 175181. Amsterdam, IBFD (2016).

78 Daljit Kaur y Rachel Saw, supra n. 9. Págs. 1419. Focusing on the exchange of information standard in income tax treaties (article 26), albeit from a Brazilian perspective, see Sérgio André Rocha. Apontamen-tos sobre a troca de informações nas convenções para evitar a dupla tributação da renda, en 181 Revista Dialética de Direito Tributário. Págs. 143152. Dialética, São Paulo. (2010).



In fact, as simplification means a reduction of formal (bureaucratic) require-ments for tax compliance (such as accounting, tax return filling, bookkeeping obli-gations and other periodic declarations), which in turn reduces compliance costs that fall on taxpayers, at a first sight, one could conclude that simplified systems hinder the transparency goals of a tax system, as they arguably will increase the “partial opacity” of small and mediumsized enterprises entitled to such regimes and, thus, diverging from the international exchange of information standard, as a country will have less information at its disposal.

The rationale underlying this statement is as follows: as the requested state is obliged to provide only that information which is obtainable under its domestic laws,79 as set forth by article 26 of the OECD Model Convention80 and article 7 of the Model Agreement on Exchange of Information on Tax Matters,81 and simpli-fied systems also reduce the scope of information that could be regularly obtained under the law of that state82, some concerns arise as regards the scope of the sta-tutory power of one state to gather information (de jure reciprocity),83 as opacity may increase the number of situations in which a requested state refuses to pro-vide information by asserting that the state is not allowed to obtain such informa-tion under its domestic law.

In this author’s opinion, the argument deserves to be questioned. Although simplification undoubtedly affects the quantity of information obtainable by a state through a SME, it is not immediate that this will also always imply losses regar-ding the quality of the information. Accordingly, simplification in tax returns, com-puterized data and accounting books under simplified systems do not necessarily reduce the availability of relevant information regarding taxpayers or their busi-

79 Heleno Tôrres argues that such limi tation is “intuitive”, as the tax administration is inexorably bounded to Principe of Legality. Heleno Taveira Tôrres. Pluritributação internacional sobre as rendas de empresa. Pág. 676. Revista dos Tribunais, São Paulo. (2ª edición, 2001).

80 Art. 26(3)(b)(3). “In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State”. As asserted by Michael Lang, since the 2011 Update of the UN Model, its article 26 basically reproduces article 26 of OECD Model, with two deviations, in article 26(1) and (6), which do not affect the conclusions of this paper. Michael Lang. Introduction to the law of double taxation conventions. Pág. 157. Linde Verlag, Viena. (2ª edición, 2013).

81 Art. 7 (1): “The requested Party shall not be required to obtain or provide information that the applicant Party would not be able to obtain under its own laws for purposes of the administration or enforcement of its own tax laws. The competent authority of the requested Party may decline to assist where the request is not made in conformity with this Agreement”.

82 Such arguments were presented within a legal framework of bilateral agreements on exchange of infor-mation based on information requests. In this author’s opinion, as from the new automatic and multilateral exchange of information standard, relevant information regards SMEs may be obtained without the need to increase compliance costs of such enterprises (for example, such data can be provided by a financial institution) and without jeopardising any rule of a simplification tax regime of one state. includes relevant information on SMEs. Furthermore, the author is unaware of requests of exchange of information with regard to data of SMEs or information that could only be provided by SMEs.

83 Tonny SchenkGeers. supra n. 68. Pág. 185.

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ness, as long as there is thoughtful and comprehensive action by tax authorities to guide tax policymakers about which information should be required from small taxpayers when complying with tax obligations, in order to guarantee the com-pliance of the tax system with international exchange of information standard with relatively low compliance costs.

The exchange of information standard could be maintained through em-pirical research or studies, by which policymakers – together with tax authori-ties – could evaluate which kinds of information with respect to a specific tax is usually necessary for tax assessment or tax audits, or which is mostly subsumed within the concept of “foreseeably relevant”,84 as well as alternative ways to obtain such information, without mischaracterizing the desired simplification. Through such efforts, it would be possible to obtain high quality information for tax mat-ters while imposing less formal or bureaucratic obligations on taxpayers in simpli-fied regimes.

