Brazilian leaders dash hopes for sweeping tax reform

Political leaders in Brazil have dashed hopes for a sweeping tax reform, agreeing instead to rework the country’s byzantine fiscal regime through a series of piecemeal changes.

“The ideal tax reform is the one that Congress can approve at this time,” Arthur Lira, the speaker of the lower house of parliament, said on Tuesday.

Tax reform is one of the planks of finance minister Paulo Guedes’ liberal economic agenda, which is aimed at increasing the competitiveness of Latin America’s largest economy.

For more than two years, however, progress has been glacial, with the government only unveiling its proposal in July last year. That proposal has now been subsumed into a deal struck on Monday night between Lira, Guedes and Rodrigo Pacheco, the president of the Senate, to pass a series of smaller changes through Congress.

“We have to make the tax reform that is possible at this moment,” said Lira, adding that he expected discussions to continue throughout the year.

The market-friendly nature of the administration is increasingly in question

As part of the new approach the Senate will develop a constitutional amendment to allow the unification of state and municipal-level service taxes, while also considering a separate piece of legislation focused on corporate tax refinancing. The lower house, meanwhile, will discuss legislation to create a federal-level goods and services tax.

The new approach is likely to disappoint investors who had hoped Guedes would be able to quickly overhaul a taxation system long considered one of the world’s most complicated.

A midsized Brazilian company takes about 2,000 hours to prepare and pay taxes, according to World Bank data — the most in the world. By contrast, a US company takes 175 hours and a UK group takes 105 hours. During the past 30 years, an average of 35 tax rules were changed every day, or 1.45 every hour, according to the Brazilian Institute for Planning and Taxation.

“In my view, their idea is to develop a strategy in order to approve what is possible and not to wait on what is more difficult. The strategy to separate into different discussions is to make it easier [to pass Congress],” said Douglas Mota, a tax partner at Demarest, the law firm.

Lucas Galvão, a tax expert at Barros Carvalho Advogados, expressed concern that the government had still not presented proposals to modify income and industrial goods taxes. “We still yet don’t know what those changes will be,” he said.

Investors watching Brazil want the legislation to pass as soon as possible, recognising that sensitive reforms will become practically impossible with federal elections next year.

“Splitting it up doesn’t really appeal to investors as governability and the market-friendly nature of the administration is increasingly in question,” said Jens Nystedt, senior portfolio manager at Emso Asset Management.

“One thing is for sure, they don’t have years and even if they decide on a piecemeal approach it has to be on an accelerated time schedule if they want to successfully address mounting investor concerns.”

Additional reporting by Carolina Pulice