Brazil has decided to finally introduce a VAT, already in place in 170 countries, and to begin simplifying the baroque tax system that taxes the poorest and rewards the rich and shareholders. This morning, the Senate approved by a vote of 53 to 49 a tax reform that has been discussed for years and was approved by the Chamber of Deputies months ago. Now it must return to the House of Commons to harmonize both versions. The entry into force will take place gradually and the implementation of the new system will only take place in 2033.
Brazil has one of the most complex (and unfair) tax systems in the world. And that’s exactly why their stores don’t sell Chanel No. 5 another perfume, just Eau de Cologne. The former pay 42% tax, the latter 12%. A slight change in composition to ease the burden on public coffers is so common that it even has a name: in the cosmetics industry, this is called chemical tax planning.
And since the system consists of a series of taxes and a series of exemptions, this is one of the countries in the world where a company has to spend the most hours filing tax returns: for a company with a turnover of 8 million euros, that’s 2,960. hours, i.e. 123 days.
This tax reform, which only affects consumption, is the most important victory on the legislative agenda that the government of Luiz Inácio Lula da Silva, 78, has achieved since coming to power last January. He hopes this will increase productivity and stimulate the economy. And it is an incentive above all for his Finance Minister and possible successor Fernando Haddad, 60, who has focused all these months on pushing the project forward and fighting to end the year without a deficit. Last night he assessed the decision in a didactic way: “We will go from a tax system that I give two points to a system that is not a 10, because we need a lot of debates and a lot of agreements to get here.” but if implemented (…), this system deserves a 7.5. (…) It can bring investments to Brazil.”
The Brazilian tax system is deeply unfair. It depends much more on consumption (food or services that rich and poor use alternately) than on income or wealth. And that disproportionately punishes those most in need. In addition, dividends to shareholders are tax-free.
The new system approved by parliamentarians has some mechanisms to alleviate inequality and encourage healthy habits. The products in the basic basket are exempt from VAT; Taxes are reduced for education and healthcare, while higher tax rates are imposed on alcohol, tobacco and pesticides, which are harmful to health and the environment.
The opposition, whose hard core consists of allies of former President Jair Bolsonaro, voted against it, arguing, disputed by the government, that it would increase the tax burden. The executive claims that the new system can represent an additional point in the annual GDP thanks to the cost savings for companies.
The tax reform approved by the Senate envisages that the five current consumption taxes will be unified into a VAT, which has not yet been set but is estimated at around 27.5%. During the process, the reform’s supporters have insisted to the numerous lobbies that any exemption would entail an automatic increase in the VAT rate that all consumers must pay.
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