Tax reform bill clears hurdle in the Senate

Eduardo Braga, the tax reform rapporteur in the Senate. Photo: Geraldo Magela/SF

The Senate’s Constitution and Justice Committee approved on Tuesday by a 20-6 vote a major tax reform bill sponsored by the Luiz Inácio Lula da Silva administration, a key step to simplifying Brazil’s Byzantine tax code.

The bill is scheduled for a floor vote on Wednesday. If approved, it will return to the House, requiring another two-round vote and a 60 percent majority.

The tax reform will consolidate Brazil’s five multi-level consumption 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.

The bill will also change Brazil’s tax system from an origin-based sales tax to a destination-based sales tax, that is, to charging taxes where the buyer is located or where the product is headed, as opposed to where the business is headquartered.

Furthermore, the bill will severely limit the ability of state governments to offer tax incentives to specific economic sectors. Tax incentives will move from a fiscal to a budgetary policy — that is, a tax incentive for a given economic sector in a state must be defined in the state’s budget with a specific amount, rather than being enacted by a tax cut.

Opposition whip Rogério Marinho tried and failed today to postpone the vote. Back in July, former President Jair Bolsonaro requested allied lawmakers to vote against the tax reform, but some House members in his own party voted in favor. Over the last few months, Mr. Bolsonaro has been speaking on social media against the proposal.

Senator Eduardo Braga, the bill’s rapporteur, presented his extensive draft back on October 25. The text added exceptions to the rules, with more economic sectors being entitled to special tax regimes.

Mr. Braga’s second draft, introduced and approved today, adds even more exceptions. For example, taxi drivers will remain exempt from certain taxes on cars. The tax on cooking gas was included in the cashback rule for poorer families.

Automakers that manufacture ethanol-powered cars were added as potential beneficiaries of tax breaks. A mechanism was also added to the revenue redistribution system in order to reward states that collect more taxes.

“The report is not a perfect work of art, but, in a democracy, it is the construction of that which is possible, especially given the correlation of forces in democracy,” Mr. Braga told the committee. “This is the first tax reform that Brazil has implemented under a democratic regime, which is very difficult.”

The increase in the number of exceptions will increase the tax rate for the products and services not under the special rules. Mr. Braga told fellow senators he will request the Finance Ministry for a study on the impacts of the new changes. The report could potentially inform the upcoming vote in the House.