What's next for Brazil's tax overhaul?

Brazil’s tax reform entered the senate, which will debate it through October, according to the reform’s rapporteur Eduardo Braga, whose MDB party is a member of the ruling coalition.

The lower house approved the reform to simplify the system earlier this month.

"If the senate makes any changes to the text of the approved reform, it has to be returned to the lower house to a new vote session and then returned to the senate, a process that likely prolongs the final vote on the reform in both houses," Mário Sérgio Lima, senior political analyst at Medley Global Advisors, told BNamericas. 

"The tax issue is complex, so it is not possible to rule out the comings and goings of the text of this reform, but the original text still contains points of too much conflict. Lawmakers in both houses need to negotiate an agreement," said Lima.

After labor and pension reforms, a tax overhaul is seen as vital to ensure Brazil’s development. However, gains from new labor and pension systems did not materialize as quickly and profoundly as projected.

"When relevant reforms are put to the vote, the government in charge generally publishes projections, which are often very optimistic, supporting these reforms to be quickly approved in congress and improve the business environment during the present administration," said Lima.

“It is difficult to materially measure the real impacts of the reforms on the economy, because we are talking about a scenario of something concrete with a projection of having or not a reform, but the major reforms we have already had, such as the labor reform, bring more dynamism to the labor market.” 

UNCERTAIN TAX IMPACTS 

Gauging the gains or losses from a tax reform is even more complex, as it involves interest groups at federal, state and municipal levels, in addition to companies and consumers.

The reform structure impacts the economy as it influences investment and financing decisions, for example in infrastructure, and this way, jobs and lifestyles.

To get the reform through the lower house, the Luiz Inácio Lula da Silva administration had to gain support from centrist parties. Negotiations involved budgetary resources for lawmakers’ projects and likely posts at state companies and in the cabinet, which will not immediately be known.

Although business leaders hailed the reform right after approval, concerns emerged later on as it became clear that states would gain the power to raise their own taxes, a sticking point especially for miners.

"This point of the reform leaves open the possibility for states and municipalities to create taxes that previously could only be created by the federal government, which leaves room for many abuses," Tito Martins, ex-CEO of Nexa Resources and former executive at Vale, told BNamericas.

A second part of the reform related to personal income has not been discussed in the lower house and is expected to be debated only later this year.

Any major change in the law requires years to consolidate, as ambiguous wording leads to legal fights between companies, authorities and governments and only court rulings determine correct application.

In light of this fact, BNamericas will continue to provide coverage to explain and help understand the reform and its impacts.

The following links contain some sector specific views on the reform:

Brazil lower house approves sweeping tax reform.

Why Brazil’s tax reform is bittersweet for the ICT industry.

Brazil tax reform sparks concerns among mining, O&G sectors 

How Brazil’s tax reform could impact the energy sector