Brazil’s tax reform — will this time be the charm?

. Jul 17, 2020
Brazil's tax reform — will this time be the charm? Jair Bolsonaro and Economy Minister Paulo Guedes. Photo: Isac Nóbrega/PR

This newsletter is for PREMIUM subscribers only. Become one now!

We’re covering Brazil’s new push for a tax reform — will this time be the charm? Souring relations with Argentina — and not-so-great with the U.S., either. Plus, Brazil reaches 2 million coronavirus cases.

Is the tax reform finally coming to life?

After a deal brokered with Congress, Economy Minister Paulo Guedes agreed to submit the government’s tax reform proposal by Tuesday of next week.

An overhaul of the tax system is a longtime promise from Mr. Guedes, but he has failed to draft a proposal after 18 months in office. As a matter of fact, the government saying they will present the bill &#8220;next week&#8221; has become a running joke behind the scenes in Brasília.</p> <p><strong>Why it matters.</strong> Brazil&#8217;s tax system imposes a heavy burden on companies and individuals, collecting over BRL 1.1 trillion (USD 206 billion) in <a href="https://impostometro.com.br/">taxes</a> already this year — an amount that would, in BRL 100 notes, fill 366 20-foot containers. It is also an overly complex system, forcing companies to spend big bucks on consultancies just to comply with the rules.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/816178" data-url="https://public.flourish.studio/visualisation/816178/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Financial transaction tax.</strong> The federal administration reportedly wants to slap a 0.4-percent tax on cash withdrawals and transfers — combined with a 0.2-percent levy on debit and credit card transactions (to be paid by consumers <em>and</em> merchants alike). In compensation, payroll taxes would be scrapped.</p> <ul><li>This sort of tax is proportionally <a href="https://brazilian.report/business/2019/09/11/cpmf-economy-ministry-central-bank-new-tax/">much more onerous on the poor</a> as it has a cumulative effect on the productive chain, causing inflation — consumption goods, including food products, take the biggest blow.</li><li>Additionally, University of Western Ontario assistant professor Felipe Restrepo <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2994163">says</a> this sort of levy <a href="https://brazilian.report/opinion/2019/08/12/bolsonaro-tax-financial-operations-system/">reduces credit availability</a> and hinders growth.</li></ul> <p><strong>Dividends.</strong> The plan includes lowering the current 34 percent tax rate on corporate profits to somewhere around 20 percent — similar to the U.S. — and then charging dividends by an additional 15 percent. Yesterday, Mr. Guedes said the government could end corporate income taxes altogether —&nbsp;but added that this part of the project is not yet ready.</p> <p><strong>Guedes v. Maia.</strong> The Economy Minister&#8217;s biggest adversary is House Speaker Rodrigo Maia — who already stole Mr. Guedes&#8217; thunder with the passing of last year&#8217;s pension reform. Mr. Maia opposes the tax on financial transactions and instead supports an <a href="https://brazilian.report/newsletters/brazil-daily/2020/02/20/brazilian-congress-tax-reform-cid-gomes-shot-police-strike/">ongoing bill</a> in Congress to create a value-added tax. This would be the result of merging three federal charges — tax on manufactured goods (IPI) and social security contributions PIS and Cofins, as well as state goods and services tax (ICMS), and municipal services tax (ISS).</p> <p><strong>Barking up the wrong tree.</strong> Mr. Guedes insistence on taxing financial operations could make him lose precious time during a challenging moment in which Brazil desperately needs to send positive messages about its economy. In an online event yesterday, Mr. Guedes said he would leave the government if Congress were to &#8220;block the agenda of reforms.&#8221; The minister has pulled that stunt on multiple occasions —&nbsp;and Mr. Maia could be ready to call his bluff this time.</p> <hr class="wp-block-separator"/> <h2>Brasília, we have a problem</h2> <p>Argentina&#8217;s Foreign Minister Felipe Solá has lashed out at President Jair Bolsonaro, saying the Brazilian far-right leader has created an &#8220;undeniable relationship problem&#8221; between Brasília and Buenos Aires. Mr. Solá cited an &#8220;unprecedented lack of desire for integration&#8221; with Mercosur countries, the trade alliance between the two countries along with Paraguay and Uruguay.</p> <p><strong>Why it matters.</strong> Argentina is Brazil&#8217;s third-largest trading partner and a key ally. Moreover, due to Mercosur rules, any trade deals or changes in import tariffs must be consensual among the bloc&#8217;s member states —&nbsp;and Mr. Bolsonaro&#8217;s confrontational stance towards his neighbors will not make life any easier for Brazil, which wants to foster more free trade.</p> <p><strong>Defeats.</strong> Paradoxically, Brazil has been the reason for stalling trade deals. The government&#8217;s laissez-faire approach towards deforestation has transformed the country into the world&#8217;s environmental bogeyman — and has been used by some European Union countries as justification to <a href="https://brazilian.report/newsletters/brazil-daily/2019/09/19/austria-veto-eu-trade-agreement-mercosur/">block the free trade deal</a> with Mercosur.