VAT Talks - Luciana Marques Vieira da Silva Oliveira



In this episode of VAT talk, we discuss the VAT system in Brazil with Luciana Marques Vieira da Silva Oliveira. Come discover with us how the Brazilian VAT ecosystem works and the benefits produced by the introduction of a real-time reporting system. Luciana advises European countries which still do not have introduced a real-time reporting system to “think of a collective, integrated solution that uses the most modern technology”. Finally, we are very proud about Luciana’s view concerning TX++ which in her words “addresses the data protection concern in a better way than current systems”.

Could you tell us a bit more about yourself and how you ended up in the field of VAT?

“I graduated in Law in 2006. In 2008-2009 I specialized in tax planning and my final work was about VAT. More in detail, I analysed a case of the Supreme Court of Brazil (STF) in which our non-cumulative tax (ICMS) was widely discussed. Since that time I have been interested in understanding the functioning of VAT and how it has been implemented in other countries. In my profession, as a Federal district attorney, I deal with the legal problems involving our VAT, called ICMS. What we observe is that the benefits defended by VAT experts, such as neutrality, simplicity, efficiency and self-enforcement, are overstated when we analyse the reality in our country. The VAT implemented in Brazil is far from the ideal VAT defended by the doctrine and causes a lot of litigation that fill our judicial system. In fact, that is a reality observed all over the world, but especially in Brazil this distortion between expectation and reality is huge. For that reason, I started researching VAT from other countries to see if they faced problems like ours in order to find solutions that could fit our reality.”

You work as a federal district attorney and are a specialist in Brazilian tax law, what are your main responsibilities and duties?

“As an attorney from my State, I am responsible for defending the State in the lawsuits that the taxpayers move against the State. We are also responsible for legal advice to the government and for collecting the non-paid VAT and other taxes in two ways: (i) with a special lawsuit designed only for this purpose, called “execução fiscal” and (ii) in administrative means, such as using credit restriction of the debtors.”

You are currently completing your master’s degree in Tax law with a focus on real-time VAT collection, could you tell us more about your research?

“In theory VAT claims to be a self-enforcing and neutral tax, but in practice that is not what we see in Brazil. Statistical data shows that it has not been a neutral tax. The current process of compliance and collection of VAT through the traditional invoice-credit method allows a huge violation to the free market competition and it is not efficient to avoid VAT GAP.

This is due to two main causes, in my opinion:

  • The lack of enforcement in the collection of VAT in the last stage, in the B2C transaction, which exclusively depends on voluntary compliance by taxpayers without legal incentive for the consumer to supervise the tax obligation of the seller;
  • The fact that the invoice-credit method does not require the payment of tax as a condition to the input VAT credit. It requires only the issuance of the tax invoice.

As a result of the conditions above we see two issues which are the major causes of the VAT GAP in Brazil.

The first is the contumacious debtor of VAT (ICMS). It is the situation where the retailer sells the product to the final consumer, collects the VAT, issues the tax invoice, declares it to the tax authority, but does not transfer the tax to the Government. He simply uses the VAT collected to finance his business or to charge better prices than other competitors that regularly pay the VAT to the tax authority. The same retailer also claims the VAT input credit from the previous purchases and obtains a VAT refund from the tax authority. In Brazil, until 2019, it was not even considered a crime. The only legal way to charge this VAT is to file a lawsuit against the company. However, these kinds of lawsuits make up 40% of all lawsuits in the Brazilian Judicial System. There are more than 30 million cases of this type. It’s almost impossible to receive any tax from these lawsuits, which can take more than 15 years to be settled. This dependence of the judicial system to collect VAT and the excess of litigation must end. We cannot allow the VAT paid by the final consumer to the seller to be used for other purposes.

The second problem is the creation of companies just to produce false VAT input credits. They do not have real business operations. They just issue tax invoices that are true documents, but do not represent actual sales. The only purpose of these companies is to reduce the VAT paid by the next seller. It’s a complex fraud to detect early on and causes a huge VAT Gap. These situations are possible because the invoice-credit method is based on voluntary collection by the vendor a period after the sale has already happened. If the seller does not correspond the VAT to the government, the country’s judicial system must act in order to enforce the tax payment.

When the VAT was conceived, in the middle of the 20th century, a system based on the seller’s responsibility to declare and collect VAT was acceptable. In the 21st century the evolution of payment methods, currently mostly electronic, allowed a change in the way of consuming. At a time when business is internationalized and based on trust provided by technology, it is not sustainable, efficient or economical to rely exclusively on the ethical behaviour of the seller to collect VAT. The current VAT compliance and collection process is a typical relationship with moral hazard, which contains asymmetric information and conflict of interest. The government’s lack of confidence in taxpayers’ declaration encourages spending on developing cross-checking processes, such as requiring the payment industry to provide the tax administration with information on sellers’ revenue. The lack of trust costs a lot to the economy as a whole.

