Brazil Tackles Nightmarish Tax System to Boost Businesses

(Bloomberg) -- Brazil’s byzantine tax system is in for an overhaul, as Congress begins debating a bill to tackle what many investors consider one of the biggest obstacles to doing business in Latin America’s largest nation.

On Tuesday a congressional committee began analyzing a constitutional amendment that aims to simplify how people and companies pay taxes, consolidating the country’s dizzying number of levies. While the proposal would not reduce Brazil’s overall tax burden, it could do so on specific goods and services, including food, medicine, and machinery.

Brazil is ranked by the World Bank as the 10th-worst in the world for the ease of paying taxes, behind Afghanistan and Zimbabwe. Brazilian mid-sized companies dedicate a whopping 2,038 hours per year preparing, filing and paying their government dues, the bank says. That drives up the cost of doing business and deters investment, industry federations have been saying for years.

Efforts to cut red tape have gained impetus after the business-friendly administration of President Michel Temer came to power and the economy has been slow to emerge from its worst recession on record.

"The tax system is the backbone of any country," Deputy Luiz Carlos Hauly, a government ally, said in an interview. "And Brazil’s has a serious inflammation that is paralyzing the whole body."

The proposal would homogenize rules and rates between the states on taxes such as the ICMS, which is charged on the movement of goods and services. Currently, ICMS tax collection is often redundant and overlapping between the 27 federal entities. Under the new, unified system a -added tax would be collected once only during purchase. Hauly hopes the bill will pass Congress by the end of the year.

In an effort to improve Brazil’s business climate, the government recently overhauled the country’s decades-old labor laws and is pushing measures to reduce borrowing costs and spreads on bank loans. The economy is expected to eek out just 0.34 percent growth this year after contracting by 3.6 percent and 3.8 percent in 2016 and 2015, respectively.