Brazil’s secret fiscal weapon: the tax ‘lion’

BRASILIA,  (Reuters) – In Brazil, groups of armed agents fly around the country by helicopter, pounding on doors and instilling fear in the hearts of those who break the law.

They’re not the police – they’re from the tax agency.

Brazil’s secret fiscal weapon - the tax lion | (Reuters)

The Federal Revenue Service, which has gained global renown for its tough and creative tactics, will be one of the most important keys to Brazil’s economic prospects in 2012. President Dilma Rousseff is counting on the agency’s tax-collecting prowess to help her government meet ambitious budget targets without smothering the country’s suddenly brittle economy.

The agency, known as “The Lion” for its official emblem as well as its ferocious pursuit of tax dodgers, deploys everything from gun-toting operatives to meters on beer kegs in breweries to ensure that individuals and companies fully declare, and pay, their share to the government.

Recent operations have had names like “Black Panther” and “Delta” that are usually more associated with army special forces. The agency even uses helicopters to size up millionaires’ homes and make sure they are consistent with their tax returns.

No one is immune: Rousseff herself briefly came under scrutiny in 2009, when she was a minister in the previous government, because of what she said was an innocent mistake on her tax return.

The agency’s methods, as well as high and extremely complex taxes, have prompted grumbling among some Brazilians. They point to woeful infrastructure, education and other decrepit public services and say they are not getting nearly enough in return for the cash they contribute. But others express admiration for a rare success story of tax collection in Latin America, a region where evasion often rivals soccer as a favorite pastime.

“When it comes to collecting taxes, Brazilians are really good. They are probably some of the best in the world,” said Italo Lombardi, an analyst with Standard Chartered in New York.

Rousseff will need every bit of the agency’s skill in what is proving to be a surprisingly tough year for Brazil’s economy.

Her government has committed to a key budget goal known as the primary budget surplus – revenues minus expenditures except debt payments – of about 139 billion reais ($72 billion) this year.

The target is closely watched by investors as a sign of whether the government is pumping too much money into the economy. Falling short of the target could signal higher inflation, which in turn could jeopardize Rousseff’s entire agenda, including her drive to lower interest rates.

There are two ways to balance a budget, of course, and Rousseff can meet the target in part by limiting spending. But officials say she is wary of cutting too much, for fear of causing damage to an economy that has been stagnant since the middle of last year. In fact, Rousseff has announced some new tax cuts to try to revive activity.

That means that the burden of hitting the budget goal will depend primarily on another stellar performance by the Federal Revenue Service, which managed to increase tax collection by 10.1 percent last year, when the economy grew just 2.7 percent.

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So far, so good. In the first three months of the year, the government was able to save nearly a third of its primary surplus target for the year. Tax revenues rose more than 7 percent compared to the same period in 2011.

One of the secrets behind such performance, officials say, is the agency’s willingness to ignore social status and political connections in a country where both often grant the elite a degree of protection in courts and elsewhere.

In April, local media reported that police seized a sports car owned by Luis Fabiano – a soccer star for the popular Sao Paulo club. Fabiano, a former member of Brazil’s national team, denied the authorities’ allegation that he had failed to pay taxes on the Audi, which is worth nearly half a million reais.

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