Brazil's bid for tax reform
Brazil is a continental country organized in the form a Federation where the Union, the States and Cities have the constitutional power to tax. In federations subject to non-centralized structures, as it is the case of Brazil, tax collection is specially associated with political leverage. The complexity derives from the various key actors (federal, state and city lawmakers, governors, mayors) with specific agendas backed by the apportionment of tax revenues.
Published on 05/01/2018
In the mid 60's, right after the 1964 military coup, Brazil approved a tax reform that sought to centralize the administration of tax revenues and reduce the power of States. The outcome was the facilitation of public investments, which led to the highest global growth rates during the 70's. Brazil became the second country to adopt VAT following France. With the end of the coup in the late 80's, Brazil introduced a relevant tax reform to eliminate political and economic centralization at the federal level, regional differences and promote economic growth. To an extent, this reform also achieved its goals. Today the 1988 tax model is seen as obsolete from an economic standpoint and requires urgent and deep changes.
Where does this matter stand now? The view is that public administration spends excessively based on the pillars of an inefficient tax system that often lacks economic rationale. The continuous disputes on tax collection derived from the same taxable events among federal, state and city tax authorities increases risk and costs for businesses. The consensus among society, non-governmental organizations, think-tanks, universities and corporate Brazil is that this situation has arrived at its limit and that the overall tax burden on the country's GDP can no longer increase. The view is that governments have to reduce expenses no matter what. This clash between society and public administration has set the agenda in the past years.
The short-term scenario suggests that Congress will review the terms of the bid in between the coming months and the first quarter of 2018. The analysis of the social security reform should have priority. The recently approved labour and employment reform meant the adoption of flexible, pro-business and modern regulations that should reduce payroll and litigation costs.
The purpose of the reforms, which also includes a political one, is to ensure costs of doing business in Brazil will reduce. The central point is the simplification of the system, reduction of compliance costs and mechanisms to minimize any financial impact on the public administration. The core ideas are elimination of ten indirect taxes, introduction of a State good and services tax, a Federal selective tax on certain goods and services (on blue chip industries as telecom, energy etc), and cities asset taxes, and consolidation of the corporate income tax and of the social contribution tax on net income into one single tax.
The long-term scenario could be a deeper reform and would only take place upon the presidential election at the end of 2018. If the current political environment makes the approval of the 2017 tax bid difficult, the federal government is still likely to make unilateral relevant changes seeking to simplify and improve the federal tax legislation.
Overall, the conclusion for U.S. investors in Brazil is optimistic. The international and domestic markets project that sooner than later the Brazilian tax system will substantially change and improve. With the end of this severe recession, the business community assumes the next tax reform, as in 60's and the 80's should pave the way for a solid growth cycle grounded on a sound and simpler tax environment.
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