Identifier
Created
Classification
Origin
05BRASILIA3091
2005-11-23 17:17:00
UNCLASSIFIED
Embassy Brasilia
Cable title:  

Brazil: Tax Agency Chief Under Investigation

Tags:  EFIN ECON SNAR PGOV BR 
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231717Z Nov 05
UNCLAS SECTION 01 OF 02 BRASILIA 003091 

SIPDIS

STATE PLEASE PASS TO IRS WASHDC
NSC FOR CRONIN
DEPT OF TREASURY FOR FPARODI
BUENOS AIRES FOR BOGNANNO
BOGOTA FOR IRS - OLGA ACEVEDO

E.O. 12958: N/A
TAGS: EFIN ECON SNAR PGOV BR
SUBJECT: Brazil: Tax Agency Chief Under Investigation


UNCLAS SECTION 01 OF 02 BRASILIA 003091

SIPDIS

STATE PLEASE PASS TO IRS WASHDC
NSC FOR CRONIN
DEPT OF TREASURY FOR FPARODI
BUENOS AIRES FOR BOGNANNO
BOGOTA FOR IRS - OLGA ACEVEDO

E.O. 12958: N/A
TAGS: EFIN ECON SNAR PGOV BR
SUBJECT: Brazil: Tax Agency Chief Under Investigation



1. Summary: On November 18, 2005, federal prosecutors filed
a civil lawsuit against Jorge Rachid, Secretary of the
Ministry of Finance's Secretariat da Receita (i.e., the
Brazilian counterpart of the U.S. Internal Revenue Service)
alleging "administrative improbity." Prosecutors are
seeking to have Rachid, along with one of his assistants,
Ricardo Pinheiro, removed from office. In addition, they
are pushing to have the pair's assets frozen so these goods
can be used to compensate the GOB for the losses (the
precise amount has not yet been calculated) it may have
suffered due to Rachid's actions. Separately, the GoB
suffered a setback when a scandal-distracted Congress failed
to ratify a Provisional Measure (presidential decree)
combining Receita Federal with the revenue gathering arm of
Brazil's social security system, Receita Previdenciaria.
The GoB likely will seek to resurrect the failed merger,
which aims to make its tax collection arms more efficient.
End Summary.

The Case Against Rachid


2. The allegations against Rachid date from 1994 when he
was a fiscal auditor in Salvador, Bahia. Prosecutors
affirmed that Rachid acted with negligence in favor of two
friends representing one of the largest construction
companies in Brazil -- OAS. Specifically, Rachid was part
of a group of Receita Federal auditors responsible for
issuing a fine of R$1.1 billion (well over US$1 billion at
the exchange rates prevailing at the time) against OAS.
Later during the proceedings, the amount of the fine was
dropped to R$25 million. Prosecutors are accusing Rachid of
negligence through the use of the wrong formula to calculate
the amount owed by OAS. They believe that Rashid
associates Sandro Martins and Paulo Baltazar, both OAS
representatives, pocketed R$18.3 million (US$ 8.3 million)
in the wake of the large reduction in the assessed fine.


3. Prosecutors also believe that since 2003 Rachid has
been taking advantage of his position to impede the
investigation into himself and his OAS associates. For
instance, in 2003, Martins served as Rachid's special

assistant for 3 months. In addition, on October 6 of this
year, Rachid signed a decree making it possible for him,
under certain circumstances, to remove a member of the
commission which was looking into the charges against him.
Meanwhile, Ricardo Pinheiro, Rachid's assistant, is being
sued along with Rachid as Pinheiro managed the 1994 audit
against OAS.

The Death of the Super Receita


4. After the no show of at least 41 senators at the
Senate's voting session on November 18, Medida Provisoria
258 (MP258) which would have created a "Super Receita" --
i.e., the integration of Receita Federal with the Receita
Previdenciaria (the US counterpart of Social Security)
expired. Many observers felt that having Receita Federal
work in conjunction with Receita Previdenciaria was an
eminently sound idea. A Super Receita would facilitate and
increase tax collection and simplify and stimulate better
and more efficient procedures, thus helping to reduce tax
evasion. However, in order for all this to happen, both the
Chamber of Deputies and the Senate would have had to approve
MP 258 within 120 days of its issuance. They never did,
principally because of the continued distractions from the
ongoing political corruption scandal.


5. Still, the GOB hasn't given up on the idea. It is
already working on developing a formal law (Projeto de Lei)
reestablishing the Super Receita. However, for foreseeable
future the Super Receita will not be an easy sell for GOB.
Opposition parties such as the PFL, PSDB and PDT aren't
buying the proposal, noting that the GOB is trying to
concentrate too much power in one place. Not even industry
and the entrepreneurial sector has been able to budge the
opposition on this. And as an election year is just around
the corner, chances are considerably diminishing for both
sides - the GOB and the opposition -- to reach an agreement
on the Super Receita.

Next Steps for Rachid and the Super Receita


6. Coincidence or not, the timing of events has been good
for Rachid. Under enemy fire, he has been nominated, by
President Lula, to command simultaneously both Receita
Federal and Receita Previdenciaria while the GOB tries to
gain approval of the formal law uniting them. This is the
first time that one person has been tapped to lead at the
same time two secretariats within two separate ministries:
Finance and Social Security. The elevation of Rachid to
"Super Secretary" of the still separate Receitas is not
only a device for the GOB to keep the dream of the Super
Receita alive, but it is a sign that the Lula administration
plans to stick with Rachid notwithstanding the current
allegations against him.


7. Still, Rachid continues to face challenges as ongoing
strikes at Receita Federal continue to impede that agency's
work. On November 22, Receita's fiscal auditors and
technicians returned to work after extended stoppages.
Employees have threatened to return to the picket line if
the GOB sends to congress the formal law proposing the
creation of the Super Receita.

Chicola