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Brazil Tax: Uncertain Reform

Brazil won't see a tax reform any time soon, experts say.

Inter-American Dialogue

Brazilian President Luiz Inacio Lula da Silva has pledged to submit to Congress [...] a tax reform package aimed at simplifying the country’s tax system and encouraging investment. What are the prospects for tax reform in Brazil? What will Lula have to do to win support for his tax reform proposal?

Emy Shayo, Brazil Economist at Bear Stearns: This tax reform was due to be presented in August, and was postponed. The government said it was not going to send a tax reform to Congress until the CPMF tax was approved. My opinion is that the prospects for this reform are terrible. I think it won't happen. Why? The first reason is that there is still no agreement with the state governments on whether they will approve the reform. And without the approval of all the states, the reform doesn't go through. The reform needs to be a consensus one because it envisages the creation of a unified VAT tax [and the elimination of the states' individual production taxes]. Some states would win and others would lose. This is the first impediment but not the worst one. The worst impediment is that this administration, despite the president's being very popular and ability to form a big coalition in Congress, is unable to get things through Congress due to political ineptitude. Finally, mayoral elections are next year and no important bills get voted on in election years. It's been more than 10 years since a tax reform has been passed in Brazil, and one is not likely to be approved in the near future.

Luiz Felipe Ferraz, Partner in the Tax Department at Demarest & Almeida Advogados in Brazil: I understand that the main attraction of the tax reform (and the issue that has been mostly debated) would be the creation of a single VAT that would attempt to unify the (municipal) service tax, the (state) VAT, the (federal) excise tax, or IPI, the (federal) CIDE tax, and the (federal) PIS/COFINS taxes. Because of resistance by the states, the government is willing to exclude the state VAT (the so-called ICMS tax) from the single VAT. There have been questions about the government's ability to unify the VAT, and there is fear that the reform could turn into a array of loopholes in the tax legislation that could frustrate expectations. From a political standpoint, a government should try to succeed in having a tax reform approved by Congress during the first year of the president's mandate—a period during which the strength of the government is clear and widely recognizable. Lula lost that chance in 2006 and has been losing the same chance in 2007. Next year will be an election year in which the Brazilian people will replace mayors and representatives in municipal legislatures. This fact could make approval of the tax reform difficult to the extent that current mayors seeking re-election try to demonstrate their power. The government has been losing in Congress in its efforts to obtain the extension of the CPMF tax until December 31, 2007. Given this fact, it is likely that it fears losing the battle for tax reform—this may be confirmed by its decision to delay the submission of the tax reform projects to Congress until the CPMF tax is ultimately voted on. In recent days, the press has reported that the federal government increased spending on projects proposed by other political parties. Whether that is true or not should still be verified, but it is certain that the government has recently intensified its dialogue with parties allied with the government and with the opposition in order to make the approval of the CPMF tax a smooth one. It is likely that the same procedure will occur with the subsequent attempt for approval of the tax reform.

Rogério Schmitt, Senior Political Analyst at Sao Paulo-based consulting firm Tendencias: It will take probably one or two years for Congress to deliberate. I hope it's shorter. I think Lula has already played an important part. He has gathered the state governors and the finance secretaries of the states and has tried to build a preliminary consensus among them. But, after the bill has been sent to Congress, Lula's role will not be as important. The bulk of the effort will belong to the party and the leaders of his coalition in Congress. Lula ... will be a symbolic leader of the proposal, but the actual negotiations will be held by the coalition leaders, both in the lower House and in the Senate. The job will not be easy because it is a constitutional amendment, so it requires a very large majority in Congress—60 percent of the votes. So, he will have to have big support and big discipline in his coalition if he wants to have the necessary votes. The governors will play an important part because the states will be strongly affected by the reform. It will probably be the big legislative issue in Brazil in 2008. It will also be an election year, but only in the second half. In the first half I believe the tax reform will get all the political headlines in the Brazilian press. The finance ministry has been promising the submission of tax reform to Congress since August, and this week they finally admitted that the bill won't be sent before January. But, actually, we don't know for sure if it will happen in January, February, or March. Nobody knows for sure. There's a risk that it won't be sent at all. Of course, this risk is very low, but eventually it will be sent, probably after Carnival ... The most likely scenario is that Congress will only finish voting on the bill in 2009.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

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