The aim of the research is to raise new perspectives of collecting taxes that accompany the evolution of the form of consumption in the 21st century. The research proposal is precisely to analyze the feasibility, in Brazil, of implementing a withholding VAT, by a split payment that segregates the tax from the amount to be allocated to the merchant/service provider, using the current payment infrastructure. It is something similar to the VAT split payment that the British government is studying to implement. The difference is that our focus is the collection of VAT in the domestic market.”

Brazil was one of the first countries in the world to implement a real-time reporting system, could you explain how it works and what are the results so far?

“The system works in a very specific way: at the moment of a purchase, after the payment of the product, the seller accesses the TA system, uploads the data about the sale, digitally signs the order and waits for the TA approval to issue the tax invoice in real time. When the TA approves the request, the authenticity of the document is guaranteed. This whole process takes a few seconds. The seller is obliged to periodically send to the TA information about his sales and previous purchases in order to calculate the VAT to be paid. The TA then analyses this information and verifies if the seller’s declaration is true, crossing it with the tax invoices issued and with information received by the payment sector (credit, debit card and similar).

It works very well, but I guess the increase of data to be crosschecked will make this model unsustainable in a short time due to its cost.”

Brazil opted for a centralised e-invoicing with approval from the TA, what is your opinion in this regard? Can we draw some other lessons from the Brazilian experience which could be helpful for European countries to take into account?

“Brazil has the tradition of developing its own tax systems. It costs a lot for the government, but I think it is a better model for a country in which the tax system is divided into three different federative entities: Central government, States and municipalities. Businesses are already adapted to the system and it doesn not seem to be burdensome for them.

Brazil is one step ahead of some European countries in terms of e-invoicing and digitalization of the tax administration. However, not having a digital invoice system yet can be an advantage for these countries. European countries can invest in systems that already use cutting-edge technology, such as blockchain. Blockchain has the potential to avoid the need to cross-check information between invoices. Perhaps in the future it could also help to automate tax collection. In Brazil, the implementation of a new technology requires to change an entire expensive system built and that already works well. The cost of change is much higher. So I think that European countries, especially because they are part of a free trade zone, should think of a collective, integrated solution that uses the most modern technology, otherwise they will soon have to change their systems.”

What is the role of confidentiality and data protection when developing a real-time reporting solution? Do you think existing solutions have a sufficient grade of data protection?

“We have seen hacker attacks on government systems all over the world. Recently our national health system was hacked and covid vaccination data was temporarily lost. For sure this should be a concern of all governments. Data protection is one of the most important questions in a world where everything is digitized. The risk of losing or leaking the data of the taxpayers must be a major concern when developing new reporting solutions. Much improvement is still needed in this field.”

The use of encryption coupled with real-time reporting can increase the level of data protection. Do you think the potential of this technology will be implemented in the VAT world in the next few years?

“I’m very enthusiastic about initiatives such as summittto´s TX++. First, because it uses modern technology, which has a great potential to reduce asymmetric information and the need for double-checking that the invoice-credit method requires. It may also allow in the future to attach smart contracts to automate VAT collection. And finally, it addresses the data protection concern in a better way than current systems, as it does not identify the taxpayers by the name, but by encrypted data. This provides more security to avoid data leaks by hackers.”

What is in your opinion the most interesting aspect of VAT to make our reader more enthusiastic?

“I think the new technologies available can make a revolution in the tax collection. Tax administrations must commit to reformulating VAT compliance and collection processes, adapting them to existing technologies. These processes need to be adapted to the Information Age, making them exponential and scalable. The current methods of tax collection (in Brazil) depend exclusively on the ethical behavior of the taxpayer to pay the declared tax. This model inherently brings the costs of mistrust, such as high compliance costs, evasion and excessive use of the judicial system to enforce tax obligations.

In my opinion, the Tax Administration should aim to function like the Digital Economy businesses, such as marketplaces, sharing economy platforms and the payment industry. Trust in these businesses is guaranteed by technology, as Rachel Botsman, a trust expert, explains in her book “Who can you trust?”. An English consumer just buys something from an unknown Chinese seller, because the marketplace guarantees through escrow accounts that the seller will only receive his money if the consumer certifies that the product arrived in a good condition. In addition, the seller only trusts that the platform will pay him for the sale, as the system is already programmed to withhold the fee of the marketplace and the seller’s value. Everything is done transparently and automated.

Thus, if I could bet on the next disruption in tax administration, I would definitely focus all efforts on the use of technology to induce trust, reduce moral hazard in the relationship between taxpayers and the TA and automate the collection of VAT, drastically reducing the current costs of mistrust.”

We would like to thank Luciana again for her time and for giving her perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via