On August 17, Brazil’s Chamber of Deputies delayed the vote on the proposed tax reform for the third time after failing to convene the necessary 308 votes to pass the proposal. This watered-down proposal includes an update to the individual income tax table, increasing the exemption range and benefiting an additional eight million Brazilians. The latest version of the proposal also introduces the taxation of dividends at 20%, which has been the primary source of criticism by the business lobby, preventing the reform’s approval. Hoping to strike a compromise, the rapporteur of the proposal, Celso Sabino, increased the tax cut on companies. However, the move displeased states and municipalities, which complained of lost revenue. Lawmakers are now working on a two-week deadline to draft the new text, which will likely be put to a new vote by September 1.

Our View

Despite the delay, firms should still plan for a watered-down fiscal reform to be approved in Q3. With the introduction of dividend taxation and the reduction of the corporate tax rate, this reform should reduce Brazil’s short-term fiscal risk by increasing the tax burden on investment. Still, political pressures to spend during next year’s election cycle will remain elevated, continuing to pose credible threats to the spending cap rule, Brazil’s main fiscal anchor. Moreover, the difficulties around passing the tax reform and the current Congressional fragmentation may also spell trouble in other priority areas, such as the proposal that would help finance the R$ 89 billion in court-ordered debts to the judiciary in 2022, which, if paid in full, would expend over 70% of the country’s discretionary budget.

Business Implications

The government’s current proposal for corporate tax reform would significantly increase the tax burden on many businesses, particularly foreign investors. Therefore, firms should monitor the reform for potential impacts and changes on tax burdens. Companies should assess the possible consequences and reconsider their corporate structures, value chains, transfer pricing, and financing of their Brazilian operations. Additionally, firms should be prepared for some degree of fiscal risk to continue to weigh on Brazil’s 2022 economic outlook. 

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