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This week in tax: Brazil’s Congress aims for VAT reform

Investors lose hope in corporate tax reform

Lawmakers in Brazil have dashed hopes of sweeping corporate tax reform in favour of VAT reform and gradual change to the wider tax code.

Investors are disappointed to find the National Congress of Brazil has side-lined comprehensive plans for tax reform in favour of incremental change after Brazilian tax reform slowed to a halt during the COVID-19 pandemic.

“The ideal tax reform is the one that Congress can approve at this time,” said Arthur Lira, speaker of the lower house.

The Bolsonaro administration made corporate tax reform a key part of its economic agenda. Paulo Guedes, minister of the economy, wanted to overhaul the formulaic tax system in Brazil and return to the arm’s-length principle (ALP).

Brazil moved away from the ALP in 1996, almost two decades before the BEPS project. The initial plan for tax reform would have brought back traditional transfer pricing and tax planning. The retreat from sweeping tax reform in Brazil is a significant setback for the right-wing government.

Instead of a break with the past, Congress is likely to pursue a corporate tax cut without the structural changes to the wider tax system. The Brazilian Senate is set to consider corporate tax changes as part of preparations for debt renegotiations.

At the same time, the Chamber of Deputies is expected to vote on key proposals to reform income tax and merge two federal consumption taxes into a single 12% VAT rate. Additionally, there are proposals to implement a special tax on online transactions.

A simplified federal VAT rate could boost much-needed tax revenue at a time of economic crisis, but it looks as if Brazil will be left with its highly complex tax system intact.

Top headlines

Here’s a selection of ITR’s top stories this week.

India unlikely to issue GST vaccine waiver

The GST Council is set to meet on May 28 where it is expected to discuss the issue of tax waivers on COVID-19 supplies and compensation to Indian states on GST revenue. The Council seems more likely to reduce the GST rate on the vaccines than issue a waiver.

The Serum Institute, the world’s largest manufacturer of vaccines, is based in India yet the country is facing an acute shortage of vaccines. Unlike many countries that are vaccinating all of their citizens for free, the cost of vaccines in India for people under the age of 45 is being passed onto state governments or individuals.

The price of the vaccines in India’s private sector is among the costliest in the world at around $12 for the Serum Institute’s Covishield and $20 for Bharat Biotech’s Covaxin.

By contrast, the European Union pays $2.15-$3.50 per dose and the United States pays $4. This has prompted state governments to urge the Council for a GST waiver on the lifesaving vaccines, which the central government has categorically refused.

“If full exemption from GST were given, domestic producers of these items would be unable to offset taxes paid on their inputs and input services and would pass these on to the end consumer by increasing their price,” said Indian Finance Minister Nirmala Sitharaman in a series of tweets.

COVID-19 vaccines have a 5% GST levied on them while 12% GST is applicable on COVID-19 drugs and oxygen concentrators for domestic supply and commercial imports.

A 5% tax rate on the vaccines ensures that the manufacturer can utilise the input tax credit and claim a refund in case of an overflow of the input tax credit, which can be carried over to the next financial year until it can be utilised.

Read the full article here

Ireland and UK push back against US tax proposal

The US Treasury’s Office of Tax Policyproposed to the OECD’s Inclusive Framework’s Steering Group that the global minimum tax rate should be 15% at least. The US Treasury underscored that 15% is a floor and discussions should continue to be ambitious and push that rate higher.

The Irish and British governments have pushed back on opposing grounds. The Irish government argues the tax solution has to work for small nations, whereas the UK government has argued the rate is contingent upon revisions to pillar one.

The US proposal for a 15% minimum corporate tax rate floor comes after pushback from the UK and Ireland on the earlier suggestion for a 21% rate to match a rise in the global intangible low-taxed income (GILTI) rate, which is the basis for the global minimum tax under pillar two.

Irish Finance Minister Paschal Donohoe emphasised that the OECD’s digital tax agenda must work for small nations with lower tax rates too, and continues to contest the agenda by also pushing back on the European Commission’s tax roadmap till 2023, which is based on the OECD’s incoming two-pillar digital tax solution.

UK Chancellor Rishi Sunak also said he would only consider a 21% rate under pillar two if changes are made to pillar one, particularly the scope of the rules, since the US proposal subjects only the largest and most profitable business groups to pillar one.

Read the full article here

Next week in ITR

As the G7 discussions continue, ITR will be analysing pillar two and its implications for the Gulf Cooperation Council (GCC) where most countries do not levy corporate tax. Pillar two could deliver a jolt to countries such as the UAE to establish a corporate tax regime.

ITR will be following up its coverage of Indian GST policy on vaccinations, especially if alternative measures are introduced to reduce the GST burden. At the same time, readers should keep an eye out for an in-depth look at tax technology trends.

This is just a sample of stories the team is working on. Don’t miss out on the key developments each week. Sign up for a free trialto ITR.


more across site & bottom lb ros

More from across our site

The forum heard that VAT professionals are struggling under new pressures to validate transactions and catch fraud, responsibilities that they say should lie with governments.
The working paper suggested a new framework for boosting effective carbon rates and reducing the inconsistency of climate policy.
UAE firm Virtuzone launches ‘TaxGPT’, claiming it is the first AI-powered tax tool, while the Australian police faces claims of a conflict of interest over its PwC audit contract.
The US technology company is defending its past Irish tax arrangements at the CJEU in a final showdown that could have major political repercussions.
ITR’s Indirect Tax Forum heard that Italy’s VAT investigation into Meta has the potential to set new and expensive tax principles that would likely be adopted around the world
Police are now investigating the leak of confidential tax information by a former PwC partner at the request of the Australian government.
A VAT policy officer at the European Commission told the forum that the initial deadline set for EU convergence of domestic digital VAT reporting is likely to be extended.
The UK government shows little sign of cutting corporate tax, while a growing number of businesses report a decline in investment as a result of the higher tax burden.
Mariana Morais Teixeira of Morais Leitão overviews Portugal’s new tax incentive regime designed to boost the country’s capital-depleted private sector.
Septian Fachrizal, TP analyst at the Directorate General of Taxes, outlines how Indonesia is relying heavily on the successful implementation of pillar one.