Realistically, more efficient and acceptable tools to secure the availability of relevant information in tax matters to tax administrations are to be found in the international scenario. For example, the widespread implementation of the US Foreign Account Tax Compliance Act (FATCA) affected the international tax in-formation networks, establishing an administrative operating model by which fi-nancial corporations are requested to provide information that may be relevant to tackle BEPS concerns. This model not only grants the quality of the information available to tax administrations, but also internalize the costs of administration of tax information exchange in such financial institutions85, relieving tax administra-tions of the burden of collecting the data themselves86. Simi larly, other measures such as the Common Reporting Standard (CRS), which calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis,87 or the Country-by-Coun try reporting (CbC) suggested in the OECD Base Erosion and Profit Shifting (BEPS) initiative regards the creation of transfer pricing files that will be exchanged be-

84 Although the “foreseeably relevant” clause has the purpose of preventing socalled fishing expeditions, it has been criticized by scholars, as that rule has motivated hideous laws which offer an economic reward to those who denounces tax evasion by American citizens (whistleblower legislation). Natalia Quiñones Cruz, La cruzada por la transparencia fiscal y la dudosa apuesta por el intercambio de información, en Revista ILADT (2010), available at https://www.academia.edu/1151370/Intercambio_de_Informaci%C3%B3n_Efectivo (accessed August 28th, 2016).

85 Miranda Stewart, supra n. 70. Pág. 169.86 Luís Eduardo Schoueri y Matheus Calicchio Barbosa, supra n. 21. Pág. 672.87 Paul Radcliffe, The OECD’s Common Reporting Standard: The Next Step in the Global Fight against Tax

Evasion, en 16 Derivatives. & Financial Instruments 4 (2014), Journals IBFD. Pág. 160169.



tween tax authorities88, also allow tax administrations to obtain information without imposing any burden small and medium taxpayers.

From an international perspective, if domestic rules do not set forth the obli-gation to taxpayer hold or provide data to the tax authorities, the refusal to provide information to a requesting state by that state does not contravene article 26(3) of the OECD Model Convention. In such cases, the only consequence to the reques-ted state will be the impossibility to further request such information not obtainable under its own law or administrative practice from the requesting state, pursuant to the principle of reciprocity.89 However, if the domestic rules require that the ta-xpayers disclose such information (by filing tax returns, for instance), even if in a simplified way (such as fewer or simpler accounting books), the requested state is not allowed to invoke the “partial opacity” of the SMEs as a domestic law limitation, as the information could be obtainable under its domestic law. In this case, refusal would justify international sanctions or the denouncement of tax treaties or agreements.

Furthermore, simplified systems may, inversely, enhance the transparency of a tax system, especially with regard to information from SMEs. Traditionally these enterprises are characterized by an increasing tendency towards informality due complexity in taxation, as many SMEs are often family-operated and have very low profit margins, and, thus, a limited capacity to bear the burden of tax complian-ce without directly affecting their business. Heavy compliance costs for such ta-xpayers often acts as a strong disincentive to comply with tax obligations.90 As a result, many small enterprises become “ghosts”,91 i.e tax authorities have no evi-

88 For a comprehensive analysis, see Maria T. Evers, Ina Meier y Christoph Spengel. Transparency in Finan-cial Reporting: is Country-by-Country Reporting Suitable to Combat International Profit Shifting?, en Bu-lletin for International Taxation, v. 68, n. 6/7. Amsterdam: IBFD (2014). Pág. 295303; María Amparo Grau Ruiz. Country-by-Country Reporting: the Primary Concerns Raised by a Dynamic Approach, en Bulletin for International Taxation, v. 68, n. 10. Amsterdam: IBFD (2014). Pág. 557566; Florentino Carreño y Miriam SánchezBriñas. Proposal for Country-by-Country Reporting, en International Transfer Pricing Journal, v. 22, n. 3. Amsterdam: IBFD (2015). Pág. 205207.

89 Michael Lang, supra n. 80, Pág. 159.90 Empirical evidence of such statement was presented by Professor José Levi Mello do Amaral Junior,

during the workshop on “Specific Issues for Small and Mediumsized Enterprises (SMEs) and Simplified Systems”, held on 10 June 2014 at University of São Paulo (USP). Professor Levi reported the failure of the tax administration to require taxpayers enrolled under the MEI regime to comply with their taxes with computerized systems in 2013. Such attempt resulted in a very high rate of noncompliance, as such small businessmen did not have the means to meet that requirement. In the next year, the possibility to comply with the taxes levied under the MEI regime became optional again.

91 Jaramillo Herrera argues that many small enterprises become ghosts, as they do not comply with tax law (paying taxes or filing returns) either because they cannot afford the burden of tax compliance or in order to increase their margin of profit. At the same time, due the lack of resources of the tax administration to carry out audits, the risks of tax evasion are low enough that many small enterprises opt not to file a tax return or comply with commercial law. If there are enough such ghosts, enforcement efforts by the tax administration are likely to be ineffective, which in turn makes evasion even more appealing. Christian R. Jaramillo Herrera, Presumptive Income Taxation and costly tax compliance: Department of Economics

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dence as to their existence, as they are not registered in the public sector databa-se, nor file tax returns or pay taxes.

In such cases, simplified systems are praiseworthy measures to enhance the degree of formalisation of SMEs and, consequently, allow tax authorities to access information that otherwise would not (or would not, for the most part) be provided by the taxpayer. Accordingly, one could argue that simplification enhances the transparency of the tax system as a whole.

