Bloomberg — Brazil’s lower house gave preliminary approval to a proposal to overhaul the country’s labyrinthine tax rules, a goal that has eluded lawmakers in South America’s largest nation for decades.
Lawmakers voted 382-118 to advance the proposal Thursday night, after months of negotiations over a major priority for President Luiz Inacio Lula da Silva.
As a proposed constitutional amendment, the plan still has numerous hurdles to clear. It must pass the lower house a second time, and win two votes in the Senate as well. Lower house Speaker Arthur Lira said this week that the Senate is likely to make tweaks to the current proposal, which would require the lower house to review the changes in the second half of the year.
Brazilian leaders and lawmakers have attempted to rewrite the country’s tax code numerous times only to fail to build the consensus between various political parties and economic interests necessary to pass a reform. Lira, Finance Minister Fernando Haddad and congressman Aguinaldo Ribeiro — the legislation’s rapporteur in the lower house — negotiated changes to the bill throughout the week in an effort to secure its passage.
Lula and his economic team see the current legislation as crucial to their broader efforts to shore up Brazil’s public finances. Lawmakers this week may also approve the government’s fiscal framework proposal, which will replace a so-called spending cap law.
The leftist leader entered the final days of voting before the legislature begins its mid-year break without a solid base in congress, although support for major economic agenda items is broader, even including some members of opposition parties.
Right-wing former President Jair Bolsonaro and other opposition figures sought to turn allies against the tax reform proposal this week, calling on lawmakers to vote against it. Yet 20 of his party’s 95 representatives backed the bill.
Long Road Ahead
The tax reform will take years to fully implement if it becomes law. The current proposal says that the new structure will begin in 2026, but a full transition won’t be completed until 2033.
The plan consolidates five existing consumption levies into two new value added taxes, or VATs. One VAT would be administered by the federal government, while another would collect revenues for states and municipalities. The plan includes funds to compensate states that are likely to lose revenue from the overhaul.
The bill provides for a zero tax rate on basic food basket items, although the list will be defined only later. It also creates a levy on goods and services considered harmful to health and the environment, including cigarettes and alcoholic beverages.
There will be a standard tax rate, along with a separate treatment for certain goods and services related to health care, medicines and basic menstrual health care products, education, public transportation, rural production and national artistic, cultural, journalistic and audiovisual productions.
A specific rate for products and services like fuels and lubricants, real estate, financial services, insurance, cooperatives, hotel services, amusement parks and theme parks, restaurants and regional aviation will be set. The constitutional amendment maintains a favored tax regime for biofuels in order to ensure lower rates than those levied on fossil fuels.
The bill also creates a cash-back system for poor families. A later proposal will define who would be eligible.
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