The World’s Most Complicated Tax System Just Got Easier
Brazil signs into law an overhaul to simplify a patchwork of tax codes from its states and thousands of municipalities
By Samantha Pearson Dec. 20, 2023
SÃO PAULO—Brazil signed into law Wednesday sweeping changes to the country’s tax code, simplifying rules that have long raised the cost of doing business and hobbled growth in Latin America’s biggest economy.
The constitutional amendment passed by Congress, which consolidates five levies into a single value-added tax, comes after years of failed attempts to streamline what the World Bank has ranked as the world’s most complicated tax system. It takes a company on average more than 1,500 hours a year to comply with the national tax code, five times Latin America’s average and more than in any of the 190 countries tracked.
Things are going to get worse before they get better, tax experts said. The law will be phased in over eight years starting in 2026, with some changes scheduled to take 50 years to fully take effect. By 2033, companies should see at least a 50% reduction in the number of hours they have to spend paying taxes, said Marcus Vinícius Gonçalves, head of tax at KPMG in Brazil.
Speaking to Congress Wednesday, President Luiz Inácio Lula da Silva praised legislators for coming together from opposite sides of the political divide to pass the law, saying its passage demonstrated the strength of Brazil’s democracy. “Remember this moment,” he said. “It shows that every time Congress is called upon to show its commitment to the people…it delivers.”
Huge chunks of the law were drafted under da Silva’s right-wing predecessor and political rival, Jair Bolsonaro. But da Silva’s success in getting the reform to the finish line–with a minority in Congress and in the week before Christmas when many legislators usually don’t come to work—marks a major victory for the leftist, political scientists said. It also bodes well for the performance of his Workers’ Party in municipal elections next year.
“It is a huge win for the administration, and particularly for Brazil’s finance minister, Fernando Haddad. Every government since democracy began has been trying to fix the ridiculous tax code,” said Daniel Lansberg-Rodriguez, founding partner of Aurora Macro Strategies, a New York-based advisory firm.
The tax overhaul, which got its final congressional approval Friday, prompted S&P Global Ratings to upgrade Brazil’s credit rating Tuesday in recognition of what it said was a recent “track record of pragmatic policy implementation.” Under Bolsonaro, Brazil passed wide-ranging changes to the country’s pension system in 2019 that legislators at the time estimated could save as much as $265 billion over 10 years.
Brazil has overhauled its labor laws to make them more business-friendly and strengthened the management of government-run companies. Lawmakers also granted the central bank autonomy in 2021, reducing political pressure over key monetary-policy decisions such as interest-rate setting.
Brazil’s big problem isn’t the number of taxes it has, but that each of the country’s 26 states, the federal district and 5,568 municipalities have different rules that overlap and contradict each other—a nightmare for companies with operations across the country, said KPMG’s Gonçalves.
“We often see multinational companies with just as many people working in the tax department in their Brazil office as in their own headquarters, sometimes even more,” he said. “We’ve had situations where companies were thinking of expanding their operations in Brazil, but they ended up investing in another country because of the complexity of the national tax system.”
Under the new rules, which apply only to levies on consumption but not income, the simplified VAT will be charged by federal and regional authorities, with little leeway for states and municipalities to set their own rules.
Originally, legislators had planned an even broader tax overhaul that would have made changes to income tax, tackling more controversial points such as higher levies on the rich and on dividends.
In one of the many quirks of the Brazilian tax system, small-business owners often distribute profits to their workers via dividends, which are exempt from tax, rather than paying salaries.
The overhaul package was split into two parts, with the more controversial points left for a possible follow-up overhaul next year.
My thanks to the Wall Street Journal … and conservative Condorito
Dr Michael G. Heller