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An Update On Brazil's Efforts To Install VAT

Friday, October 4, 2019

Brazil's Government must overcome a number of challenges, including assuaging the concerns of state authorities, if it is deliver on its plans to overhaul the country's complex indirect tax system.

Under the proposals, contained in draft legislation PEC 45/2019, the following levies would be subsumed by a VAT, which would be known as IBS, and a "selective tax": the tax on industrialized goods, IPI; the social security contributions PIS and Cofins; the state sales tax ICMS; and the municipal services tax ISS.

Under the proposals, IBS would be divided among the government, states, and municipalities, as currently. However, the Government is likely to see resistance to the reforms from some states that have benefited from the current distribution of revenues, which benefits economically developed states at the expense of others.

Under the plans, a greater proportion of revenues would be distributed based on a state's population. In a bid to secure approval for the plans, the regime will be phased in. In the first and second years following the bill's enactment, the tax rate for IBS will be set at one percent, charged exclusively at federal level, with a corresponding reduction in the burden of the taxes it will subsume. Work is still required to establish how to implement the changes on a revenue-neutral basis.

During years three to nine, the burden of the taxes it will subsume will be reduced equally each year until the levies are replaced entirely by IBS from the tenth year.

Similar to India's regime, where a GST Council was formed to make decisions concerning the operation of its goods and services tax, the legislation provides for the creation of a policy-making "National Management Committee", which would be made up of union, state, and municipality representatives. Likewise the Bill includes provisions to compensate states.

Aside from revenue distribution issues, the Government will have to win support for proposals to restrict the ability of states to offer preferential treatment to industries.

According to a recent update from the Chamber of Deputies, the bill has been subject to much debate by lawmakers and several amendments have been proposed. The Government is awaiting the opinion of a special committee set up to consider the bill in July 2019. The bill has passed a first hurdle, however, with the Constitution and Justice and Citizenship Commission endorsing the proposals on May 22.