Boosting brazil’s economy br miguel abuhab at TOCICO

2015 TOCICO International Conference
© 2015 TOCICO. All Rights Reserved.
A plan to boost Brazil’s economy by
simplifying its tax system
by Miguel Abuhab

©2015 TOCICO. All Rights Reserved.
Goals
2
Boost economy
Leverage of the formal economy
Simplify the tax system

Overall
3
A first glance over the
Brazilian economy
landscape would show
several problems
In a holistic approach we identify the
undesirable effects that jeopardizes the
country’s economic development
...However,

Overall
4
Local Optimum
Face the problem under a
holistic approach
Global Optima
Deals with the Undesirable
Effects one by one

Undesirable Effects
5
Increase of
taxes rate
Tax incomes
reduction
High cost of
tax collectionTax avoidanceFiscal DisputeExcess of lawsuits
Expensive overhead
to the taxpayer
PenaltiesCorruptionSMB Tax
SystemTax RefinanceInspectionSide
ObligationsTax Substitution
Informal
Economy
DefaultWitholding

…When we deal with each problem in
isolation we deal with the symptoms
and not the real cause.
Theory of Constraints
6
In order to improve the overall we don't have to improve everything
As long as the real cause is untouched
the symptoms/problems will not go
away and new ones will be created.

Simplify means to reduce the numbers of touchpoints needed to impact the whole system
Theory of Constraints
7
7 touchpoints 1 touchpoint
The complexity of a system is measured by the number of points that need to be touched
to impact the whole system

Most of the current business rules were
created under a technology constraint
Once the constraint was removed, the
business rules remained the same
Orthodoxy
8
Orthodoxy is everything we do, we don´t know why we do, but we keep doing
An orthodoxy arises when despite of the end of the technology constraint, there´s no
evolution in terms of behavior and the business rule set during the technology
constraint remains untouched.

A Classic Case of Orthodoxy
9
Hotel
CHECK-IN
12H
CHECK-OUT
12H

Orthodoxy
10
Goods Goods were used
for tax payment
Technology constraint
Money
Technology constraint removed Taxes are payed in
money

UNDERSTANDING THE PLAN
11

Conflict
12
to
to
to
In order to ensure the
country`s competitiveness we
need to do the tax reform
Follow the legislation
Do not do the tax
reform
Do the tax reform
Ensure country
competitiveness
Boost economy

…The taxes must be
calculated and collected
based on the taxpayer
initiative
Wrong Assumption
Because we erroneously believe that...
13
…The taxes
collection must be
based on the goods
circulation.
In order to ensure the country`s
competitiveness we need to do the tax reform

Current technology allows taxes to be calculated
based on the money circulation and collected
through its flow within the banking system
Breaking the Wrong Assumption
14
…The taxes
collection must be
based on the goods
circulation.
…The taxes must be
calculated and collected
based on the taxpayer
initiative

Tax is declaratory
Tax collection depends
on taxpayer initiative
Bank transactions have
no accounting support
High complexity and
cost to the taxpayer
corruption
tax substitution side obligations
withholding default
inspection
assessment
fiscal war tax avoidanceexcess of lawsuits
informal economy
SMB Tax SystemTax Refinance
high cost of tax collection
Current Reality Tree
15
Increase of taxes rate
tax incomes reduction
Unbalanced tax benefits
are granted by States
Undesired effects
Root cause

Tax is declaratory
Taxes start to be
automatically calculated
by the State
Unbalanced tax benefits
are granted by States
Fiscal benefits start to be
equally granted by the
States
Tax collection depends of
taxpayer initiative
Bank transactions have
no accounting support
High complexity and
cost to the taxpayer
corruption
tax substitution side obligations
withholding default
Inspection
Assessments
Fiscal War Tax Avoidanceexcess of lawsuits
informal economy
SMB Tax SystemTax Refinance
high cost of tax collection
Placing injections on the root causes
16
Taxes start to be
automatically collected by
the banking system
Banking transactions start
to have accounting
support
Increase of taxes rate
Tax incomes reduction

