Brazil Rushes to Approve Tax Reform Before Presidential Election

President Jair Bolsonaro’s administration is rushing to approve a long-delayed overhaul of Brazil’s tax code before next year’s presidential election, trying to keep at least part of its market-friendly agenda afloat amid fiscal and economic setbacks imposed by the pandemic.

Lower House Speaker Arthur Lira and Senate President Rodrigo Pacheco are scheduled to meet on Wednesday to discuss a joint strategy to tackle the proposal, which will likely be sliced in different bills that would start moving through each of the houses to speed up the debate.

Brazil Rushes to Approve Tax Reform Before Presidential Election

Reforming Brazil’s byzantine tax system -- with its more than 5,000 laws and thousands of different rates -- has eluded at least four presidents over the past three decades as it means reconciling interests from several business sectors and state governments. Unlike many countries seeking to balance their budgets in the aftermath of the pandemic, Brazil doesn’t intend to raise taxes now, but rather simplify its code to eliminate loopholes and improve the business environment.

If approved, the reform may become one of the last major achievements by Economy Minister Paulo Guedes. The University of Chicago-educated economist took the reins of Latin America’s largest economy in 2019 seeking to implement an ambitious program of privatizations and deregulation, coupled with tax and spending cuts. But after the approval of a landmark pension reform, most of his plans have been left on the back burner while the government tries to bail out a pandemic-ravaged economy.

The minister is also pushing for a reform of public sector careers, as well as for legislation that would allow the privatization of power utility Eletrobras and the postal service.

Five Chapters

In order to make the tax reform more easily digestible, the economic team intends to split it in five chapters that will be introduced as separate bills in congress. Some of them are likely to sail through, but most will face obstacles, possibly unsurmountable ones, according to a dozen lawmakers and party leaders interviewed by Bloomberg News.

The reform’s approval would fuel investor optimism amid concerns about Brazil’s fiscal situation, said Felipe Salto, head of an independent senate institution created to increase the transparency of public accounts. Yet the slicing of the proposal is a sign that it may be less ambitious than expected, he added.

Another challenge will be to pass the full reform before lawmakers’ attention completely turn to next year’s presidential elections.

“The closer we get to the election, the more difficult it becomes for lawmakers to approve unpopular measures,” said Augusto Coutinho, a veteran house representative and an ally of Bolsonaro.

Here are the five key chapters of the reform, as conceived by the economic team in agreement with the house speaker, and their odds of approval.

ProposalOdds of Approval
1. To merge two federal levies on consumption, the so-called PIS and Cofins, into a 12% value-added taxLikely, as long as tax on service sector is lowered
2. To turn a tax on industrialized goods known as IPI into a selective levy that would only be imposed on products with a negative impact on public health or the environment, such as alcohol, tobacco and vehiclesLikely, despite strong lobby from these industries
3. To reduce a tax on corporate income and apply it on dividends, which are currently exempted -- that creates distortions and loopholes that encourage, for instance, individual taxpayers to open companies to benefit from lower tax rates available for corporationsLikely, but lawmakers will seek a transition period
4. To introduce a tax on digital transactionsUnlikely, despite strong campaign by Guedes
5. To create a new debt renegotiation program to help companiesVery likely

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