This article was developed by the tax team of Update Brazil Consulting (www.updatebrazilconsulting.com ).
On 21 July 2020, the Minister of Economy, Paulo Guedes, handed over to the Brazilian parliament the tax reform proposal prepared by the government.
Read this, it seems a significant political event, given that the Brazilian tax system is one of the most complex in the world and, according to many economists, one of the reasons for the strong social inequality existing in the country.
In reality, Guedes has presented a reform proposal which, at least temporarily, concerns only the introduction of a tax (CBS, Contribution on Goods and Services) which aims to replace five current federal taxes, attributable to the PIS-COFINS nomenclature.
In practice it is the introduction of VAT, a value added tax produced by businesses, which replaces taxes calculated as a percentage of turnover. In practice, with this new method of calculation the accumulation of taxes on turnover is eliminated, leading to a decrease in business costs.
Surely something more was expected, a year after the announcement of the preparation of the reform, but it is at least a small step forward of a government that has certainly not stood out for the initiative in terms of the much needed and expected reforms in Brazil (the pension reform, approved at the end of 2019, was mostly the result of the efforts of the previous Temer government).
The Brazilian Tax Code was promulgated in 1966 and, starting in 1988 – the year in which the new Constitution came into force – almost 400,000 (!) Tax regulations have been approved. It is easy to imagine the regulatory tangle that has arisen, creating duplications and overlaps that make business life very difficult. The calculation of the taxes to be paid is estimated to require a medium-sized Brazilian company the time equivalent to about 2600 man-hours per year, and this falls within the items of what is called “the Brazil cost”, ie the cost additional that a company must face when deciding to operate in the country.
The positive factor is that, in 2020, the Brazilian Parliament did not remain idle waiting for the government’s proposal. There are two proposals under discussion, one in the Senate and the other in the Chamber of Deputies, already at a good level of progress and which address reform more extensively. In fact, the introduction of CBS concerns only the taxation of the production of goods and services at the federal level, but there are other issues to be resolved in order to modernize the Brazilian tax system.
At the state level, for example, there is a tribute called ICMS, which has been transformed over the years into an economic policy instrument of individual states, which – by promising lower rates – try to attract new productive settlements at the expense of other states. The resulting tax war led to a generalized lowering of tax rates and therefore of tax revenues: a game in which all states (and citizens) lose and where the location of businesses responds to distorted economic criteria. And if a company chooses to build a factory in a state for tax reasons, the potential loss of productivity on other factors (quality of labor, cost of credit, transportation and logistics costs, etc.) is relevant, and leads to another element of the so-called “Brazil cost”.
The tax reform under study in the Chamber provides for the unification (or at least a sharp reduction) of taxes on the production of goods and services, removing the possibility for States to use them as an economic policy tool.
The next steps
As you know, VAT is a type of tax that indiscriminately affects the population, especially in the Brazilian case of a single 12% rate (which applies to a bicycle as well as to a yacht), except in special cases.
Although some products of the utmost necessity (which are part of the “basic basket”) will be exempt from CBS taxation, from a social equality point of view it is important that the tax reform defines a form of taxation that affects the richest most. And this can only be done by reviewing the structure of income taxes and higher taxation of annuities and wealth.
In addition, the service sector is the one most damaged by the introduction of CBS by 12%, given that, unlike industrial companies, it cannot deduct the purchase of raw or semi-finished materials on credit. A differentiated regime has been devised by the government only for the banks, with a reduced rate of 5.8%, while the companies that provide public transport services have even been exempted from the tax.
Aware of the fact that CBS is only a first step, the Government has announced that it will soon present the other three phases of the planned reform:
– Replacement of the Tax on Industrialized Products (IPI) with a selective tax on certain products, such as alcoholic beverages and cigarettes
– Revision of taxation of income and an higher taxation of profits and dividends
– Reduction of taxation on the remuneration of employees (which would particularly benefit service companies), whose lost revenue could be compensated by the introduction of a tax on digital banking transactions
Now that the Government and Parliament are moving in the same direction, it is hoped that by the end of 2020 or the beginning of 2021 a tax reform will be approved which simplifies the life of businesses, stimulates economic growth and which - above all - opens the way to a decrease in inequality social still so strong in Brazil.