Taxes are automatically
calculated by the State
Banking transactions will
start to have accounting
support
Future Reality Tree
17
Drastic reduction of
declaration costs for
taxpayers
lowering cost in the judiciary
power
Drastic reduction of the tax
assessment numbers
Drastic reductio of
corruption
significant increase of taxes
collection incomes
Drastic reduction of the tax
inspection costs
Drastic reduction of the
default risk
End of Tax
avoidance
End of Fiscal Dispute
Drastic reduction of the
informal economy
Drastic reduction of
withholding
Taxes are automatically
collected by the banking
system
Fiscal benefits start to be
equally granted by the
States

IMPLEMENTING THE PLAN
18

The Strategy
VAT – “Value Added Tax” to be collected by the banking system on a cash basis
 All banking transactions among companies must contain its taxpayers identification number
 The companies will be credited when paying their suppliers and will be deducted when they
receive from their customers. These transactions will be automatically handled by the banking
system.
 When a company receives a bank deposit regarding a commercial transaction, either products
or services, the tax payment will be automatically collected by the banking system, observing
that the total tax amount due to be paid must be deducted from the company's entry credit
and later on handed to the clearing house
 The effect is like having a “Cash Added Tax”
19

The Strategy
VAT – “Value Added Tax” to be collected by the banking system on a cash basis
 The tax collection regarding the sales that are made to end consumers will be collected once
the payment services providers place a deposit at the taxpayer's bank account
 The tax payment regarding the sales on cash will be collected based on the fiscal coupon
 The tax incomes will be daily collected through the banking system and will be transferred to
the government’s treasury
 Only the exceptions must be reported by the taxpayers
 The tax is non-cumulative
20

Tax collection on cash basis
21
Industry Manufacturer Retailer End Consumer
e.g. VAT: 1%
$100 $1000$500
DB: $ 1
*EC: $ 0
DB: $ 5
*EC: $ 1
DB: $ 10
*EC: $ 5
VAT: $5
* Entry Credit (Accounting)
VAT due to pay: $4
VAT: $1
VAT due to pay: $1
VAT: $10
VAT due to pay: $5

Tactics
Technological implementations
 All banking transactions among companies must contain its taxpayers
identification number (CNPJ at Brazil)
 Mandatory inclusion of the invoice number in all electronic billing
messages (Financial EDI) among companies and banks.
22

Conflict
23
to
to
to
In order to ensure the
country`s competitiveness we
need to do the tax reform
Do not do the tax
reform
Do the tax reform
Ensure country
competitiveness
Boost economy

Eliminating the conflict
24
to to
Do not do the tax
reform
Ensure country
competitiveness
Boost economy

Solutions
25
The current legislation remains the same
The decision to implement the plan lies in
the Executive Power
Do not do the tax
reform
and

Quote
“It always seems
impossible until its done.”
Nelson Mandela

Thank you!
Miguel Abuhab holds a mechanical engineer bachelor's degree from
ITA - Brazilian Air Force Institute of Technology, rated as one of the
top and most prestigious engineering schools in Brazil. Miguel’s first
endeavor as an entrepreneur ended up to be the biggest ERP
company in Brazil, implementing fiscal systems at over the 4,000
companies.
Miguel also founded NeoGrid - A Global Supply Chain Management
Systems provider, being awarded by FINEP, the Brazilian
Government Innovation Foundation, as one of the most innovative
companies for two years in a row. NeoGrid also featured at
Gartner’s Magic Quadrant in 2014, for its deep understanding of the
Brazilian supply chain landscape and its vast portfolio of Internet
Brokerage solutions covering banks, industry, retailers and fiscal
transactions within the Brazilian Tax System.
27
Miguel Abuhab
miguel@abuhab.com
www.miguelabuhab.com
TOC-ICO, Theory of Constraints - International
Certification Organization Co Founder

Boosting brazil’s economy br miguel abuhab at TOCICO

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