Brazil: Lower house of parliament approves 'historic' tax reforms

Brazil's lower house of Congress on Friday (July 7) approved the main text of a tax reform that will restructure the country's complex consumption taxes. President Luiz Inacio Lula sa Silva touted the seal of approval as a "great victory". This reform was previously attempted by various administrations without success. The reform is a key step in Lula's plans of boosting growth.

The lawmakers voted in two rounds while approving the reform. They are now set to conclude voting some amendments later in the day. The bill will then be sent to the Senate. Two rounds of voting will take place there as well.

"It's a historic moment and a great victory," Lula tweeted after the voting. "Brazil will have its first tax reform of the democratic period ... We are working towards a better future for everyone."

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The reforms

If passed, the reforms will be implemented starting 2026. There is a plan, over eight years, to merge five levies into a value-added tax (VAT). There will be separate federal and regional rates. These will be defined later by a complementary law.

The approved proposal also shifts the tax basis from where goods are produced to where they are consumed over a 50-year transition period, starting in 2029.

The changes are expected to benefit more to Brazil's wealthier and more populous states. The bill is thus likely to encounter stronger opposition in the Senate where state governors have more influence. It is expected that there will be calls for broader compensation measures in the Senate.

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Markets reacted positively as the reforms got approval of the lower house. The Brazillian currency strengthened more than 1 per cent against the dollar. Benchmark stock index Bovespa jumped 1.4 per cent.

"For a while, many doubted that the reform would be approved," economists at JPMorgan said. "Long-term transition means that complexity will remain high for some time, but we look for enhanced productivity and higher growth down the line."

The reforms were approved by 382-118 in the first round of voting held late on Thursday. In the second round, lawmakers passed by 375-113.

308 votes were needed for the proposal to be approved.

"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 "The outdated way in which taxes are currently organized greatly hinders industry, commerce and services."

(With inputs from agencies)

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