Waning Competitiveness Forcing Tax Reform in Brazil

Brazil Tax Reform

Trend

  • Political pressure from local manufacturers is pushing the government to pursue a simplification of the tax code
    • The Dilma administration is negotiating with state governments and congress to reduce and standardize the ICMS tax
    • The ICMS, which currently ranges from 7% – 12% depending on the state, is an inter-state tax on goods and services that resembles a sales tax
    • State governments have proposed the adoption of a unified nationwide tax of 2% and would base the tax on destination, rather than origin

Drivers

  • President Rousseff recognizes the role of tax reform in stimulating growth and has pledged to address the issue
    • Complex tax laws are a major factor inhibiting multinationals’ efforts to expand into second- and third-tier markets in Brazil
    • Reforms are gaining ground as an approach to compensate Rio de Janeiro and other oil-producing states for the loss of royalty fees under a new royalty system

FSG View

  • Tax simplification would ease the costs of doing business and push industrial policy toward the federal level, making engagement with the federal government more imperative than ever
  • Companies operating factories in Manaus and other states that rely on tax incentives may see the relative tax benefits of producing in these states diminish. Such companies should closely monitor developments in the tax reform debate in the Brazilian congress

 

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