Part 1 - AL-Tax

International Taxation Handbookmodel used assumes ex-ante that the value added tax (VAT) system proposed willwork perfectly without significant transaction costs. The accounting tax systemplays a significant role in the functioning of the VAT system. A well-functioningaccounting system is a sine qua non condition for the proposed solution to work.Unfortunately, this is not the case in several emerging markets, especially Brazil.This section discusses some adjustments which are necessary to make the accountingsystem work in emerging markets, using Brazil as a special case.This chapter states that a significant reduction in tax rates on consumption mayhave a greater impact on GDP and welfare than trade liberalization. This result onlyholds if the newly reduced tax rate is implemented de facto. This new tax must becalculated and consistently charged for the system to work. The general accountingsystem plays a significant role in both phases. The VAT is based on the value addedto a certain product and involves a machinery calculation related to a margin overcosts incurred to produce a certain product. To achieve this final number (the margin),firms must have an adequate cost accounting system that allocates costs toproducts on an appropriate basis. This allocation can be done using several methods.The allocation method is not the essential question. Full allocation, activitybasedcosting, etc., can be used. The central point is to guarantee that the chosenmethod is unbiased and used consistently through all the firms’ activities.It cannot, however, be assumed that all firms will have the same competenceand compliance. To guarantee the execution of the calculation proposed,accountants must be well trained and an effective auditing process must be inplace. Accounting education in emerging markets is a frequent cause for concern(Lopes, 2005). In Brazil, the accounting education system is based on a four-yearbachelor degree, without an extensive certification program like the American(CPA) and British systems (ACA, ACCA). Most colleges only offer eveningcourses and the quality of education is generally perceived to be low. Professioneducation is virtually nonexistent. In addition, most of the tax work is conductedby accounting technicians who possess only a high-school level of education.On a more general level, Brazil complies with four of the five criteria that Aliand Hwang (2000) showed to be related to the irrelevance of accounting data.First, Brazil has a bank-oriented (as opposed to market-oriented) financial system.In Brazil, few banks supply most of the capital that firms need and as a consequencethere is a lower demand for published financial reports. Second, privatesector bodies have no relation whatsoever with the standard-setting process. InBrazil, all accounting rules are issued directly by the central government or byone of the agencies that have responsibility for specific guidelines. The premisehere is that government standard setters issue rules that are designed to serve352