Is Brazil finally having a tax reform?

. May 23, 2019
tax reform brazil

For the past few weeks, the Brazilian government and Congress have held a tug of war, with each side looking for displays of strength to knock their counterparts off balance. Yesterday, it was the lower house’s time to show its force. In the House’s Constitution and Justice Committee, lawmakers approved a tax reform bill before the government has even had the chance to draft a proposal of its own.

After the pension reform dragged on for weeks in the very same committee, fast-tracking the tax reform—which is the number 2 priority of the government’s economic agenda—is Speaker Rodrigo Maia’s way of showing President Jair Bolsonaro that Congress can move fast, as long as it wants to. With Congress not keen on giving up much ground, government officials have shown discrete signs of support to the reform.

</span></p> <h2>What does the tax reform bill say?</h2> <p><span style="font-weight: 400;">In theory, the bill would make Brazil&#8217;s tax system less bureaucratic. It </span><a href=""><span style="font-weight: 400;">creates a new tax</span></a><span style="font-weight: 400;">, called the Tax on Goods and Services (IBS). It would be a value-added tax, resulting from the unification of three federal charges—tax on manufactured goods (IPI) and social security contributions PIS and Cofins—the state goods and services tax (ICMS), and municipal services tax (ISS). The transition would take ten years to conclude.</span></p> <p><span style="font-weight: 400;">In order to respect all three levels of government (federal, state, and municipal), the proposal would allow each to charge different rates. Another tax, for special goods and services, is also being considered on the federal level.</span></p> <p><script src="" type="text/javascript" charset="utf-8"></script></p> <p><span style="font-weight: 400;">Including ISS and ICMS is also a way to deal with tax wars being waged between states and towns, one of the worst problems of Brazil’s labyrinthine system. It also makes the proposal even more ambitious than Economy Minister Paulo Guedes&#8217; yet-to-be-presented plan. Recently, he said the government wants a gradual transition, focused only on federal taxes to avoid “</span><a href=""><span style="font-weight: 400;">overstepping [the government&#8217;s] powers</span></a><span style="font-weight: 400;">.”</span></p> <p><span style="font-weight: 400;">Ideally, the effort for the reform would mean Brazil has a shot at making its super-complex tax system a bit simpler—which could lift many hurdles for businesses—as well as passing the </span><a href=""><span style="font-weight: 400;">pension reform</span></a><span style="font-weight: 400;"> still in 2019. For a cash-strapped administration, it would also be a major boost. But Brazilian politics is far from an ideal world.</span></p> <h2>Arm wrestling</h2> <p><span style="font-weight: 400;">At first glance, it may seem that Congress and the government are aligned over the matter. But according to political scientist Leandro Gabiati, a director at consultancy firm Dominium, Congress is by no means extending an olive branch to the administration—this is a </span><a href=""><span style="font-weight: 400;">display of power</span></a><span style="font-weight: 400;">.  </span></p> <p><span style="font-weight: 400;">“What House leaders are trying to do is show </span><i><span style="font-weight: 400;">they</span></i><span style="font-weight: 400;"> are going to set Brazil’s economic agenda—not the Executive branch. Congressmen will put the reform on hold, so it won’t interfere with pension reform,” he told </span><b>The Brazilian Report.</b></p> <p><span style="font-weight: 400;">“Mr. Guedes may eventually send his bill, but lawmakers have already said they do not want to discuss the government’s proposal. If the president doesn’t want to negotiate with Congress, then let’s move forward with our own projects.”</span></p> <p><span style="font-weight: 400;">House Speaker Rodrigo Maia reportedly reached a deal with Mr. Guedes to wait for developments with the pension reform before moving forward with the tax reform. But the menace of that bill will continue to hover—as its speedy process so far shows. </span></p> <p><span style="font-weight: 400;">The tax system overhaul was proposed on April 4 and, less than two months later, it was approved by the Constitution and Justice Committee. Now, it will have a special committee of its own, reaching the same stage the pension reform is at, despite being presented by President Jair Bolsonaro himself on February 20. As both projects amend the Constitution, they must go through two rounds of votes in the House and Senate—with 60 percent of support—in order to be approved.</span></p> <h2>The limits to Congress&#8217; showboating</h2> <p><span style="font-weight: 400;">An overhaul of this magnitude cannot prosper without the Executive’s blessing, says Mr. Gabiati. Eventually, if Mr. Guedes sends his proposition, it would be easy to merge them. However, all of this depends on political negotiations—the Achilles heel of this administration so far. </span></p> <p><span style="font-weight: 400;">“Interfering with revenue is such a delicate matter that demands power which is only available in the president&#8217;s office. You need an army of technocrats to create a bill that can be trusted regarding revenue losses or gains. Only the Economy Ministry has that ability. You also need data from internal revenue services—which Congress doesn’t have. I don’t see many chances of it prospering [without the help of the administration],” says Mr. Gabiati.</span></p> <p><span style="font-weight: 400;">Waiting for the pension reform to be approved creates another issue: timing. In 2020, Brazil will hold municipal elections, making it even harder to pass legislation altering states&#8217; and municipalities&#8217; finances in such a dramatic way.</span></p> <p><span style="font-weight: 400;">In other words, without political drive and support from President Bolsonaro, the outlook for the tax reform is not so good. But there are those who bet on a chance of improved dialogue between the branches of power, such as Congressman Felipe Francischini, the chairman of the Constitution and Justice Committee. “We can create consensus in the parliament. Sometimes this fight [between government and Congress] is created by the media, by social media. To move forward with important matters there has to be more dialogue.”

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