Brazilian Evidence on Tax Evasion and Enforcement: A Case Study of Global North–South Comparison

• Author: Viviani Silva Lírio,Felippe Clemente,Temidayo James Aransiola
• Date: 01 December 2021
• Published date: 01 December 2021
• DOI: 10.1177/07340168211038040
• Subject Matter: Articles

Article

Brazilian Evidence on Tax

Evasion and Enforcement:

A Case Study of Global

North–South Comparison

Felippe Clemente

1

, Viviani Silva L´

ırio

2

,

and Temidayo James Aransiola

3

Abstract

This study investigates the differences observed in the rate of tax evasion between the Global North

and South countries, with special focus on Brazil, by comparing key parameters of their tax systems,

namely, tax burden, audit cost, and fines. This is achieved by extending and applying Graetz,

Reinganun, and Wilde’s model using data from tax authorities from European and Latin American

countries, which produced parameters that are used for Bayesian games. The results show that tax

evasion is directly associated with tax burden and audit cost, but the effect of fines is unclear.

Overall, findings pointed to shortcomings in the tax system of Latin American countries that create

the avenue for high tax evasion.

Keywords

tax evasion, global north–south comparison, Brazil

The problem of tax evasion is a priority to many governments, given that it shorts the public

budget that could be allocated to providing vital services (e.g., health, education, safety), yet, it is

notoriously difficult to detect and measure it. Tax evasion can be succinctly defined as the illegal and

intentional actions taken by individuals and firms to reduce their legally due tax obligations, by

underreporting incomes, sales, or wealth; by overstating deductions, exemptions, or credits; or by

failing to file appropriate tax returns (Alm & Martinez-Vazquez, 2003).

According to Alm and Martinez-Vazquez (2003), tax evasion poses far more serious co nse-

quences in developing and transition countries (henceforth, Global South) than in developed econo-

mies such as European and North American countries (henceforth, Global North); however, most of

the studies in the literature on the topic are focused on the context of the Global North. Nevertheless,

1

Institute of Social Sciences, University of Lisbon, Portugal

2

Rural Economics Department, Federal University of Vic¸osa, Brazil

3

Institute of Economics, University of Campinas, Sa

˜o Paulo, Brazil

Corresponding Author:

Felippe Clemente, Institute of Social Sciences, University of Lisbon, Av. Prof. An´

ıbal de Bettencourt, 9, Lisbon 1600, Portugal.

Email: felippe.clemente@ics.ulisboa.pt

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DOI: 10.1177/07340168211038040

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2021, Vol. 46(4) 450–465

some studies have borrowed, adjusted, and compared lessons from the analyses of tax evasion and

enforcement in the Global North context for the better understanding and reduction of tax evasion in

the Global South (Alm & Martinez-Vazquez, 2003; Bird & Casanegra de Jantscher, 1992;

Martinez-Vazquez & McNab, 2000; Schneider & Enste, 2000; Tanzi, 1980). A few other studies

specify even further by comparing differences in estimating this phenomenon between the regions of

Latin America and Europe that have the highest and lowest tax evasion rates, respectively (Bagnulo

et al., 2009; Fern´andez-Ballesteros et al., 2009; Guseinova et al., 2011; Inostroza et al., 2010; Korol,

2013; Raffo et al., 2008). Additionally, these studies design different comparative strategies, such as

the effectiveness of descriptive and statistical analysis, decisional trees, and artificial neural network

models for a better understanding of tax evasion in both regions.

In Latin America, Brazil gains the spotlight because of the combination of three risk factors

related to tax evasion: (i) the soft legislation, (ii) the high tax burden (besides being complex and not

very transparent), and (iii) the low social returns. Estimates from the National Union of National

Treasury Attorneys between January 1 and November 23 of the year 2020 show that Brazil lost

R$562 billion due to illicit practices relating to tax evasion (equivalent to 7.6%of the gross domestic

product [GDP]; SINPROFAZ, 2020). However, contrary to what occurs in many European nations

and even in Latin America, tax evasion in itself is not considered a crime in Brazil. The categoriza-

tion of tax evasion as a criminal offense in the Brazilian legislation depends on the existence of a

fraudulent practice, that is, the deliberate attempt to commit fiscal fraud. Even so, if the tax evasion

is identified and the due amount is paid, the investigation procedure is dissolved, that is, once the

debt is paid, the practice of tax evasion is disregarded and there is no punishment for the agent who

committed the attempted tax fraud, favoring the existence of a sense of impunity.

Regarding tax burden, there are some estimates made by the Brazilian Institute of Planning and

Taxation (IBPT) that give a clear illustration of its magnitude. In the year 2006, the average

percentage of income paid in tax on consumption, property, income, and others was about

39.72%; this value reached 41.25%in the year 2020 (IBPT, 2020). Using an alternative parameter,

this report showed that the number of days that the taxpayer needs to cover the average tax burden

increased from 4 months and 25 days in 2006 to 4 months and 30 days in 2020. Such estimates place

Brazil in ninth place in terms of tax burden, however, without any similarity in terms of social return

or quality of life compared to the other countries at the top of the ranking.

In terms of social returns, IBPT has been calculating and publishing, since 2011, the Index of

Return of Welfare to Society to measure the return of taxes levied by countries to the population. The

index considers the 30 countries with the highest tax burden in the world, including Brazil, to

indicate how these countries perform. In the latest report, published in 2018, Ireland, the United

States, Switzerland, South Korea, and Australia are the best placed countries in terms of the quality

of the application of the taxes collected, with regard to the impacts on improving the quality of life of

their citizens. In all the editions, Brazil was in last place even behind other South American

countries, such as Uruguay and Argentina.

The objective of this study is to empirically analyze the phenomenon of Brazilian tax evasion in

comparison between Latin American and European countries and, by consequence, identify good

practices that can be bridged. In specific, firstly, this study extends the theoretical model of Graetz,

Reinganun, and Wilde (GRW, 1986), such that the theoretical links between tax evasion and

enforcement variables such as tax burdens, fines, and audit costs become explicit. Subsequently,

the directions of these causal links are empirically evidenced using data from the Global North and

South regions.

The structure of this article is as follows. In the next section, we present the research background

and, in the third section, the underlying theoretical model that guides this study. These last two

sections guide the hypotheses of this study presented in the fourth section. In the fifth section, we

present the data sources and the case study is framed in the sixth section. The descriptive and

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