Tax reform continues to be the key topic for Brazilian businesses. In-house tax executives and advisors agree that there is a fundamental need to simplify the country’s intricate indirect tax system. However, tax simplification is easy to talk about and harder to achieve in the short-term.
A slim majority of 36.1% of respondents to ITR’s survey were unsure on the chances of tax reform in 2020. Close to a third of participants, 30.6%, believe that the overhaul is likely to go ahead this year, while 25% see it as unlikely this year.
“For the first time, I am seeing movement on having a tax reform approved in Brazil. The political environment is ready for it. I believe it will take place in 2020,” said one LATAM head of tax at an electrical engineering company.
Meanwhile a minority of 8.3% don’t think tax reform is possible in 2020. “This year we have local city hall elections. I do not believe there will be any tax reform,” said one regional head of tax operations at a technology company.
Taxpayers have previously said that the existing proposals have a good chance of success. This prompted ITR to run an anonymous survey to gauge the sentiment among tax professionals on the likelihood of Brazil approving tax reform in 2020.
According to PwC’s Paying Taxes 2020 report, a Brazilian company takes 1,501 hours to pay taxes, while the average is 234 hours. This is because of the plethora of taxes, ancillary obligations, and numerous different laws from the three levels of administration – each with different views about the interpretation of tax law. The separate levels of government also do not communicate which leads to duplicate efforts on the taxpayer’s side.
Since members of congress will be awaiting mayoral elections in October 2020, substantial laws are unlikely to pass this year. It wouldn’t be the first time a government’s pursuit of tax reform is held back by the election cycle.
Competing ideas
Outside of the government’s own proposal, the most advanced bills are the Chamber of Deputies PEC 45/2019 and the Senate PEC 110/2019. Both bills pledge to consolidate the range of indirect taxes, but the details of how are very different.
The results show that 44.4% of responders back the PEC 45/2019 bill, followed by the PEC 110/2019, holding 27.8% of the vote. However, there is a wider sentiment that the PEC 45/2019 would be most likely pass but only with several amendments.
Nearly a fifth of survey participants, chose “other”, noting that the most likely proposal to go through would be the government’s own. A combination of both PEC 45/2019 and PEC 110/2019 was also suggested as a possible option.
The Brazilian government proposal seeks to unify the PIS/COFINS, federal consumption taxes, into a single tax with only one rate, there are 2 different systems for PIS/COFINS with different rates.
“This proposal will only increase tax burden with no real benefit from a tax environment stand point as it maintains all other taxes,” said Luiz Guilherme de Medeiros Ferreira, head of tax at IBM Brazil.
A combination of proposals has garnered strength as a joint committee has been set up and will meet on March 3. The Temporary Joint Committee on Tax Reform is composed of of members of both Congress and the Senate, which will be responsible for drafting a joint proposal. The rapporteur of the committee, Congressman Aguinaldo Ribeiro, expects to have a proposal in 45 days.
Reports suggested that the first part of the government’s tax reform proposals were supposed to be submitted in February 2020, but this has not happened. Brazil’s controversial President Jair Bolsonaro has said that one of his legislative priorities for the year is tax reform, yet, against the backdrop of mayoral elections, it may be difficult to garner a sufficient majority.
It remains unclear if the government will submit a new proposal or work with the Joint Committee to push for a single proposal.
Previous attempts to push through reform have been unsuccessful in Brazil because finding consensus among conflicting interests in a 25-party Congress is difficult. Additionally, a constitutional amendment needed for tax reform requires a supermajority – three fifths of Congress – to go ahead.
“It’s a big challenge to have alignment between the government and Congress and have a final bill move forward,” said the regional head of tax operations.
Tax reform in Brazil needs to accommodate conflicting interests and consider tax collection capacity and management of tax revenues. Any concrete changes will be slow to materialise.
Brazil’s complex system
The complexity of Brazil’s VAT system creates administrative hurdles and numerous disputes. Brazil has five different types of indirect taxes and multiple rates for each of them:
At the federal level, the PIS and COFINS are applied on gross revenue, while the IPI, an excise type tax, is applied on manufacturing;
Individual states apply ICMS on goods; and
Municipalities apply the ISS on services.
PEC 45/2019
It intends to simplify and combine all five consumption taxes into one single tax - Imposto sobre Bens e Serviços (IBS) - following the international model of VAT. IBS would be charged based on the destination principle.
PEC 110/2019
This bill seeks to replace nine existing taxes and promotes broader tax simplification and considers possible tax incentives to certain sectors and specific economic activities.
Government proposal
A four-part comprehensive proposal that seeks to unify consumption taxes and provide a federal VAT-like contribution on goods and services (CBS). It also proposes changes to corporate and individual income taxation as well as a reduction of payroll taxation.
