Investor Presentaiton

tax bookkeeping, and electronic invoices) is to electronically validate and authenticate all commercial and tax-related fil- ings4. This unprecedented and ambitious program has now attained priority status. Electronic invoicing has been compul- sory for twenty-five sectors of the Brazilian economy as from December 20085. Recent studies estimate that, by the close of December 2010, nearly 20,000 companies will have adapted to this system, and a further three million by December 2012. The project is likely to radically transform the business environment of the Brazilian economy, hitherto notorious for its informality and tax evasion. At the beginning, this initiative was a response from the technical staffs of some States Treasures to a Federal legislative guideline. As time passed, the States and Counties Treasures recognized the huge potential to increase their tax collection, if the project is successfully put in place. After all, the tax authorities will have a clearer and better overall picture of the economy. Remote and far-flung organizations of borderline legitimacy will become visible and exposed. With this expanded processing and data cross-checking capacity, the tax authorities will gain. greater control over Brazilian taxpayers. Furthermore, several private sector companies that com- ply with their tax obligations rapidly enrolled with the project, recognizing that this was an opportunity to diminish the huge competitive advantage that tax evasion and illegal practices represented for their competitors. Thus, this program now ranks as one of Brazil's rare examples of successful public and private sector alliances. This has all occurred at a time when Brazilian tax burden has reached unprecedentedly high levels. Also, not only has the financial crisis cut the wings of public revenue growth, but has also required an increase in countercyclical expenditures and/or tax exemptions, in the current environment of a budget agenda at a high level of government expenditures with defined destination. In this context, any action leading to a potential increase in public revenues without altering tax burden seems auspicious. It is not our intention here to make normative consider- ations on these trends and ventures. This would be an incursion into areas pertaining to ideological and political aspects of the role, the size, and the competence of the Government. The social return of public transfers, the regressive profile of Brazilian tax 4 The Government is currently working on other projects targeting new taxes or segments: transportation services, social security, financial statements, corporate income tax, services invoices, electronic controls of inventories and production. 5 The pioneer sectors were: manufacturers of automobiles and related products, cement, medications, meat products, alcoholic beverages, soft drinks, steel, pig iron, and electric energy suppliers. structure, the Government's current expense: investment ratio, or the crowding out effect of public spending over private investment, are all crucial elements for a qualitative analysis of the performance of the public sector, but these are not part of our focus at present. We also have no idea of what the impact would be of a highly efficient and pan-optical tax system in an environment where 40% of the work force is not officially registered and where 25% of total corporate revenue for 2008 was simply not declared. We start from the premise, and on the understanding, that this route towards greater efficiency of the res fiscalis seems irreversible, even if the results could still take some time to appear. In the case of the tax substitution, results have already arrived. According to the State of São Paulo Treasure, the leading supporter of this measure, tax substitution is one of the government's major allies in combating tax eva- sion. By transferring the tax collection to the beginning of the supply chain, the tax authorities have simplified the process of monitoring payment of the respective tax and have also as- sured tax justice, by thwarting the unfair competition of some companies that do not pay their taxes in full. Moreover, the system also represents a substantial gain in tax administra- tion efficiency and reduces the related costs thanks to more concentrated controls". SPED (Public Digital Bookkeeping System) is a novelty and requires substantial investment of time and money for companies and governments to adapt to the new require- ments. The project has taken longer than planned, but it will certainly be implemented. Enforcement is assured by administrative legislation and criminal law. Obviously, in the context of a definitive impact on tax evasion and on illegal practices, the effectiveness of this program is conditional upon better equipped official bodies. Although the general direction is accurate, we must not underestimate the risks involved in implementing this program if the necessary in- vestments on equipments, even more crucially, on people, do not occur. The idea behind this Report is to illustrate how some of our investments are positioned in order to directly benefit from these moves. Not that the investment thesis in these companies is based solely on the success of these ventures; far from it. We met the theme from our bottom up analysis, not vice versa. This is just one more ingredient added to season already appealing business models. As pointed out above, the initiative is timely and, it would seem, irreversible. Its objective is unique, although hits the companies in which we invest in different ways. Let us examine some cases. 6 Estudo Sobe Sonegação Fiscal das Empresas Brasileiras (Study of Brazilian Corporate Tax Evasion), Instituto Brasileiro de Planejamento Tributário, March 2009. 2

View entire presentation