Tax reform will make things simpler, but Brazil will still not be for beginners

The tax reform proposal, approved by the lower house of Congress last week, is expected to pass the Senate by October after at least two months of debate. 

Finance Minister Fernando Haddad expects the upper house to simplify the proposal by removing some of the last-minute exemptions added by the lower house, and has won over the bill’s rapporteur, Senator Eduardo Braga. 

However, reducing exemptions will not be easy, as more segments — such as IT and telecommunications companies — are looking forward to securing their place on the list of more than 12 activities that will have special tax rules, including exemptions or lighter levies of 60 percent of the standard VAT. 

This tug-of-war is likely to generate more unnecessary noise around the reform, say economists who were directly involved in the proposals that led to the bill or who are closely following the changes. 

According to them, most of the exemptions approved by the House stem from the fact that many sectors and entities do not understand the VAT system — or pretend not to in order to gain advantages, as the Brazilian tax system has accustomed them to doing for decades.

“The logic of VAT is completely different from what we have today, which is a cumulative system, where taxes overlap and companies pay more than their share in the chain,” says Eduardo Fleury, an economist and tax lawyer who co-authored one of the tax reform bills that merged into the current one. 

In his opinion, some of the exemptions in the reform text reveal a profound lack of knowledge on the part of the lobbyists behind them, or even ulterior motives — as several companies claiming special conditions have already spoken with specialists and have chosen to ignore their explanations.

The VAT rate and the tax burden

The core of the proposal remains: the merger of five consumption taxes — IPI (on manufactured goods), ISS...