Brazil’s promised tax overhaul is more ‘tweak’ than ‘reform’

. Jul 22, 2020
Brazil's promised tax overhaul is rather an underwhelming tweak Senate President Davi Alcolumbre (powder-blue mask) fist bumps Economy Minister Paulo Guedes at the presentation of the new tax reform bill. Photo: Pedro França/Senate

During the 2018 presidential campaign, Paulo Guedes made markets salivate with the promise of “radical liberal reforms” were he to become the country’s next Economy Minister. Playing the role of Jair Bolsonaro’s economic tsar, he pledged to completely overhaul the complex tax system and make Brazil a more business-friendly country.

However, these changes were not nearly as swift as Brazilian markets had hoped. A whole 18 months after taking office as Economy Minister, Mr. Guedes finally presented his tax reform bill this week — but calling it a ‘reform’ is a stretch, coming across more like a tweak that, while being important, is a lot less than was expected.

</p> <p>The bill he submitted to Congress on Tuesday includes a single reform proposal: merging social contributions on consumer goods PIS and Cofins into a single 12-percent levy —&nbsp;to be called “Social Contribution on Goods and Services.” And even this solitary change was not exempt from criticism, with some economists believing the rate is <a href="">too high</a> and that it will be particularly cumbersome to the services sector, potentially creating inflationary pressures on consumers.</p> <p>Even Congress — typically averse to reform — considered the proposal &#8220;not bold enough.&#8221; Indeed, lawmakers had begun discussions last year on merging multiple federal taxes — including PIS and Cofins — with other state- and municipal-level taxes. But Mr. Guedes says the federal government cannot interfere with taxation at those levels.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/816178" data-url=""><script src=""></script></div> <p>Despite the criticism surrounding the administration&#8217;s &#8216;lackluster&#8217; proposal, it is important to highlight that the change Mr. Guedes proposes is an important one.</p> <p>PIS and Cofins taxes are regulated by <a href=",(LC%20123%2F2006).">myriad rules</a> that, according to the Economy Ministry, amount to 2,000 pages —&nbsp;forcing companies to spend enormous resources just to comply with the law. Moreover, each new product sparks doubts on whether or not these levies apply, often leading to tax lawsuits. There are currently 71,000 open cases concerning PIS and Cofins involving the Federal Revenue Service and Brazil&#8217;s Administrative Court of Tax Appeals (Carf). The Supreme Court is dealing with 22 issues related to these two taxes and lower courts face over 10,000 cases.</p> <p>Moreover, this tax change can be approved without the need for a constitutional amendment, making its <a href="">congressional path</a> much, much easier.&nbsp;</p> <p>Economist Fabio Klein <a href="">told</a> C6 Bank&#8217;s content platform 6 Minutos that the new tax will be inspired by the Canadian model for a value-added tax. &#8220;A federal VAT would be a sort of flagship to encourage states to adhere,&#8221; he was quoted as saying.</p> <iframe src="" width="100%" height="232" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe> <hr class="wp-block-separator"/> <h2>A symbolic gesture </h2> <p>After a meeting between government members and congressional leaders, Mr. Guedes spoke to the press, flanked by House Speaker Rodrigo Maia and Senate President Davi Alcolumbre. The gesture was seen as the trio&#8217;s commitment to quick approval of the proposal. &#8220;Politics will dictate the pace of the reforms,&#8221; said the Economy Minister.</p> <p>Interestingly, however, none of three mentioned President Jair Bolsonaro, who has antagonized Congress on several occasions since becoming the head of state.</p> <p>Mr. Guedes said his idea is to propose a tax reform step-by-step, and that Tuesday&#8217;s bill is just the first move. He promises to slash corporate income taxes and <a href="">begin taxing companies&#8217; dividends</a> in the future. But he won&#8217;t touch the issue of state and municipal taxes. “It is not for an Economy Minister, but for Congress to legislate relations between federal entities. I can&#8217;t overstep the jurisdictions of mayors or governors,” he told reporters.</p> <p>The government&#8217;s bill will have to &#8220;compete&#8221; with <a href="">two other proposals already being discussed</a> in each of the congressional houses — both of which are broader than the government’s bill. Right now, there is no political consensus to approve either one of them.</p> <div class="flourish-embed flourish-sankey" data-src="visualisation/3253356" data-url=""><script src=""></script></div> <h2>The long road to pass the tax reform</h2> <p>The lack of an agreement over the tax reform is a consequence of several factors, one being the political dispute between the different branches of government in Brazil. In last year&#8217;s pension reform, the most meaningful achievement since Mr. Bolsonaro became president, the <a href="">credit was given to House Speaker Rodrigo Maia</a>.</p> <p>Now, Mr. Guedes — once hailed as Brazil&#8217;s new economic tsar — wants his moment in the sun.</p> <p>Another obstacle, the most important of them, is to manage the interests of potential winners and losers. There is a virtual unanimity that the sweeping reform of a system known to be chaotic would ease the economy, but most are not willing to relinquish gains or carry the burden of new taxes. Disputes among different states, cities, or even economic sectors have left the reform stuck in the mud for decades.&nbsp;</p> <p>“The diagnosis of the need for reform is unanimous: the tax system is unfair, irrational, and penalizes the poor. It encourages evasion and fraud, it is very expensive to pay and receive taxes —&nbsp;for both taxpayers and state entities,” <a href="">writes</a> Antônio Augusto de Queiroz, a director at the Inter-Union Department of Parliamentary Advisory (DIAP).</p> <p>Mr. Queiroz told <strong>The Brazilian Report</strong> that, despite the need for simplification, the reform is anything but a shoo-in. “It is a <a href="">very complex topic</a>, not easily resolved. There are at least three types of disputes. One between different government levels — federal, state, and city. There is a dispute between taxpayers and the government — the taxpayer wants to pay less, and the government wants to charge more. And perhaps the most fierce comes among regions, over exemptions and tax breaks.”</p> <p>According to Mr. Queiroz, these complications make the government&#8217;s idea of a gradual step-by-step reform the right one. He sees this as a way to avoid the discussion of controversial shifts, such as the taxation of financial transactions, while Mr. Maia’s leads the lower house — his term is set to expire in February 2021.</p> <p>“Though modest and fragmented, it is a significant advance. Still, it is limited to the unification of taxes at the federal level. I see a reasonable chance of approval, though a high 12-percent rate will penalize the services sector and may face resistance in Congress.”

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José Roberto Castro

José Roberto covers politics and economics and is finishing a Master's Degree in Media and Globalization. Previously, he worked at Nexo Jornal and O Estado de S. Paulo.

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