Brazil has decided to definitively adopt a value added tax, which 170 countries already have, and begin to simplify the baroque tax system that taxes the poorest and rewards the rich and shareholders. The Senate approved this morning by 53 votes to 49 a tax reform, discussed for years, which received the approval of the Chamber of Deputies months ago. Now it must return to the Lower House to harmonize both versions. The entry into force will be gradual and the new system will be implemented only in 2033.
Brazil has one of the most complex (and unfair) tax systems in the world. And that is precisely why their stores do not sell Chanel No. 5 or any other perfume, only cologne water. The former pay 42% taxes, the latter 12%. Slightly altering the composition to pay less to the public coffers is so common that it even has a name: it is what the cosmetics industry calls chemical-tax planning.
And, as the system consists of a string of taxes and a string of exceptions, this is one of the countries in the world where a company must dedicate the most hours to filing tax returns: for a company that has a turnover of 8 million euros, that is 2,960. hours, that is, 123 days.
This tax reform, which only affects consumption, is the main victory in the legislative agenda that the Government of Luiz Inácio Lula da Silva, 78, can score since taking power last January. He hopes it will increase productivity and boost the economy. And it is a boost especially for the Minister of Finance and possible successor to him, Fernando Haddad, 60 years old, who during all these months has been focused on moving the project forward and fighting to close the year with zero deficit. Last night he evaluated the decision in a didactic way: “We are going to go from a tax system that I give a score of two, to one that is not a 10 because we need a lot of debate and many agreements to get here, but if it is enacted (… ) this system deserves a 7.5. (…) It can bring investments to Brazil.”
The Brazilian tax system is deeply unfair. It relies much more on consumption (food or services that rich and poor use interchangeably) than on income or assets. And that disproportionately punishes those most in need. What’s more, dividends to shareholders are exempt from tax.
The new system approved by parliamentarians has some mechanisms to alleviate inequality and promote healthy habits. The products in the basic basket are exempt from paying VAT; educational and health care will have a reduced tax while alcohol, tobacco and pesticides, harmful to health and the environment, will pay higher percentages.
The opposition, whose hard core are the allies of former president Jair Bolsonaro, voted against with the argument, which the Government denies, that it will increase the tax burden. The Executive maintains that thanks to the cost savings for companies, the new system can represent an extra point in the annual GDP.
The tax reform approved by the Senate means that the five current consumption taxes will be unified into a VAT that has not yet been set but is estimated to be around 27.5%. During the processing, the promoters of the reform have insisted to the multiple lobby that each exception would imply an automatic increase in the VAT percentage that all consumers must pay.
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