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Lawmakers in Brazil have voted to overhaul the nation’s byzantine tax system, which has frequently been cited as a barrier to doing business in Latin America’s largest economy.
After years of planning and delays, the lower house of Congress on Friday backed the landmark constitutional amendment that will simplify a host of levies on goods and services.
Multinational corporations had long complained that Brazil’s labyrinthine tax rules are costly to fulfill, full of legal uncertainty and an impediment to investing.
The legislation will replace five separate consumption taxes with a dual VAT system — one charged by federal authorities, and the other at a regional level. It will be phased in over eight years starting in 2026. Central parts of the proposal were designed in the previous rightwing Jair Bolsonaro administration.
The passage of the reform was met with broad support.
“With this reform we will have a modern tax system. It is a huge step for Brazil,” Guilherme Mello, secretary for economic policy at the ministry of finance, told the Financial Times.
“For you to have more investments, you have to at least have a competitive tax system.”
Proponents of the reform say it will boost economic growth, with the potential to add as much as 2.39 per cent to gross domestic product over the next eight years, according to the Institute for Applied Economic Research, a government think-tank.
Attempts at comprehensive reform eluded governments for decades, so its passage represents a political victory for leftwing President Luiz Inácio Lula da Silva and finance minister Fernando Haddad.
However, there was criticism over the large number of exceptions to the new rules, following lobbying by interest groups. Full exemptions were granted for health services and basic foodstuffs such as rice and beans, among others. Public transportation as well as agricultural and livestock products were granted partial exceptions.
“The system needed to be simplified, so that these resources can be used to improve company productivity and make investments more attractive,” said Ariana Zerbinatti, partner at consultancy Buyside Brazil. “On the negative side, [there has been] a large number of exceptions . . . that is part of the political game.”
Another concern is what Congress will set the standard VAT rate to be. Haddad has said the number of exemptions was likely to push it up to 27.5 per cent, which opponents say would rank among the highest consumption taxes in the world.
Finance ministry officials argue that this is still below the 34.4 per cent total amount currently charged on consumption by the myriad overlapping duties.
The reform will also end the practice of taxing goods where they are produced, instead shifting to a model with levies imposed at the point of consumption. This entire process will take 50 years to be fully implemented.
The legislation also seeks to purge elements widely regarded as regressive. Certain luxury items exempted from vehicle tax, such as jet skis, speedboats and yachts, will now be subject to the levy.
While the Lula administration insists the package is not intended to increase the overall tax burden, it is separately pushing through measures to raise revenue collection in a bid to balance the public accounts. These include the imposition of duties on digital sports betting and assets held by wealthy citizens in tax havens.
“Brazil has lower income tax revenues and higher consumer tax revenues,” said Mello. “We’re looking at the possibility of getting it more balanced. Idea is not to raise the tax burden, but to have a different distribution.”
Additional reporting by Beatriz Langella
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