Congress Tax Reform in Brazil
Politicians and citizens alike have observed the Brazilian Congress with unrivaled attention throughout last year because one of its most awaited reforms seems to be taking long strides in finally being implemented after twenty years since the first project for this was presented to the legislative in may 23th of 1995 by president Fernando Henrique Cardoso seeking to implement a dual IVA (federal/stately) but keeping the Tax on Services intact (ISS).
Today such a project would certainly be considered unambitious as authorities have certainly become increasingly bold over the possibility of reforming the national tax system in hopes of solving some of the more concerning fragilities that cause despair among international and local investors alike.
This is because, for starters, Brazil has at least fifteen distinct taxes that are not only segregated as federal, stately and municipal, but also whose assessment can sometimes occur simultaneously or even cumulatively. As anyone with a shallow knowledge of economics can state, the more taxes a business is obliged to answer, the more ancillary obligations prowl the surroundings which invariably leads to the need for more accountants, administrators and of course, lawyers experienced enough to deal with the many mistakes that may still happen despite the taxpayer`s best efforts.
A system of this complexity scares potential investors in the country, having already been considered by the Organization for Economic Co-operation and Development ("OECD") in its 2018`s annual report as one of the primary reasons that investors skip Brazil entirely in favor of more welcoming markets. Even most national tax specialists find it is hard to criticize foreign investors when there is such a high cost in maintaining a respectable operation.
However, it seems that the winds of change are finally blowing in the country and today it is safe to say that Brazil has at least three main players when it comes to a tax reform: Fiscal Citizenship Centre`s Director Bernard Appy; Congressman Luiz Carlos Hauly and, of course, President Jair Bolsonaro with his still ephemeral government`s proposal supposedly headed by himself and his Minister of Economy Paulo Guedes.
Bernard Appy`s proposal was registered by Congress as PEC number 45/2019 and was though with the simplification of the system in mind. Alas, despite not reducing tax burden at all, his so-called tax upon goods and services (“IBS”) would extinct the main federal taxes (“IPI”, “PIS” and “COFINS”) as well as the principal sources of revenue from States (“ICMS”) and counties (“ISS”).
As most classic IVAs, Appy`s IBS would not only obey the non-cumulative taxation principle and generate immediate financial credit compensable in the following sixty days but, most importantly, it would help to harmonize legislation throughout federal territory with the exception of rates. Considering that Brazil had five thousand, five hundred and sixty-nine counties plus twenty-seven States in 2019 compared to the US`s fifty states, it is painfully easy to perceive how overwhelming it can be to keep up with all legislation needed to keep a business running in order.
Also, the approval of this PEC would not provoke immediate changes in Brazil`s tax burden as the project predicts one test year before a proper transition starts and IBS`s rate steadily increases over the course of ten years by 12,50% until it finally reaches 100% having substituted five distinct taxes.
It is noteworthy that this project still may present some problems for taxpayers since there is a clear stipulation that fiscal benefits in general such as fiscal incentives, exemptions, base reductions or presumed credits will be completely extinct. Considering that Brazil is divided in five geopolitical regions, each with remarkable characteristics and diverse resources, the concession of incentives has proven vital for a general, integrated development.
Meanwhile, Hauly`s proposal was registered as PEC number 110/2019 and features the creation of a federal IVA valid within the Brazilian territory as a whole and another, stately, IVA that`s applicable to certain goods, services, activities and economy sectors due to the utilization of new technologies, where the rates could be reduced if so desired by the authorities.
This project would go beyond even Appy`s project and seeks to replace even more taxes like the tax on financial transactions, the CIDE-Fuel, the contribution on profits and, finally, the Wage Contribution for Education. Again, this implicitly signifies fewer ancillary obligations for all taxpayers as well a lower possibility of potential mistakes, something capable of reducing litigation on the administrative and judicial level, both welcome factors for all investors and public officials.
On the other hand, Hauly does not seek to end fiscal benefits as a whole, instead choosing to restrict concessions of special treatments only to taxpayers that deal in foods, medicine, public transportation, fixed goods, sewage system, early, elementary and high school education, health production chain, packaging material, waste materials deriving from the reverted logistic system.
Similarly, this PEC is different in that the cumulative nature of Brazil`s tax system would be completely maintained. This may prove problematic as this methodology is unpopular with most citizens that do not understand it fully and are unsure of how much tax effectively composes the final price of a given good or service.
Nonetheless, a special selective tax would also be imposed not only to those who deal in alcoholic beverages or tobacco like planned by Appy, but also others sectors such as energy and telecommunications, a fact that could very well lead to grave problems if not carefully handled by the authorities since these other taxpayers impact the Brazilian population as a whole with the transference of any increases in tax burden by means of higher tariffs in electricity and phone bills.
The implementation of this particular reform is also notably faster, happening twice as fast as Appy`s at five years with a gradual introduction of the IBS and the selective tax by 20% each year until their maximum rate is reached.
Finally, we must keep in mind that the federal government has not yet presented a formal proposal and merely hinted that senator Flávio Bolsonaro plans to do so in the next few months. Officials have stated that this project also aims to create a federal IVA with a rate of about 15% to 20% that seeks to reach dividends as a means of maintaining current tax revenue without targeting Brazilian citizens that do not receive values classified as such.
Supposedly, the public administration wishes to begin their project with the fusion of the contribution to the Social Integration Program (“PIS”) and the Social Contribution on Revenues (“COFINS”) into a single tax with an 11% rate to kickstart this federal IVA which may be voluntarily combined with a dual IVA created simultaneously by States and counties. How this procedure is to be made remains to be seen.
In this scenario, the Industrial Products Tax and the Tax on Financial Transactions would supposedly be used as mechanisms in market regulation, one by selective application on only a few products and the other being changed in response to the financial market as a whole.
Furthermore, another crucial suggestion of the government`s proposal seems to be a complete reform of the income tax (IR) through some notable changes. Legal entities, for example, would not be able to deduct the values received as interest on net value anymore besides having their all dividends distributed submitted to taxation at a rate of 15% when sent to the US or 25% when sent to tax havens.
While no official program has been shown at the moment, authorities have hinted at other facts that may or may not be proven true. First, that the changes would obey this very order: With the fusion of PIS and COFINS, then the modification of IPI followed by Income Tax`s reform and finally with the exemption of taxes based on companies payroll. Secondly, that all fiscal incentives would be extinct except by the Manaus Free-trade Zone.
In conclusion, at the moment it is uncertain which proposal will prevail in the Brazilian intensely competitive political scenery, but it may be safe to say that there will be much debate and possibly much struggle as a myriad of distinct players seek to lead this reform and be known as the protagonist who managed to solve what may be the greatest problem the country has ever dealt with.