Finally, from a pragmatic standpoint, the implementation of simplified sys-tems for SMEs would hardly frustrate the goals of international exchange of infor-mation to tackle harmful tax competition and prevent tax base erosion. Aggressive international tax planning schemes demand voluptuous amount of money in order to enable the creation of a complex – multinational – business structure, that SMEs simply cannot afford. As such, it seems that relevant base erosion and profit shi-fting issues are not likely to emerge from SMEs. On the other hand, small taxpa-yers arguably also do not hold relevant information – that could not be obtained otherwise – about MNEs, the aggressive tax planning or tax evasion schemes of which are the main targets of the BEPS project. In the author’s opinion, informa-tion requirements for SMEs would at most times only imply increased compliance costs for such taxpayers – with all the negative consequences highlighted above – while not providing a relevant level of assistance to tax authorities.

3. International Tax Transparency and Simplified Tax Systems: A Brazilian Perspective

3.1. Remarks on Brazilian Simplified Systems

Sustainable tax governance requires fairness, in both tax competition and in the manner by which the burden of tax compliance is divided among taxpayers. The latter is strongly related to compliance costs of taxation and complexity, which should be reduced whenever possible in order to achieve an efficient and fair tax system, as overly complex systems and high compliance costs are often related to horizontal inequality, regressiveness and distortions in structural fairness. The-refore, simplification of the tax system can be considered as a claim of the princi-ple of equality.

(University of Michigan, March 2004), Pág. 4, available at http://www.frp2.org/english/Portals/0/Library/Tax%20Administration/Presumptive%20Income%20Taxation%20and%20Costly%20Tax%20Compliance.pdf. (28 August, 2016).



In this author’s opinion, this provides for the legitimacy of simplified regimes under any tax system in which equality plays a significant role in the structure of tax law. In other words, the principle of equality is deemed to be a sound justifica-tion for the implementation of legal measures that could assist SMEs or provide them with better competition conditions, such as simplified tax regimes.

Yet, under the Brazilian Federal Constitution, the legal basis of simplified systems is not only equality, but also specific constitutional provisions regarding the simplification and establishment of a favoured tax regime for SMEs, that grant an incentive for the competitiveness and economic development of smaller tax-payers.92 Such a unique constitutional framework has permitted the development of simplified regimes that have been widely accepted among small enterpri-ses.93 Howsoever, although there are many provisions throughout Brazilian tax law regarding simplification of specific situations,94 three regimes are particu larly noteworthy:

– The Individual Microentrepreneur Regime (“Microempreendedor Individual”, MEI), the legal basis of which is Complementary Law 128/08;

– The Special Unified Tax Regime for Micro and Small Enterprises (“Simples Nacional”), the legal basis of which is Complementary Law 123/06; and

– The Presumptive Income Tax Regime (“Lucro Presumido”), the legal basis of which is Decree 3,000/99 and Law 9,249/95.

Both the MEI and Simples Nacional regimes are simplified systems which aim to encourage the regularization of SMEs, diminish their overall tax burden (both direct and indirect) and simplify tax compliance, by shifting the regular tax assessment of most taxes levied on business to a sole gross turnover-based

92 Specifically: (i) article 146(III)(d) provides that complementary law must define the framework of simplified and favoured tax regimes for SMEs, (ii) article 170(IX) establishes as a principle of economic order the favoured treatment under the law to SMEs formatted under Brazilian law and with headquarters and admi-nistration in Brazilian territory and (iii) article 179 provides for the obligation of the public administration to grant to SMEs a different treatment in order to promote simplification and to encourage their competitive-ness.

93 The Federal Government estimates that 9,513,065 enterprises were enrolled under either the Simples Nacional or Microempreendedor Individual regimes in 2014. See http://www8.receita.fazenda.gov.br/sim-plesNacional/Arrecadacao/EstatisticasArrecadacao.aspx. (9 July, 2015). However, it is estimated that the total number of enterprises in Brazil was approximately 17 million in 2014 according to the IBPT. See http://www.empresometro.com.br/Site/Estatisticas. (28 August, 2016).

94 For example there are specific tax rules for individuals engaged in rural activities, regulated by Normative Instruction 83/2001, which implies a simplified tax compliance regarding income tax. Also, nonresidents services renderers enjoy a “simplified regime”, as there is a withholding income tax (art. 685(II)(a) of De-cree 3,000/99), with a 25% tax rate, levied on the payment of the Brazilian service recipient to the service renderer’s foreign mother company. In other words, the source of payment is considered by Brazilian law to be a valid connecting factor to the taxation of the income of foreign companies derived from services rendered inbound. Although such connecting factor might be questionable, it promotes simplification in the taxation of foreign permanent establishments and services renderers.

