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With Small Changes in Composition, Labeling, and Tax Classification, Consumption Giants Reduce Rates, Clog the Carf with Disputes, Feed a Taxing Madhouse of Trillions of Reais, and Push Inefficiencies, Competitive Distortions, and Extra Costs onto the Brazilian Consumer’s Wallet Throughout the National Production Chain Today.
The case of Sonho de Valsa is the perfect gateway to understanding how small changes in formula, packaging, and tax classification can turn into a true tax juggling act. The classic candy, with its twisted packaging, became a wafer wrapped in flow pack, lost its milk chocolate coating, and gained a “chocolate flavor coating.” The change seems subtle on the shelf, but it makes a huge difference in tax classification.
At the same time, the filling of McDonald’s cones ceased to be called ice cream and is now sold as a dairy drink, dropping from a tax burden of 38.97 percent to 11.78 percent. None of this is illegal; it all relies on loopholes, classifications, and possible interpretations within a tax system that already carries the nickname madhouse and currently concentrates around 5.4 trillion reais in contested taxes, equivalent to 75 percent of the GDP of Brazil.
The Brazilian Tax System as a Conflict Factory
The starting point is a system that collects a lot and returns little in services to society.
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In 2020, Brazil collected the equivalent of 13 percent of GDP in consumption taxes, and in 2021, 14.5 percent, amounting to approximately 1.29 trillion reais just in taxes related to the act of consuming.
By August 2023, this level had already been surpassed in a situation of increasing burden.
Meanwhile, the Doing Business Subnational Brazil report, prepared by the World Bank at the request of the Secretary General of the Presidency of the Republic, showed that a Brazilian company spends between 1,483 and 1,501 hours per year just to prepare, declare, and pay taxes.
This is time that could be spent on innovation, efficiency, and product, but is consumed by fiscal bureaucracy.
According to the Brazilian Institute for Planning and Taxation, some items end up having as much as 80 percent of the price formed solely by taxes.
In practice, gasoline carries about 56.09 percent in taxes, and electricity 48.28 percent.
Even with this heavy burden, the IRBES index, which relates taxes paid to returns in social well-being, places Brazil in the last position among 30 assessed countries, with 142.29 points in 2022, far from Ireland’s 168.94, the four-time champion of the ranking.
ICMS, IPI, and the Gray Zone Where Small Changes Turn into Gold
The design of consumption taxation helps understand why small changes are worth so much money.
For individuals, the labyrinth is already known, with Income Tax, Property Tax, Vehicle Tax, and Social Security.
For companies, the picture is much more complex: in addition to these, there are dozens of accessory obligations and a framework that starts with the choice of tax regime, between Simples Nacional, Presumed Profit, and Actual Profit, depending on annual revenue.
Concerning consumption, two acronyms stand out. The ICMS, a state tax on the circulation of goods, is already embedded in the price of almost everything the consumer buys.
On the other hand, the IPI, a tax on industrialized products, is federal and, in Brazil, does not apply uniformly to the added value, as is the case in much of the world.
Here, the rate varies according to the type of product and can range from 0 to 30 percent.
This model is fueled by a nomenclature for goods, the NCM, created in Mercosur to standardize product codes among countries.
In Brazil, it also came to determine how much tax is paid.
If a given good is classified as perfume, the IPI can reach nearly 30 percent. If classified as cologne, the charge drops to 7.8 percent.
The boundary between the two opens an entire gray area for litigation.
This combination gives rise to strategies where a candy is reclassified as a wafer and ends up being taxed as a bakery product, exempt from IPI. Or where ice cream becomes a dairy drink and incurs much less tax.
The same reasoning has already been applied in disputes involving Crocs, debated as rubber sandals or waterproof shoes, cereal bars classified as confectionery or cereal preparation, and even the traditional Leite de Rosas, which changed from a taxed beautifying lotion at 22 percent to a body deodorant with an IPI of 7 percent.
Sonho de Valsa, Carf, and the Explosion of Billion-Dollar Litigations
O Sonho de Valsa is an emblematic example of how small changes in packaging and composition are designed with a tax microscope.
The change from the twisted packaging to the flow pack was presented as a way to preserve crunchiness and flavor for longer.
But the decisive move was the change of coating, from milk chocolate to a “chocolate flavor” coating, which distanced the product from the chocolate category.
Based on this, the company requested the reclassification of the product from the Administrative Council of Tax Appeals.
Previously treated as chocolate, the candy paid 5 percent IPI. As a wafer cookie, it was reclassified as a bakery product, resulting in exemption.
The precedent opened the way for a series of similar requests from other companies.
The Carf, an agency within the Ministry of Finance that adjudicates tax disputes, became the stage for this juggling act.
In the first semester of 2022 alone, there were 2,832 processes related to product reclassifications.
In parallel, the mountain of contested taxes reached about 5.4 trillion reais, 75 percent of GDP.
Of this volume, 166 billion entered into dispute starting in 2023 after a change in the council’s decision-making process.
Since 2020, in case of a tie among councilors, the so-called casting vote had been eliminated, and the benefit of the doubt remained with the taxpayer.
In 2023, the government reinstated the casting vote, which returns the power to the Union to break ties in its favor.
The Ministry of Finance’s bet is to recover, with the new rule, an estimated annual fiscal deficit of 59 billion reais caused by the previous interpretation.
