Brazil, close to completing a long-awaited tax reform with a broad impact

Brazil is close to completing a long-awaited reform that simplifies its system of taxesa political triumph for the leftist president Luiz Inácio Lula da Silva and a possible boost for the first economy in Latin America.

The project, described as “historical” by the government, was approved by the Chamber of Deputies last week and now goes to the Senate.

Why is it labeled “historical”?

Different governments have unsuccessfully tried since the end of the last military dictatorship (1964-1985) to advance with the reform, including that of former far-right president Jair Bolsonaro (2019-2022).

This is the first amendment on the consumption tax system in 58 years.

Their goal: to simplify the lives of government, businesses, and families by breaking down an extremely complex system.

It also seeks to combat tax evasion and, through the unification of taxes on consumption, increase productivity, attract investment and generate more employment.

Governments will no longer be able to give up part of their collections to attract companies, ending a “tax war” between states, and this will favor companies relocating near large consumer markets.

“GDP will be better thanks to greater efficiency, reduced legal uncertainty and an end to misallocation of resources. All sectors winhe told AFP. Braulio Borgesresearcher at the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV IBRE).

Private and government institutes project that the reform will have a positive impact on GDP growth in the coming years.

What is the political impact?

A little over six months after taking office and after a series of legislative defeats that weakened the environmental agenda, Lula’s government scored a major political victory by approving a reform considered as necessary as it was elusive.

The Executive had to cede prominence in the process to figures from the Centrao, a group of center and center-right parties that usually exchange support in exchange for positions in the public structure.

In particular, the president of Deputies, Arthur Lirawith who Lula it was photographed the night after approval.

“It was the first time that we managed to promote an extraordinary political alignment”, Reginaldo Lopes, a deputy from Lula’s Workers’ Party (PT) and coordinator of the proposal’s working group, told AFP.

But that consensus came at a price. The Centrao longs for portfolios in the government. A week after the vote by the deputies, a center party won the Ministry of Tourism on Thursday.

Another weighty supporter was Tarcísio de Freitas, governor of Sao Paulo – the richest and most populous state – and a former minister and ally of Bolsonaro.

“There was an understanding that with the reform we all gainedadded Lopez.

The ultra-right ex-president left the process weakened. His attempt to get his Liberal Party (PL) to vote en bloc against the project failed and a fifth of his deputies disobeyed him (20 of 99).

What changes for Brazilians?

The reform unifies the five current taxes on consumption into one: the Value Added Tax (VAT), which, in turn, will be split into one federal and one state.

The changes will give Brazilians more transparency about the composition of the prices they pay when purchasing goods and services.

In particular, relief is expected for the low-income classes thanks to the tax exemption for a “basic national basket”, whose items will be defined by law.

In addition, there will be a “cashback” system that provides for tax refunds to mitigate social inequalities.

The reform “benefits mass consumption more,” Borges said.

The industry is another of the main winners, according to the expert, thanks to the end of taxes collected in “waterfall”, which are paid at each stage of production.

The changes will be implemented gradually, with a planned transition until 2032.

What remains to be defined?

The project could suffer alterations in the Senate.

It remains to define the value of VAT, which will affect goods and services. It is speculated that it will exceed 25%, making it one of the highest in the world, something that arouses criticism.

Borges said, however, that the VAT value will not mean an increase in the tax burden, but rather clearly show in a single tax what is currently paid dispersed in several.

Source: AFP