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tax assessment. Under article 13 of of Complementary Law 123/06, the material scope of the MEI and Simples Nacional regimes covers most relevant taxes levied on business activities, both direct and indirect taxes, and under the jurisdiction of either the federal union, states or municipalities, namely (i) income tax (IRPJ), (ii) tax on manufactured products (IPI), (iii) social contribution on net profit (CSL), (iv) social contribution for social security (COFINS), (v) social contribution on gross turnover (PIS/PASEP), (vi) employer’s union contribution (CPP), (vii) tax on distri-bution of goods and services or sales tax (ICMS) and (viii) tax on services (ISS). On the other hand, the presumptive income tax regime refers only to income tax (IRPJ) and social contribution on profit (CSL).

On the other hand, the presumptive income tax regime, although it may not be considered as a proper “simplified regime” (at least not to the extent of the others), it is especially relevant for SMEs (especially medium-sized enterprises), as it also promotes high standards of regularization and simplification, and even reduces the tax burden, not only for income tax purposes, but also indirectly for the social contributions levied on business turnover (PIS and COFINS), that are con-sidered taxes levied on consumption. Either way, as income tax and social contri-butions play a significant (or most significant) role on taxpayer’s overall burden (on legal bodies), the presumptive tax income system arguably also covers the main taxes levied over SME’s business95.

Although the material scope of the simplified systems could be considered broad, such regimes have been criticized for not covering all taxes nor partial forms of assessment of these taxes, i.e. specific situations in which the taxpayer is required to make a payment in advance, regarding a partial or full tax rate in res-pect of a future tax triggering event96.

For instance ICMS has a tax rate of approximately 4% for taxpayers enrolled under the Simples Nacional regime. However, if the taxpayer acquires goods for resale from companies situated in other states, the taxpayer is subject to an an-ticipated tax assessment, specifically a 10% tax rate on the transaction value as the good enters the state’s territory, as a partial “anticipation” of the payable tax that would be due if the taxpayer were not entitled to the simplified regime. As a rule, this tax collection mechanism does not imply distortions within a regular VAT

95 Taxpayers under the presumptive income tax regime must comply with such contributions under a cumu-lative basis regime, which implies a lower effective tax rate than that applicable under a non-cumu lative basis regime. (The cumu lative basis regime rate for such contributions is 3.65%, whereas under the noncumu lative basis regime, the rate is 9.25%.). A comprehensive study of social contributions levied on gross turnover in Brazil is beyond the scope of this study. For a critical overview of such regimes, see Paulo Ayres Barreto, A não cumu latividade das contribuições e sua vincu lação à forma de tributação do imposto sobre a renda, en 94 Revista do Advogado. Págs. 130135. (2007).

96 Paulo Victor Vieira da Rocha, ICMS e Simples Nacional, en 23 Revista Direito Tributário Atual. Págs. 410426. (2009).



regime, whereby the taxpayer is entitled to 10% credit when subject to the full tax rate due to the tax triggering event, which would be offset against the general 18% tax rate. Nonetheless, unlike taxpayers under the “normal” tax regime, taxpayers enrolled under the Simples Nacional regime obtain no credit or refund in these situations. This causes distortions in the tax system, as small taxpayers pay a higher effective tax burden than larger taxpayers, and also violates specific cons-titutional provisions which set forth a different and favoured tax regime for SMEs.

Furthermore, although the abovementioned simplified tax regimes are optional,97 the application of the legal framework is in an all-or-nothing fashion. From the taxpayer’s perspective, this fact is considered to be a step backwards visàvis the previous simplified tax regime, under which the taxpayer could at least choose the scope of the application (i.e. whether federal taxes or state taxes). Ac-cordingly, taxpayers questioned this all-or-nothing system, but the Superior Court of Justice (“Superior Tribunal de Justiça”, STJ) held that such system is legal: once enrolled under a simplified system, the taxpayer is not allowed to choose which provisions will be applied (i.e. a hybrid system).98 This idea of simplified sys-tems as a “tax benefit package” should be rejected, as it prevents a comprehensi-ve debate before the courts regarding the provisions within Complementary Law 123/06 or their application by the tax authorities which, instead of promoting fa-voured conditions for SMEs, inversely cause distortions that often partially offset the benefits of such regimes.

