Brazil takes historic step towards tax reform with Lower House approval

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View of Congresso Nacional (National Congress), the legislative body of Brazil's federal government, in Brasilia, capital of Brazil.

Brazil’s Lower House of Congress marked a significant stride towards tax reform on Friday by approving the principal text of a restructuring initiative for the country’s convoluted consumption taxes, as reported by Reuters.

The approved reform, which is set to come into effect in 2026, proposes a progressive merger of five existing levies into a value-added tax (VAT) over a span of eight years. This VAT will have distinct federal and regional rates which will be established by a supplementary law in the future.

Furthermore, the initiative plans a major transition in the tax basis from the production location of goods to their consumption location over a 50-year period, commencing in 2029. This transformation is expected to favour the more populous and wealthier states of Brazil, although it is anticipated to meet increased resistance in the Senate. Broader compensation measures are likely to be demanded due to the greater sway held by state governors in this chamber.

The news of the Lower House’s approval was well-received by markets, with the Brazilian real appreciating over 1% against the dollar and the nation’s benchmark stock index Bovespa (.BVSP) escalating by 1.4%.

Economists at JPMorgan remarked, “For a while, many doubted that the reform would be approved. Long-term transition means that complexity will remain high for some time, but we look for enhanced productivity and higher growth down the line.”

The first round of voting saw the reform passed by 382-118, followed by a 375-113 victory in the overnight second round. The wide margin showcased robust support for the proposal, with only 308 votes needed for its approval.

Finance Minister Fernando Haddad championed the reform as a vital measure for stimulating economic productivity. He criticised the current tax system as a significant barrier to the growth of the industry, commerce and services sectors. Mr Haddad expressed his confidence that the proposal will not meet much resistance in the Senate, citing encouraging feedback from senators.

The decision to approve the reform was also supported by Senate head Rodrigo Pacheco, and seen as a considerable achievement for Lower House Speaker Arthur Lira, who ardently advocated for the project.

On the other hand, the move signals a significant blow for former President Jair Bolsonaro in his bid to counteract the Lula administration, especially as he has been prevented from running for office until 2030. Despite his campaign against the reform and urging for a vote against it, Bolsonaro’s efforts have been largely ineffective, with some members of his party even voting in favour of the bill.

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