When Even Giraffes Pay Import Tax
The chaos is not limited to chocolates and dairy drinks. A case brought to the Carf and then to the STJ and STF illustrates the degree of possible absurdities.
In 2007, three giraffes native to South Africa arrived in Brazil, in a barter contract between the Dallas Aquarium and the Hermann Weege Foundation, which manages the Pomerode Zoo in Santa Catarina, that would send 32 Brazilian birds in return.
There was no cash payment, nor intent to sell the animals.
Still, the Federal Revenue Service charged the import PIS and Cofins as if the giraffes were merchandise.
The foundation argued that there was no sale transaction and that the animals did not qualify as commercial goods, but lost in all instances.
The courts’ understanding was that, under the Civil Code, the giraffes were goods, and, consequently, subject to taxes on the entry of foreign goods into the country.
In the end, the institution had to pay 25,300 dollars in taxes, an amount capable of making similar operations unfeasible for other entities.
The episode became a symbol of how the Brazilian tax mesh can reach even a swap contract between zoos.
The Hidden Cost: Time, Structure, and Competitive Distortions
While companies sophisticate tax engineering, the cost of complexity also grows.
Estimates indicate that organizations based in Brazil spend about 160 billion reais per year on accounting and 34,000 hours annually on tax procedures.
It is a fixed cost that does not show up on the price tag but is passed back to the consumer in the final price.
A survey cited by the Brazilian multinational Stefanini shows the extent of the international difference: in Brazil, for every 200 employees, one works directly with accounting.
In Europe, the ratio is one in 500. In the United States, one in a thousand.
In other words, the country consumes more people and resources just to deal with tax obligations.
Classification disputes also distort competition.
When one manufacturer manages to classify its product in a lighter tax category and another does not, two very similar items reach the shelf with different tax burdens, affecting price, margin, and investment capacity.
As Carf’s decisions are made on a case-by-case basis, it is almost impossible to establish a clear line of who is right, who is wrong, and who is just better advised.
At the country’s border, the problem appears in the form of a stopped container. Imported products get held up in customs while it is discussed whether a specific NCM code is correct or not.
During this time, companies pay for the cargo’s stay at the terminal, face delays in delivery to customers, and in some cases, discover that storing the product has cost more than collecting the disputed tax.
Fiscal War, International Engineering, and the Line Between Planning and Abuse
The internal confusion coexists with a fiscal war that began with good intentions and ended up producing new imbalances.
Since the 1988 Constitution, states have gained autonomy to define ICMS rates.
The initial idea was to allow more distant regions, or those with lower income, to reduce or eliminate the tax to attract businesses.
In practice, it created a scenario where states granted successive benefits, giving up essential revenues and often without a proportional return in jobs and income.
On the business side, supply chains emerged where stages are fragmented across different states just to take advantage of incentives.
The result is a back-and-forth of loads that increases logistical costs, yet still compensates against the savings in taxes.
On the international stage, multinationals operate schemes as sophisticated as the so-called Double Irish Dutch Sandwich.
In this scheme, an Irish holding company owning intellectual property licenses its rights to another company in the Netherlands, which sells the product in high-tax markets.
The profit returns to an operational subsidiary in Ireland and is taxed at very low rates.
It is a legal game of profit allocation that has already been used by companies like Google, Apple, and Facebook, yielding annual savings of billions of dollars.
In Brazil, the situation is different. The legislation is so complex that it leaves room for practices that, in principle, remain within the law but require interpretation.
As noted by Professor Gabriel Quintanilha from FGV Direito Rio, tax planning is legitimate.
What is not allowed is abusive planning, where fictitious situations are created just to evade taxes.
If the taxpayer can, within the legal framework, adjust to pay less, there is no vice or illicit in their conduct.
Small Changes, Big Reforms, and the Debate That Is Missing
The problem is that Brazil sustains this game of small changes and fiscal juggling on a base of taxpayers who feel the weight of the tax burden in their daily lives.
While large corporations have teams capable of exploiting every loophole in the legislation, most smaller companies and ordinary citizens struggle to meet deadlines, understand rules, and avoid bureaucratic traps.
The case of Sonho de Valsa summarizes this scenario.
The country debates for years whether a product is a candy or a wafer, whether it is ice cream or a dairy drink, whether Crocs are sandals or waterproof shoes, while 5.4 trillion reais remain blocked in contests and the IRBES keeps Brazil at the end of the line in social return.
The central discussion about simplifying the system and making it predictable is always postponed.
Tax reforms promise to streamline this labyrinth, but experience shows that the pressure from specific sectors often fragments proposals, preserves privileges, and maintains gray areas.
Without clear rules, transparency in rates, and integration among taxes, the incentive to continue spinning the wheel of reclassifications remains alive.
In the end, the core issue is not whether companies should or should not engage in tax planning, but what the acceptable limit is between efficiency and abuse in a system that is costly, creates legal insecurity, and delivers little in social return.
From there, the simplification agenda ceases to be just a technical issue and becomes a discussion about what model of state and collective financing the country wants to sustain.
And you, after knowing these cases and understanding how small changes in product classification impact billions in taxes, do you think Brazil needs a reform that eliminates the loopholes or one that preserves some of this space for legitimate tax planning?
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