A significant aspect common to all of these simplified tax regimes is that the tax assessment is entirely based on business turnover. Also, the requirements to enrol under such regimes mainly take into account the turnover, which pro-vides for a better degree of simplification. There are rigid turnoverbased limitations under which SMEs are entitled to a specific simplified system and the taxpayer will be subject to exclusion from that regime once the taxpayer exce-eds such turnover limi tations. The annual gross turnover for purposes of the MEI regime is BRL 60,000 (approx. USD 18,44599); under the Simples Nacional regime the annual gross turnover limi tation is BRL 3,600,000 (approx. USD 1,106,570); and under the presumptive income tax regime, the limi tation is BRL 78,000,000 (approx. USD 23,975,655). Thus, a taxpayer with an annual business turnover of BRL 50,000 (approx. USD 15,369) is entitled to the MEI, Simples Nacional or pre-

97 This issue is controversial. During the workshop on “Specific Issues for Small and Mediumsized Enter-prises (SMEs) and Simplified Systems”, held on 10 June 2014 at the University of São Paulo (USP), the invited experts expressed their doubts as to whether, from an empirical perspective, SMEs really have the option not to enroll under simplified regimes, as such enterprises could hardly compete against the major players without a simplified and more beneficial commercial and tax treatment.

98 RMS 29.568/AM, Rel. Ministro Castro Meira, Segunda Turma, j. 20/08/2013, DJe 30/08/2013.99 All values in US Dollars are approximated values and were estimated using the currency value on

01.11.2016.

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sumptive income tax regime, while a taxpayer with an annual business turnover of BRL 50,000,000 (approx. USD 15,369,010) is entitled to only the presumptive income tax regime.

Nonetheless, in this author’s opinion, some concerns arise from the absen-ce of a progressivity within these simplified systems . As a taxpayer that exce-eds the turnover limi tation under a simplified system will be fully excluded from that regime (regardless of the value), some distortions and uneven situations may arise. For example an enterprise enrolled under the Simples Nacional regime that exceeds by only BRL 1 (approx. USD 0.31), the annual BRL 3.6 million (approx. USD 1,106,570) gross turnover limi tation would have to comply with its tax obliga-tions like any other MNE.

One could argue that, in this case, the taxpayer is still entitled to pay its income tax under the presumptive regime, which means a lower tax burden re-garding income tax, social contribution on profits, PIS and COFINS (social con-tributions on gross turnover), and a more simplified compliance burden, due the reduction in complexity. Nevertheless, the same regime is applied either to enter-prises with annual gross turnover of BRL 3,600,001 (approx. USD 1,106,570.3), as well as those with annual gross turnover of BRL 78,000,000 (approx. USD 23,975,655). Furthermore, the same problem will arise whether a taxpayer under the presumptive income tax regime exceeds by even BRL 1 (approx. USD 0.3) the turnover limi tation, such that the taxpayer would compete under the same tax con-ditions as major players and mostly MNEs.

This may represent a very serious issue, as the impact on tax assessments under these simplified regimes varies greatly among them. Under the MEI regime, the taxpayer is subject to only a symbolic flat rate for the municipalities’ tax on ser-vices (ISS) of BRL 5 (approx. USD 1.5), as well as for the states’ tax on distribution of goods and services (ICMS) of BRL 1 (approx. USD 0.3), while also being sub-ject to a 5% tax rate on the value of the minimum wage for federal taxes (income tax; tax on manufactured products; social contribution on net profit; social contri-bution for social security; and PIS/PASEP). In 2016 this regime implied a total tax burden of BRL 45 (approx. USD 14) for trade businesses and industries or BRL 49 (approx. USD 15) for services, which represents a particu larly low tax burden, es-pecially if compared to that borne by enterprises under the “regular” tax regime100.

100 For the sake of comparison, let’s imagine a taxpayer A enrolled in MEI with an annual BRL 60,000 turnover and a taxpayer B enrolled in Simples Nacional with an annual BRL 60.001 turnover. Both are traders. Taxpayer A will pay monthly tax burden of BRL 45 (approx. USD 14 and about 0,9% of his turnover), while taxpayer B will be subjected to a monthly tax burden of BRL 200 (approx. USD 61.75 and about 4% of his turnover). Now imagine a taxpayer C that is also a trader but is enrolled in Presumptive Income Tax regime, as his annual turnover is BRL 600.000 (approx. USD 185.116). The latter will be subjected to a monthly tax burden of BRL 7,256 (approx. USD 2,239 and about 14,53% of his turnover – referring to 8%



For taxpayers enrolled under the Simples Nacional regime, the total tax burden is calcu lated based only on a portion of the gross turnover, subject to varying tax rates pursuant to annual gross turnover brackets and also depending on the business activity. For instance a trade business is subject to a tax rate of 4% to 11.61% on its turnover, while industries are subject to tax rates of 4.5% to 12.11%. Services are subject to different tax rates based on the services rende-red and the gross turnover of the taxpayer, often at tax rates starting above 15%.

Finally, the presumptive income tax burden is commonly less than that under the income tax regime based on real profit, especially as regards compliance costs (time, accountability, etc.). Because the presumptive income tax regime is optional, it is possible to shift to the average tax regime if, for any reason, the tax burden is higher than the average regime.

