Brazil’s govt presents 1st tax reform proposal

Brazil’s government presented the first stage of its tax reform proposal to congress.

In this first stage, the government proposes to simplify the country's complex tax structure by establishing a single 12% corporate tax, based on companies’ gross revenue.

Called the social contribution to transactions with goods and services (CBS), the tax would replace the PIS, Pasep and Cofins taxes.

The government claims tax income would not increase. It also admitted that the first stage is only a preliminary proposal to start congressional debate.

"We have confidence in congress, and we are open to other proposals from congress to be included in the reform," economy minister Paulo Guedes said during a press conference.

Presenting the reform in stages forms part of the government’s negotiation strategy to avoid presenting a complete proposal whose main points could be refused right away.

Guedes has repeatedly advocated for a financial transaction tax, known as CPMF, which was criticized by congress leaders. The proposal does not include such a tax.

"At this point, the government brings a proposal to unify taxes, but we already have proposals in congress that amplify this reform and that we should include in this final proposal," lower house head Rodrigo Maia said.

"While tax simplification is important for boosting long-term competitiveness and investment outlook, the near-term fiscal challenges of a high fiscal deficit and high and growing debt burden also need to be tackled to reduce fiscal vulnerabilities," Shelly Shetty, co-head of Americas Sovereign Ratings at Fitch, said in a statement.

"The resolution of Fitch’s negative outlook on Brazil’s 'BB-' rating will continue to reflect the capacity of the government to consolidate fiscal accounts to stabilize and eventually reduce the government debt burden, progress on economic reforms and the assessment of medium term growth prospects," she added.

THE COMPLEX ISSUE 

Tax reform discussions are closely monitored by various economic sectors, lobbying for tax reductions. 

Meanwhile, analysts highlight that the proposal proves the government will continue its reform agenda after the pandemic.

"The push by Brazil’s government to change the tax system provides a welcome sign that the government’s reform agenda is still progressing, despite the political infighting caused by the handling of the coronavirus crisis," said William Jackson, an economist at Capital Economics. 

"If implemented, the main benefits would accrue over the longer-term by improving potential GDP growth. More immediately, it would probably help to lower longer-term bond yields," he added.

A simpler tax system would benefit the economy as Brazilian firms spend about 10 times longer complying with and paying taxes than companies in other Latin American countries. 

THE NECESSARY STEPS IN CONGRESS 

As the tax reform is considered a constitutional amendment, it must first be approved by a special committee and in two voting rounds in the lower house, with three-fifths of the 513 lawmakers voting in favor.

In the senate, the proposal must pass through the constitution and justice commission (CCJ), and gain also in two voting rounds the same support as in the lower house.

Analysts expect the final approval of the reform could come only in 2021, due to municipal elections in November. 

These elections usually affect congressional proceedings, as many lawmakers return to their home states to participate in allies’ election campaigns, leaving both the upper and lower houses relatively empty. 

Pictured: Lower house head Rodrigo Maia and senate leader Davi Alcoumbre receive the tax reform proposal from economy minister Paulo Guedes.