Brazil is known for its complex business environment, and its byzantine tax system is a big reason why. According to the World Bank’s Doing Business rankings, Brazil is the world’s seventh-worst place to have to pay taxes, roughly on par with the Republic of Congo and Bolivia. President Jair Bolsonaro’s government, continuing to tackle some of the most vexing issues facing Latin America’s largest economy, hopes to simplify taxes for both business and ordinary citizens, a goal that eluded prior heads of state.

1. What’s so bad about Brazil’s tax system?

It’s governed by 5,680 laws and charges thousands of different rates, depending on both the product and the state. For example, the purchase of ethanol is taxed at 32% in Rio de Janeiro but only 12% in Sao Paulo. And those rates change constantly. The country’s tax burden is close to 33% of gross domestic product, a rate that’s considered high by economists. Given the poor state of Brazil’s government accounts and rising debt load, there’s little room to cut taxes. But simplifying them would be an achievement in itself.

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2. How would Bolsonaro’s government simplify taxes?

There are four main proposals:

• Brazil’s influential lower house speaker, Rodrigo Maia, backs a reform designed by a former finance ministry undersecretary, Bernard Appy. It would merge several taxes into one levy, known by the acronym IBS, which would apply uniformly across all states. A lower house committee has decided that Appy’s legislation abides by domestic laws, and it’s now being analyzed by a special commission.

• Many senators have expressed support for a similar bill by former Deputy Luiz Carlos Hauly that would combine taxes such as IPI (levied on manufactured products), IOF (a tax on financial transactions), Pis/Pasep (paid by corporations to support social programs) and ICMS (levied on state goods and services) under one nationwide duty.

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• The economy ministry, headed by Paulo Guedes, is designing its own reform proposal, with details still to come. What’s known is that it would modify Brazil’s current income tax structure. Policy makers have even considered bringing back a much broader tax on financial transactions similar to the so-called CPMF that expired in 2007.

• Instituto Brasil 200, a forum that’s formed by business leaders, supports a more wide-ranging measure that merges all of the country’s current levies under one financial transaction tax.

3. What’s been the response?

Business leaders are clamoring for ways to streamline the nation’s taxes and save them time and money. Octavio de Lazari, chief executive of Banco Bradesco SA, Latin America’s second-biggest bank by market value, said reducing the number of taxes is a priority. “It’s not just the taxes themselves, but rather the work that’s needed to manage them,” including the cost of retaining lawyers, he said in a July interview with newspaper O Estado de S. Paulo. Yet reconciling different proposals and interests from several business sectors and states will be a complicated task -- one that previous reform attempts failed to overcome. With so many options and requests, lawmakers such as Fernando Bezerra Coelho, government leader in the Senate, are already warning there’s no way any final votes will take place before next year.

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4. Can something get passed into law?

Any tax overhaul would have to be approved by Brazil’s Congress, which can be a challenging task given the presence of dozens of parties and shifting alliances. Some taxes, such as ICMS, are mentioned in the country’s constitution. So any changes affecting those taxes would have to be passed as a constitutional amendment, meaning that it would have to be backed by 60% of both the lower house and Senate after an extended debate process. Other taxes are just plain controversial. In September, Bolsonaro fired the head of the country’s internal revenue service due to disagreement over reintroducing the CPMF, the levy on financial transactions that was in effect from 1997 to 2007. Much will depend on the support of Maia, the lower house speaker, who helped Bolsonaro win legislative backing for changes to Brazil’s pension system, which had eluded four previous administrations.

5. What came of past efforts at tax reform?

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Brazil’s tax system remained dense and complicated even as the larger financial system was overhauled under the two-term presidency of Fernando Henrique Cardoso, from 1995 to 2002. “The difficult part of this is that there will be winners and there will be losers,” he said shortly after leaving office. His successor, Luiz Inacio Lula da Silva, came into office vowing to be the one to get an overhaul passed, saying “tax reform has never gotten off the ground in Brazil because the government never got behind it.” His first effort met resistance from state governors who said the proposed changes would cost their regions needed revenue. He left office at the end of 2010 with his promise unfulfilled.

6. What happens if nothing is done?

Analysts say that tax reform is one of the changes needed to unlock Brazil’s long-term economic potential. In the absence of an overhaul, Brazil may miss out on stronger foreign direct investment flows that it needs as companies redirect their money to other countries. A failure to address the problem would further burden productivity and growth that’s struggled to gain traction following the devastating 2015-2016 recession. According to Appy, a tax reform that’s the size of the one he envisions would add 10 percentage points to Brazil’s GDP in 15 years.

To contact the reporter on this story: Rachel Gamarski in Brasilia at rgamarski@bloomberg.net

To contact the editors responsible for this story: Walter Brandimarte at wbrandimarte@bloomberg.net, ;Daniela Milanese at dmilanese@bloomberg.net, Matthew Malinowski, Laurence Arnold

©2019 Bloomberg L.P.

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