Thus, a taxpayer that is excluded from the MEI regime because its annual turnover exceeded the legal benchmark by BRL 1 will bear a tax burden that is almost 60 times higher in the best scenario. The same problem arises depen-ding on whether the taxpayer decides to operate not as an individual, but rather through a legal entity. In other words, except for rare instances where the taxpayer has a very high annual outcome from his business while under the MEI regime as an individual, the current framework of the Brazilian simplified systems does not encourage the growth of the business structure of smaller taxpayers, as a small improvement in the annual outcome may result in a disproportionate increase in the tax burden in the next year.

Another issue that may cause some concerns, albeit from the perspective of public sector, is the potential loss of revenue resulting from such low effective tax rates applicable to SMEs and the effects thereof on good practices of sustainable tax governance. Nonetheless, in this author’s opinion, such question is based on a false premise. As simplification encourages formalisation, it is not necessarily true the establishment of simplified systems causes any loss of revenue, especia-lly considering that the majority of tax collection under these regimes would not be reached, regardless of whether such simplified systems exist.

Indeed, as many small SMEs from the “informal sector” have limited ability to bear a tax burden or complexity, no revenue would be yielded voluntarily from the

Income Tax, 2,88% Social Contribution on Net Profit, and 3,65% Social Contribution on Gross Turnover). A taxpayer not enrolled to any simplified tax regime under Brazilian Law is subject to even higher tax burden, but an exactly number is hard to be found, as it depends on the profits earned and deductions made by the taxpayer within the year, Nonetheless, the nominal rate for Income Tax within this regime is 15% (plus additional 10% for monthly income higher than BRL 20,000/USD 6181) and the nominal tax rate for Social Contribution on Net Profit if 9%. Besides, Social Contribution on Gross Turnover have nominal tax rate of 9,25% on monthly turnover.

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compliance of such enterprises with their tax obligations or even from audits, due the lack of information about their businesses (as they would not be filing returns). In addition, even assuming the compressing effect on revenue, it is not relevant when compared to the increase in formalisation of such enterprises. Such effect, if it were to exist, would be limited to only an initial period. In the long run, tax re-venue has a tendency to increase, not only as consequence of broader levels of formalisation, but also stemming from the natural disposition of such enterprises to grow economically.

Finally, it is also questionable – and unfortunately has been accepted by the Superior Court of Justice101 – the legal requirement to a taxpayer be entit-led to a simplified system consisting in the absence of any fiscal irregularity pur-suant to the taxpayer’s register or tax debts (article 17(XVI) of Complementary Law 123/06). In fact, small taxpayers are precisely the fragile ones and most in-clined to fail, especially as regards compliance with their tax obligations. For this reason, the law ought to be more understanding with this group of taxpayers, in-troducing mechanism to help them overcome financial or economic crisis periods, and not to exclude them from simplified systems in such situations – which most often means condemning them to informality or otherwise removing themselves from the system all together.

Nonetheless, even with such structural flaws simplified regimes are still con-sidered the best options for Brazilian small and medium enterprises and are lar-gely adopted by most taxpayers (except for those that are not allowed by the law to comply with their taxes according to such regimes). Not surprisingly, in 2012, about 6.8 million micro and small businesses were operating in Brazil, which re-presented around 99% of total business.

This brief overview indicates that the legal framework of simplified systems in Brazil indicates an overall good benchmark for simplification on taxation of SMEs, in light of its clear rules as regards the criteria to be met by taxpayers in order to benefit from such regimes (which is extremely praiseworthy as regards cer-tainty in tax matters). Nonetheless, the application of these rules by tax authori-ties and Brazilian courts, which are especially concerned about revenue matters, should be reconsidered. Distortions derived from such application weakens im-portant goals of a simplified system, namely to provide effective conditions of com-petitiveness for SMEs.

101 RMS 27.376/SE, Rel. Ministro Teori Albino Zavascki, Primeira Turma, j. 04/06/2009, DJe 15/06/2009.



3.2. Framework of Brazilian Simplified System and International Tax Transparency

Section III stressed that neither high standards of simplification within a tax system nor the existence of simplified regimes necessarily jeopardizes high standards of transparency. Whilst some opacity is unavoidable in simplified systems, the degree of opacity (i.e. the extent to which access to relevant information should be sacrificed) may be subject to ex ante control by tax policymakers and tax autho-rities during the creation of the rules of simplified system, as well as gains from the formalisation of small taxpayers (either in public revenue terms or relative to access to information that would not otherwise be obtained from such taxpayers) often offsets the losses from such opacity.

Nonetheless, each simplified regime within a tax system requires further en-quiry to verify whether its legal framework jeopardizes recommended standards of transparency or exchange of information.