</p> <ul><li>A study called &#8220;<a href="https://science.sciencemag.org/content/369/6501/246/tab-figures-data">The rotten apples of Brazil&#8217;s agribusiness</a>&#8221; shows that up to 22 percent of Brazilians exports which leave the Amazon and Cerrado biomes and head to the EU might have left illegally deforested areas. Last week, the government finally made a commitment to preserve the rainforest. The <a href="https://brazilian.report/podcast/2020/07/16/explaining-brazil-podcast-deforestation-is-bad-for-business/">latest episode</a> of our Explaining Brazil podcast breaks down what that means.</li></ul> <p><strong>Losing money.</strong> The souring relationship with Argentina is bad for business. Reporter Lucas Berti showed that <a href="https://brazilian.report/latin-america/2020/06/10/blanked-brazil-argentina-turning-china-trade/">China has now surpassed Brazil</a> as Argentina’s biggest trade partner.</p> <hr class="wp-block-separator"/> <h2>He loves me &#8230; he loves me not</h2> <p>A <a href="https://youtu.be/72dIrFu_8aw?t=585">video</a> of U.S. President Donald Trump receiving a briefing on the U.S. Southern Command Enhanced Counternarcotics Operations has ruffled feathers among Brazilian diplomats and military officers. That&#8217;s because of how U.S. Navy Admiral Craig Feller appears presenting Brazilian Brigadier David Almeida Alcoforado: &#8220;Brazilians are paying for him to come and work for me.&#8221;</p> <p><strong>Say what?</strong> Many saw these words as testament of how the U.S. treats their allies in a condescending manner — and of how Jair Bolsonaro&#8217;s automatic alignment with Mr. Trump has not changed this attitude.&nbsp;</p> <p><strong>Why it matters.</strong> Mr. Bolsonaro&#8217;s entire foreign policy philosophy is based on one thing: being a top ally of the U.S. — but it hasn&#8217;t panned out as expected.</p> <ul><li>Columnist Benjamin Fogel <a href="https://brazilian.report/power/2020/07/14/trump-biden-election-us-presidency-mean-bolsonaro/">wrote</a> on <strong>The Brazilian Report</strong>: &#8220;For all their sycophancy, Mr. Bolsonaro and his Foreign Minister Ernesto Araújo — who once penned an essay depicting Mr. Trump as the savior of Western civilization — could not stop the U.S. slapping a travel ban on Brazilians in light of the Covid-19 pandemic.&#8221;</li></ul> <p><strong>Breaking with tradition.</strong> It is worth remembering that the Brazilian Armed Forces have traditionally been wary about the North American power&nbsp;—&nbsp;and never pledged unconditional alliances. Even the Washington-backed military dictatorship tried to keep the U.S. at arm&#8217;s length and preached foreign policy independence —&nbsp;establishing <a href="https://brazilian.report/podcast/2019/04/24/brazil-deal-china-relations/">relations with Communist China in 1974</a>.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Coronavirus.</strong> Brazil has become only the second country to top the mark of <a href="https://brazilian.report/power/2020/07/16/2-million-covid-19-cases-in-brazil-the-anatomy-of-a-disaster/">2 million confirmed Covid-19 cases</a> — with almost 76,700 confirmed deaths. The numbers are much larger, scientists say, due to Brazil&#8217;s low testing rates and lack of action to control the spread. Despite mounting criticism, President Jair Bolsonaro has said Interim Health Minister Eduardo Pazuello will stay in office.</li><li><strong>Congress.</strong> As we reported in <a href="https://brazilian.report/newsletters/brazil-daily/2020/07/16/brazil-new-branch-brics-bank-5g-coronavirus/">yesterday&#8217;s Daily Briefing</a>, President Jair Bolsonaro&#8217;s decision to break with a deal and veto parts of the <a href="https://brazilian.report/newsletters/brazil-daily/2020/06/02/brazil-government-turns-to-sanitation-overhaul-to-kickstart-economy/">new sanitation regulations</a> has infuriated lawmakers. Mr. Bolsonaro scored out a provision which would have allowed states and cities to renew concessions with state-owned companies for another 30 years. Now, even those who agree with the president in principle have supported overturning the veto, stressing that deals brokered with Congress must be respected. On Thursday, the lower house imposed a defeat to the government, extending the coronavirus emergency aid to sports professionals and greenlighting the renegotiation of football clubs&#8217; tax debts.</li><li><strong>Cabinet.</strong> New <a href="https://brazilian.report/society/2018/12/07/brazil-education-productivity/">Education</a> Minister Milton Ribeiro, a presbyterian preacher, defended secularism in public school during his inauguration ceremony on Thursday. He also denied supporting physical punishment of children — a worry that surfaced after a video of Mr. Ribeiro saying children must learn through &#8220;pain&#8221; came to light.</li><li><strong>Communication.</strong> The Federal Accounts Court, which monitors public spending, wants Press Secretary Fábio Wajngarten to leave the government. His department has not complied with transparency rules when disclosing expenditure on ads; the press revealed the government paid for ads in gambling and even pornographic sites. Moreover, he has a conflict of interest —&nbsp;and his own company provides services to government advertisers.

Our content is protected by copyright. Want to republish The Brazilian Report? Email us at contact@brazilian.report