Brazil lower house approves sweeping tax reform

Brazil’s lower house approved the main points of a tax reform, which could transform the country, even though it would be implemented gradually through 2032. 

Senate approval is likely, but a timetable has not been published. The proposal was created with broad political input and its main objective was to simplify the tax system with a focus on consumption.

"This approved reform was built with the joint effort of congress, the federal government and states. It is not a simple issue to reach a consensus," André Pereira César, a political analyst at Hold Consultoria, told BNamericas.

"Now, this reform depends on the approval of the senate, which is likely to happen, but we cannot say that it is a done deal, as there will be resistance from some senators," said Pereira César.

In the first voting round, 382 lawmakers approved and 118 voted against the reform, while in the second round 375 approved and 113 disapproved. 

Under the reform, the ISS, ICMS, PIS, Cofins and IPI taxes will be combined into the federal CBS tax, goods and services tax IBS, collected by states and municipalities, and selective tax IS, imposed on goods and services harmful to health and environment.

Under the reform, taxes will be imposed at the place of consumption rather than production, which could influence investment decisions. Currently, many companies install factories far from consumption centers due to tax incentives.

"What we really want is a fairer country, a richer Brazil that can distribute wealth. A country that relieves production, brings competitiveness and generates jobs," center-left lawmaker Aguinaldo Ribeiro (pictured), who sponsored the reform, said in a statement.

Plans to reform the tax system emerged in the 1990s, but failed over lack of social and political consensus.

ECONOMY

The reform could add 2.39% to GDP by 2032 because it corrects productive misallocation that results from overtaxing goods and services, according to a study by state research institute Ipea.

"Tax reform is one of the priorities of the country's economic agenda. The current system is an obstacle to growth as it reduces the productivity of companies, prevents the efficient allocation of resources and generates a level of litigation in society unparalleled in other countries," Isaac Sidney, president of banking association Febraban, said in a statement. 

"After the tax reform, I see the government focusing on some changes in sanitation regulation and after that on some topics related to social policy," Pereira César said.