Reforming Brazil’s Consumption Taxes—Will It Finally Happen in 2022?

Brazil’s consumption tax reform has received increased attention during the first three years of President Jair Bolsonaro’s administration. Tax reform proposals under discussion in Congress made the headlines practically every day, and it is expected that the subject will continue as a hot topic in 2022, the last year of this administration. Recently, it was reported that a tax reform proposal would be ready for a vote in the Senate’s Constitutional and Justice Commission later this month.

It is widely recognized that Brazil needs a tax reform to fix its broken consumption tax system. The burning question is: Will a tax reform finally get through Congress in 2022? In order to answer this, it is necessary to understand not only the problems underlying Brazilian consumption taxes but also the scope of the current tax proposals under discussion and the different interests that have prevented a tax reform from moving forward in Congress.

Setbacks for Reform Proposals

The tax reform debate is not new. Proposals for reform have been discussed for decades in the country. The need to overhaul Brazilian taxes derives from a chaotic framework in which multiple consumption taxes coexist, each of which is regulated by particular legislative provisions with its own taxable base, tax rates and input tax credit system. Often, the same tax is levied under different regimes. All these factors make Brazilian consumption taxes some of the most complex in the world.

Brazil’s multiple consumption levies and fragmented legislation create economic distortions and make tax administration and compliance very time consuming. Another problem associated with this dysfunctional system is tax competition among Brazil’s states. Additionally, the current tax framework results in conflicts of jurisdiction among different levels of government over which of them can tax a particular item.

Controversies arising from the current framework are often taken to administrative and judicial courts. Because many tax provisions are enshrined in the constitution, a number of these issues end up in Brazil’s Supreme Court, which may take several years to rule, thus contributing to tax uncertainty. Recent cases include whether state value-added tax (VAT) made up the taxable basis for federal VAT-type social contributions (PIS/Cofins). This case (Extraordinary Appeal RE 574706) became known as the “case of the century” due to the substantial amounts involved.

Several tax proposals have been put forward in the last few decades to simplify existing consumption taxes, but none has gathered enough political support to make their way through Congress. One of the proposals that gained most attention was Constitutional Amendment (PEC 293/2004) reported by ex-congressman Luiz Hauly. After decades under discussion in Congress, a special commission approved the proposal in late 2018 only for it to be forgotten afterwards.

Other proposals presented during the current administration include: (1) Constitutional Amendment (PEC 45/2019); (2) Constitutional Amendment (PEC 110/2019); and (3) Bill 3887/2020 (PL 3887/2020). All these proposals would simplify Brazil’s consumption taxes, but their scope varies. While PEC 110/2019 proposes to merge nine taxes into a value-added tax, PEC 45/2019 limits this to merging five taxes and Bill PL 3887/2020 centers on replacing two social contributions.

None of these proposed reforms, however, has made progress in Congress. The Covid-19 pandemic was certainly a factor, but other reasons transcend this—for example, political infighting between the President and Congress, a dispute between the Senate and the Chamber of Deputies over which house the media should focus its attention on regarding tax reform, and a clash of opposing interests from the different levels of government and business sectors affected by the proposals.

To overcome some of those obstacles, a joint committee with members of both congressional houses was created in early 2020. The committee was expected to develop a consensual framework that satisfied representatives from both houses, to accelerate the process with an eye to getting the tax reform proposal through Congress quickly. However, after little more than a year, the committee was disbanded under the pretext that it had exceeded the maximum number of sessions allowed.

Similarly, in this period, representatives from the Ministry of Economy and State Treasury officials held meetings to iron out differences regarding some aspects of the tax proposals, notably with respect to how to finance proposed intergovernmental funds for regional development and to compensate potential tax revenue losses from the new VAT. Despite some progress in the discussions, no consensus was reached.

Since then, tax reform has lost momentum and given way to other discussions in Congress. More experienced political analysts are skeptical of political promises to pass a tax reform this year, saying that the timing for approving sweeping reforms has already gone. Even if a tax reform proposal is approved in the Senate, it would still have to go through the House of Representatives, where the proposal is expected to face some hurdles.

In conclusion, the debate over a consumption tax reform in Brazil is complex. Many attempts have been made in past and current administrations to untie the knot, but none has so far been successful. Given the different aspects and opposing interests involved, promises that Congress will pass a tax reform in 2022 seem too good to be true, especially in an electoral year. If anything, the debate can help to smooth out difficulties and try to advance the discussions in Congress, but that is all.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Phelippe Toledo Pires de Oliveira is a tax attorney at the Office of the Attorney General for the National Treasury in Brazil (PGFN) and a postdoctoral researcher at the Institute for Austrian and International Tax Law (WU).

The author may be contacted at: phelippe.oliveira@pgfn.gov.br