Lula’s proposal to give the tax reform some teeth

Finance Minister Fernando Haddad on Wednesday delivered to House Speaker Arthur Lira a bill with regulations for Brazil’s landmark tax reform, approved last year. The 356-page draft includes legal definitions and other minutiae necessary for the reform to work, and the real novelty lies instead in political developments, tax law expert Maria Carolina Gontijo told The Brazilian Report.

The tax reform, approved in a constitutional amendment enacted in December, will radically change Brazil’s Byzantine consumption tax system by consolidating five multi-tiered taxes into two VAT-like levies: one at the federal level (CBS) and one for states and municipalities (IBS). Currently, the state-level ICMS tax on goods and services is by far the main source of revenue for state governments.

Moreover, the reform will gradually change Brazil’s tax system from an origin-based sales tax to being destination-based, meaning that taxes will be collected where the buyer is located or where the product is headed, rather than where the business is headquartered. Finally, the new rules also limit the ability of state governments to offer tax incentives to specific economic sectors.

Because of all these politically sensitive changes, the tax reform approved last year faced resistance from several political sectors — something which happened on a much smaller scale with the regulations presented this week, Ms. Gontijo says.

The group of governors...