The Brazilian Congress is once again considering a series of tax reforms aimed at simplifying its incredibly complicated indirect tax system. The primary proposal (known as PEC 293) proposes to replace the following taxes with a nationwide VAT.
1. ICMS – state-level VAT
2. IPI – federal tax on industrialized products
3. ISS – municipal tax on services
4. PIS and COFINS – federal social taxes
This reform also would eliminate the Tax on Financial Transactions (IOF) which would be substituted by a more narrowly targeted excise tax.
The VAT rate under this proposal has not been specified, but rather be left to the incoming president.
In Brazil, there is a surprising level of agreement that the current indirect tax system is untenable (some would call it crazy!). There is also broad based support for adopting a national VAT. However, a change of this magnitude will not be easy. The term “PEC” stands for Proposal of Constitutional Amendment, meaning that a change of this size and scope will require modifying the federal constitution. Further, eliminating local taxes requires the federal, state and local governments reach a consensus on revenue sharing. The challenge of coaxing local governments to give up their tax sovereignty when coupled with electoral intrigue, will make passing sweeping tax reform a tall order.