Regarding the formal scope, simplification provided by simplified regimes under Brazilian Tax Law also affects formal tax and commercial law requirements, accountability requirements and ancillary tax obligations. For instance, an enter-prise enrolled under the Simples Nacional regime must file only one single and simplified return per year as regards its social, economic and tax situation (“De-claração Anual do Simples Nacional”, DASN), as established in article 25 of Com-plementary Law 123/06, and must maintain simplified accounting records for the oversight of its business.

This means that even though taxpayers entitled to such regime are obliged to provide information regarding other taxpayers upon request, pursuant article 26(3) of Complementary Law 123/06, the information available to the taxpayers and also the format in which these information will be provided may be not as comprehensive as the information that would be provided otherwise, i.e., if the taxpayer was not entitled to a simplified regime, as simplification also means a smaller degree of details in tax returns and fiscal bookkeeping. Thus, there is a tradeoff between simplification of formal tax requirements and opacity with regard to tax transparency that must be considered by policymakers.

Simi larly, taxpayers enrolled under the MEI regime must file only one single and simplified return per year (the DASN). A significant difference, however, is that Complementary Law 123/06 does not provide for the possibility of the tax autho-rities to request information from other returns or forms, including with regard to other taxpayers (art. 25, §4º), maximizing the simplification for such regimes re-gards ancillary tax obligations and compliance costs in order to foster its forma-lisation. In this case, in the other hand, as a general rule such taxpayers cannot

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offer any assistance in tax inspection and are fully opaque for tax matters. Infor-mation can only be obtained through tax inspection (which is expected to be rare by virtue of the amounts involved).

On the other hand, taxpayers under the presumptive income tax regime must keep the same accounting records as other enterprises for commercial law purpo-ses, as set forth by article 527 of Decree 3,000/99. Every year, the taxpayer must file an income tax return and must fulfil information requests from the tax autho-rities. Nonetheless, for tax purposes the requirements are limited to a cash flow book and an inventory control book, which must be retained for at least five years. In this sense, also under this regime there is a tradeoff between simplification and opacity for tax matters, even in a lesser extent.

Nevertheless, with regard to Brazilian simplified systems, the “opacity” of small and medium-sized enterprises in such regimes seems to not compromise tax transparency, as the legislator also established specific provisions which pro-hibit foreign investments or partnership in the company’s shares, as well other re-levant limi tations: (i) taxpayers enrolled under the MEI regime may not be legal bodies, nor may they be shareholders of any company, whether national or fo-reign; (ii) the same is true for enterprises enrolled under the Simples Nacional regime, as article 17(II) of Complementary Law 123/06 prohibits such enterpri-ses from having non-resident shareholders (which is in line with constitutional provisions, namely article 170(IX)); (iii) and finally, taxpayers will not be deemed to comply with income tax on a presumptive basis if they earn income or capital gains from abroad (Decree 3,000/99, article 246(III)).

Therefore, the partial opacity of Brazilian SMEs enrolled under such regimes seems to not have a relevant impact on international exchange of information. Compliance with simplified systems concerns only the Brazilian tax authorities, as such companies are not exactly the best choices for multinationals when desig-ning their tax planning.102 Thus, information regarding SMEs also does not play a relevant role in international exchange of information matters (and would likely not pass the “foreseeably relevant” clause found in exchange of information agree-ments and income tax treaties), as it is really significant to domestic tax authorities in enforcing compliance with such regimes or in determining whether a taxpayer is still entitled to any simplified systems.

102 SMEs are not viable choices for international tax planning schemes as they are prohibited to have non-resident shareholders (“Simples Nacional”) or to earn income or capital gains from abroad (“Lucro Presu-mido”) in order to be entitled to such regimes. This author recognizes, however, the theoretical hypothesis of a foreign company that controls Brazilian entities enrolled under a presumptive income tax regime. No-netheless, as deductions play a significant role in international tax arbitrage and also because the invested company in Brazil will always have to pay income tax, even when generating net operating losses, it is very unlikely that such a structure would be used in international tax planning.



To sum up, high standards of transparency are relevant, as long as they do not imply a higher level of complexity for SMEs. Of course some filing of returns or reports may and shall be requested by tax authorities from such enterprises, if they are essential to good tax governance – specifically the prevention of tax base erosion and tax evasion through exchange of information. Nonetheless, the increase in complexity of taxation for SMEs should be justified, i.e. the gains in access to the required information must be higher than the negative effects of tax complexity. This is a situation which, as stressed in this section, with regard to in-formation provided by SMEs, is exceptional.

4. ConclusionThe “unprecedented progress towards better transparency and exchange of information”,103 whilst undoubtedly laudable, should not be achieved upon the sa-crifice of simplification goals in taxation, especially regarding issues related to small and medium-sized enterprises, which have restricted capability to bear both direct and indirect tax burdens. Although carrying some degree of opacity to a tax system in a first moment, simplified systems are relevant tools for tax authori-ties, as it provides better conditions to foster tax compliance and higher transpa-rency standards in the long run. The question that arises, though, concerns what should be expected going forward and how the current outcome of simplified sys-tems can be improved.

