Brazil’s economy has bounced back strongly under the guidance of new President Luiz Inacio da Silva Lula. Data in June 2023 showed that the GDP had grown nearly 2% from the previous quarter. The data also showed that Brazil’s economy grew 4% from the same time a year ago. Learn about the tax reform in Brazil here:
The next focus for the government is tax reform in Brazil. In early July, the lower house of Brazil’s government approved a new reform on consumption taxes. Now President Lula wants to adapt income taxes.
Tax reform in Brazil is a hot topic and will play an important part in the country’s future economic growth. After an unstable period under former President Jairo Bolsonaro, Brazil is looking to strengthen its position as the leading economy in Latin America.
Let’s examine the new tax reform in Brazil changes and what it means for businesses looking to invest in the giant South American nation.
See also: company formation in Brazil.
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The tax reform in Brazil explained
On July 6th, 2023, Brazil’s lower house approved a proposal to revamp the country’s complex tax laws. President Lula applauded the move, calling it a “historic moment and a great victory.”
After the House voted 375-113 to approve the new tax reform in Brazil, it will now be sent to the Senate for another two rounds of voting.
The endorsed proposal includes a 50-year transition period commencing in 2029, during which the tax basis will shift from the production location of goods to their consumption location. This change should favor Brazil’s wealthier and more populous states.
However, it is expected to face significant opposition and demands for broader compensation measures in the Senate, given the greater influence of state governors in that legislative body.
Following the lower house’s approval, the market responded positively. The Brazilian real strengthened by over 1% against the dollar, and the benchmark stock index Bovespa (.BVSP) surged by 1.65%.
“It’s a necessity for our economy so our productivity can advance,” Finance Minister Fernando Haddad said. “The outdated way in which taxes are currently organized greatly hinders industry, commerce, and services.“
The new tax reform in Brazil simplifies a complex system
2019 World Bank data showed the average annual time required to comply with Brazilian tax laws amounts to approximately 1,500 hours, equivalent to 187 eight-hour workdays.
Brazil operates multiple tax regimes at the federal, state, and municipal levels, often with overlapping elements. The nation’s infamous bureaucracy significantly inflates the expenses of conducting business in Brazil and hampers the prospects of innovation.
The lower house of the Brazilian Congress has given the green light to a tax reform proposal that aims to streamline the intricate array of regulations.
Under this reform, numerous consumption taxes will be consolidated into two value-added taxes (VATs) known as CBS (federal) and IBS (local).
Finance Minister Fernando Haddad has expressed expectations that senators may adjust a 35-page last-minute amendment introduced by lawmakers, which includes several new provisions. One such provision would allow state governments to retain additional taxes on primary and semi-finished goods until 2043, replacing similar funds in certain state governments.
The overhaul of Brazil’s complicated tax code has been contemplated several times over the past few decades, but only now has it reached a stage where it could be effectively put into action.
One of the most significant changes in the reform is the elimination of cumulative taxation once it is implemented. Instead, products will be taxed at their destination point to put an end to the so-called “tax wars,” where states compete by offering more attractive tax incentives to entice companies.
The federal government asserts that the reform will not lead to a reduction in the overall tax burden for Brazilians or the total tax revenue collected. To address concerns from states and municipalities, a system of checks and balances will be established, specifically allocating taxes to these entities. Additionally, a council will be formed to oversee the administration of VAT tax regulations.
Experts suggest that the economic benefit of the reform for the country would stem from the enhanced efficiency of the tax system, which could foster increased competitiveness and lead to improved tax collections in the long run.
Brazil’s economy continues to grow
Thanks to its booming agriculture industry, the Brazilian economy proceeds to grow at a rapid rate. Agricultural output in Brazil surged 21.6% in the last financial quarter.
The Brazilian real experienced a gain of over 1% against the U.S. dollar, while the benchmark Bovespa stock index (.BVSP) recorded a 1.8% increase.
Combine this with the new tax reform in Brazil and it’s an ideal time to enter this latin american market.
Biz Latin Hub can support your business in Brazil
At Biz Latin Hub, we offer comprehensive market entry and back-office solutions in Brazil, the rest of Latin America, and the Caribbean.
Our offices are located in major cities across the region. In addition, we have established partnerships in numerous other markets, providing our clients with an extensive network of resources.
This extensive coverage makes us well-equipped to support market entry and cross-border operations across multiple countries.
Get in touch with us today to learn more about our services and how we can assist you with your business endeavors in Latin America and the Caribbean.
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