The Brazilian Government has introduced a tax reform system which has been approved by the congress. Lula da Silva is the left wing president of Brazil. Though, his street credibility has enabled him to conduct reforms which many right wing politicians were unable to conduct.
 Brazil’s tax system is unique and outlier in the world. The country’s constitution has empowered federal, state and municipal governments to levy consumption tax. Given the county has 27 states and 5570 municipalities, it has turned into a madhouse for the taxes. It is like it has over 5600 tax systems and laws. In 2019, the World Bank estimated that it took 1501 hours a year for Brazilian companies to comply with tax laws. The global average is only 234 hours.
Many companies are not even sure under which tax system their sales and income should be audited and taxed. The value of open cases in Brazilian courts that are about tax disputes is reaching 5 trillion reais. That is about 75 percent of the country’s annual gross domestic product.
The current tax system is also distorting incentives. The tax system is mostly cumulative, it means that companies should pay value added tax, when they purchase input goods. However, these taxes are not usually credited back to them like most countries. Those firms who manufacture more complex stuff are taxed more than others. The current tax system is thus impeding growth and development.
Considering all these facts, the new tax initiative aims to reduce the number of tax systems and tax authorities massively. The reform would also diminish value added tax from 34 percent to 27.5 percent, when it is fully implemented by 2033!
Of course different lobbyists are circling around to make amendments and exemptions in the law favoring particular groups. They have been partially successful and already some exemptions have been given to special groups. For this to be a revolutionary reform, the government and congress should resist in coming months.Â
Source: Economist