In this author’s opinion, some reflections about the material scope of simplified systems should be on the agenda of tax policymakers. SMEs do not evenly compe-te with larger firms if both are subject to the same tax treatment and, thus, are not likely to survive. Therefore, one should expect increased movement towards an ex-pansion of the material scope of simplified systems, as a measure to support the principle of equality by providing for different treatment of small and medium-sized taxpayers, reducing the tax burden that falls on them. Especially in developing cou-ntries such measures are essential to foster domestic business to grow and to be capable of competing internationally in the future. In Brazil, such tendency has been confirmed, as one could see by recent changes in the legal framework of simplified systems set forth by Complementary Law 147/14, which enlarged the scope of ser-vices providers that are entitled to “Simples Nacional” regime.

Also, the comprehension of the inherent difficulties of small and mediumsi-zed enterprises in competing in an integrating and economically globalized world may result in substantial actions to correct the distortions in the current legal fra-

103 See Jeffrey Owens, Moving towards better transparency and exchange of information on tax matters, en Bulletin for International Taxation. Págs. 557558. (2009).

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mework of simplified systems highlighted above. An noteworthy improvement that could be a result of such comprehension is the establishment of “intermedia-ries” simplified regimes among the existing ones, in order to embrace situations in which the economic growth of the taxpayer’s business increases moderately and the initial tax rate of the next simplified system to which the taxpayer would be fur-ther entitled is simply too high and the tax burden too costly. Also, steps should be taken to withdraw inadequate provisions within simplified systems which are not compatible with their goals and contradictorily reduce the benefit and simplifi-cation of such regimes (e.g. withholding taxes that do not take into consideration particu lar features of small and medium enterprises nor their economic reality). Such modifications, whilst not costly to tax administration, would promote sustai-nable development and provide real conditions of competitiveness and economic growth for SMEs. Even though some loss of tax revenue is expected, in the long run it is also expected to increase, due to formalisation and tax compliance of such enterprises. Furthermore, assuming that these enterprises will have a tendency towards economic growth under such regimes due to better chances of competi-tion, the long-term revenue increase is very likely to offset any short-term loss or reduction.

From an international perspective, the framework of a simplified system should interfere least (or not significantly) with the current process of transforma-tion of the international tax regime and with the international exchange of infor-mation standard. In other words, the partial opacity of a simplified system result should not be an insurmountable obstacle to international co-operation in the ex-change of information, nor to the achievement of high standards of tax transpa-rency, so that the “opacity” of SMEs cannot be challenged within a framework of specific antievasion or transparencyoriented legislation, such as controlled fore-ign corporation (CFC) rules.

In this context, good policymaking – which requires cooperation and an open dialogue between tax policymakers, tax authorities and taxpayers – plays a fundamental role in overcoming problems related to the “partial opacity” of SMEs in an international context, in which the exchange of information and transparency are key elements to sustainable tax governance, and also to preventing tax base erosion and profit shifting.

For instance the growing process of tax computerization of tax administra-tions could be reversed to the benefit of small taxpayers by allowing the tax autho-rities to obtain relevant information on tax matters without requiring any tax return filing or declaration from such taxpayers, but from financial institutions or even from the taxpayer’s supplier (if possible or viable), thus, not causing compliance costs for smaller taxpayers.



Nonetheless, where information is to be required directly from SMEs, and considering that information requests directed to SMEs are unlikely to promote substantial assistance with the goals of exchange of information standards (such as preventing tax evasion and disclosing aggressive tax planning arrangements), such requirement should be justified, providing underlying reasons for the conse-quent increase in complexity caused by such requirements.

In the author’s opinion, the Brazilian tax system offers a valuable, although not unflawed, benchmark of a simplified systems for SMEs. The legal framework of such regimes offers, on one hand, effective provisions towards simplification, reducing the effective tax burden and the compliance costs for small taxpayers. On the other, it establishes specific rules to prevent abuse of such systems in in-ternational tax planning or evasion schemes (for example by prohibiting the pre-sence of foreign shareholders in enrolled companies under the “Simples Nacional” regime104).

Finally, good standards of simplification cannot be successfully achieved without co-operation and an open dialogue between tax policymakers, tax autho-rities and taxpayers. Such dialogue is utterly vital to correct distortions within the current legal framework, to suggest possible improvements to such regimes and to achieve a harmonic system, by which tax authorities would be able to access relevant information of taxpayers in order to make tax assessments, while sacri-ficing to a lesser extent the simplicity and fairness goals of legal frameworks de-signed for SMEs.

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