Brazil: The ongoing Challenges of the Tax Reform

In Brazil, the upcoming tax reform has been one of the key issues surrounding Bolsonaro`s election. But now, a year and half later, what has become of the challenge to simplify one of the world`s most complex and most costly tax systems?

 

What is the Status Quo of the Tax Reform?

On February 18, the National Congress announced the resumption of the Tax Reform, through approval of the creation of the Temporary Joint Commission, according to the Joint Act of the President of the Federal Senate and of the Chamber of Deputies no. 01/2020. The Commission is composed of 25 members of Congress and 25 of the Senate, whose job it is to unify the Tax Reform proposals in progress in both houses, with Constitutional Changes PEC 110/2019 in the Senate and PEC 45/2019 in the Chamber. These changes are supposed to be implemented within a record period of 45 days.

 

In a nutshell, the two proposed constitutional changes are based on the extinction of a series of taxes, consolidating the tax bases in two new taxes:

  • IBS: a goods and services tax, along the lines of value added taxes levied in most developed countries
  • Selective Tax: a specific tax on some goods and services

 

Which taxes shall be abolished?

In both proposals discussed in the National Congress, to date, they propose the extinction of the ICMS (State tax) and ISS (Municipality tax).

In addition, the Federal Government stated the possibility of sending a proposal to the National Congress, which should be presented in three stages.

  1. The first of which deals with taxation on consumption, a proposal that is already pending before the National Congress, here called Value Added Tax (VAT).
  2. The second stage is about creating a tax on cigarettes and beverages.
  3. And, finally, the third stage deals with the change in the Income Tax and resumption of taxation on profits and dividends, and exemption from the payroll.

 

What to make of the Tax Reform Proposals?

The current developments are perceived differently in Brazil. On the one hand, they generate a lot of expectations in Brazilians who crave fair and reasonable taxation, on the other hand, they cause enormous concern as to their feasibility and effectiveness. As described in a previous article, it remains to be seen whether the economic heterogeneity of Brazil`s federal states can be done justice with the new tax reform once its been completed and working.

 

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