US embassy cable - 05BRASILIA3091

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