Around the world, paying taxes is usually a thankless task, a nuisance. But, for Brazilian workers, the process is an actual hell.
The tax system in the South American giant is baroque – extremely complex, full of exceptions and exemptions. Quite incredibly, it’s one of the few in the world that, since the 1990s, exempts the dividends that companies distribute to their shareholders from being taxed.
Brazil’s tax system, more than anything, is profoundly unfair. The tax burden is based much more on the consumption of food or services – which are required by both the rich and the poor – than on income or wealth. Taxes punish the most vulnerable; instead of alleviating brutal inequality, they exacerbate it.
After three decades of debate, the Chamber of Deputies – the lower house of the National Congress – comfortably approved a tax reform late Thursday night. 382 deputies voted in favor, 118 against, while three abstained. Now, the legislation moves on to the Senate for approval.
The project’s ambitions are low. It seeks to unify the five consumption taxes and adopt a VAT – a value-added tax. Actually, two VATs, as Brazil tends to have an aversion to simplicity. All magnitudes are gigantic in this country of 203 million inhabitants (according to the last census), 27 states (as many as there are countries in the EU) and 5,000 municipalities. Accordingly, the figures related to any fiscal matter are dizzying. For example, in no country in the world does a company need to dedicate so many hours to the tax bureaucracy: on average, 2,960 hours are required by a company that has a revenue of $8 million… that is, 123 days of the year, according to a study by Deloitte. Among wage earners, it’s not uncommon to simply entrust income statements to accountants, who promise to take advantage of even the smallest loopholes. Jefferson Nascimento – coordinator of social and economic justice for Oxfam – warns that “the complexity of the system masks the inequality” it generates.
The speed of the tax reform negotiations in recent days has been spectacular. Members of the Congress have dedicated eternal debates to this subject in recent years – debates that, time and time again, have come to nothing, due to the power of lobby groups. Lobbyists managed to neutralize the previous attempt at reform during Jair Bolsonaro’s administration (2018-2022). This week, however, the Chamber of Deputies suspended every part of the parliamentary agenda that didn’t have to do with taxes, to ensure that the project was voted on as soon as possible after a first reading.
While parliamentarians, governors and mayors are having discussions (calculators in hand), the media has tried to explain the intricacies and novelties of the tax system with simple examples. According to an editorial in the Brazilian newspaper O Globo, the country’s tax system is “the most opaque, complex and expensive in the world.”
On top of this, the system is regressive. At the start of the legislative session, Nascimento – from Oxfam, one of the NGOs fighting for taxes to be an instrument of the redistribution of wealth – explained that “in Brazil, more than half of the tax [revenue] comes from taxes on consumption – a percentage much higher than the OECD (the group of the most developed countries) average. This means that the poor end up paying more than the rich because, at the other extreme, income and wealth are taxed little.”
The Brazilian income tax is progressive, with a maximum rate of 27.5% paid by any employee who earns a salary starting at $950 a month (3.5 times the minimum wage), up to the highest-paid banker in the country. But it wasn’t always like this – at the end of the 1980s, the top marginal rate was 45%. For this reason, Brazil also has its version of Warren Buffet, who complains that he pays less taxes than his secretary. He’s the founder and CEO of a thriving business – Petz – a chain of stores with everything any pet lover could dream of. “I, as the CEO of my company, pay [a lower tax rate] than any one of our cashiers. It’s a shame,” Sérgio Zimerman lamented, during an interview a few months ago. “If people knew how much they pay [in taxes] on each product, there would be a riot.” It’s not easy to know, because understanding the ins and outs of the system practically requires a graduate degree in taxation. For the Brazilian businessman – whose company is listed on the stock market – “it’s absurd for someone to defend [the idea] that dividends shouldn’t be taxed.”
This exemption – introduced in Brazil in 1995 – is almost unique in the world. Only two tiny European countries – which have nowhere near the brutal inequality of the richest country in Latin America – don’t tax the profits distributed by companies, according to the US-based Tax Foundation. That is, precisely, explains the Oxfam expert, the main source of income for the mega-rich. “The 0.2% of Brazilians with the highest income receive 70% of [their earnings] through dividends,” he says.
Tax exemptions are common in Brazil. The pressure from corporate lobby groups is enormous and the congresspeople are easy to convince – every year, all sorts of waivers are incorporated. This hits many different products and services, including one of the most popular deserts on the planet: ice cream. It turns out that, in its classic version, you pay 5% tax on the sale price in Brazil. But, with a slight change in composition – and when it’s baptized as a “milk drink” – fiscal magic occurs, with zero taxes being imposed. McDonalds knows this well. For instance, instead of vanilla ice cream, a treat called Casquinha Baunilha triumphs… “a super-crunchy cone with a vanilla milk drink.”
The deductions are countless. And the menu of tax exemptions is rich and varied. A long list is drawn up by the Association of Tax Inspectors under the National Treasury of Brazil, presented as money that the state refuses to collect. The chapter dealing with corporate profits and dividends alone resulted in a whopping $15 billion in deductions in 2022. The Brazilian government could easily collect this amount if it had implemented a tax on large fortunes, which was once part of the constitution.
Some of the most privileged companies benefit from the deductions established by the tax inspectors, when it comes to settling accounts with the Treasury. The Vale mining company – one of the most valuable Brazilian firms – benefited from exemptions worth $3.8 billion in 2022, partly due to its donations to the cultural sector. This is one of the most surprising examples, but the cunning is endless.
Some of the key data related to the reform – such as the exact percentage of the new VATs – will be discussed later. At the moment, the plan is to set the VATs at around 20-25%. While these details are being ironed out in a constitutional amendment (which will need to be added to one of the most extensive constitutions in the world), even if the reform goes ahead, it will still require a complementary law to be passed. And, of course, there will be a transition period that – according to the proposal – could go past this decade.
Although the redistribution of wealth was one of the key promises made by Luiz Inácio Lula da Silva during his presidential campaign, nobody is expecting drastic or revolutionary changes. Rather, the executive branch sees the creation of the VATs – as well as the formation of a regulatory body that distributes the proceeds between the states and municipalities – as being key to beginning the process of simplifying the baroque tax system. Minister of Finance Fernando Haddad – who belongs to Lula’s center-left Workers’ Party – hasn’t repeated what he vowed in April, that “companies that don’t pay taxes and have benefits are going to start contributing.”
This past Wednesday, Haddad took on a more diplomatic and ambiguous tone at a press conference: “No one is thinking in the very short-term, [about] profits or losses. We’re thinking that Brazil will grow with this reform – more investment will come because there will be more legal certainty and it will bring greater peace of mind to public administrators, so that they have the necessary resources to honor social commitments. Everyone wins.”
In the meantime, a good part of the tax revenue will continue to come from everyday products, such as the national dish, rice and feijâo (beans). With the reform, Brazilians living in shanty towns will no longer have to pay taxes on basic necessities… and neither will their fellow citizens who live in mansions with pools.
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