Brazil

Executive Summary

  • President Luiz Inácio Lula da Silva’s administration has been making announcements and adopting actions that signal conflicting economic policy directions, and that might indicate a potential shift towards State capitalism-type rather than free market and free enterprise policies.
  • After its return to democracy in 1985, Brazil’s first attempt at State capitalism collapsed and resulted in a two-and-half-year, domestic policy-generated recession that reduced the country’s GDP by 8.1 percent between 2014 and 2016.
  • Policies and actions adopted by the Lula administration have some similarities with this first attempt, in particular when it comes to government intervention in large business conglomerates.  However, President Lula faces significant political and institutional constraints.
  • Structural and microeconomic reforms also pursued by the administration offer an opportunity for businesses and investors, but State capitalism-type policies increase risks of capital misallocation, government and market inefficiencies, and corruption.

Analysis

As President Luiz Inácio Lula da Silva’s administration approaches its 18-month mark, federal government announcements and actions begin to signal a potential shift to move Brazil towards a State capitalism-type economy and reverse the free markets and free enterprise approach adopted by the past two administrations.  When seen in conjunction with the recently-approaved new fiscal framework and historic tax reform, these signals provide a mixed message to businesses and investors.  They point, at the same time, to more and less government intervention in markets.Continue Reading Brazil’s State Capitalism Revisited: Mixed Signals to Businesses and Investors

January 10, 2024

Latin America

Executive Summary

  • President Lula da Silva concluded his first year successfully delivering on economic and social policies, and with good economic growth and job creation results.
  • In contrast, he achieved mixed results in foreign policy and made little progress in his goal to curb what he perceives as threats to Brazilian democracy by the far right.
  • The large, pro-business conservative majority in Congress continued to deliver both so-called “structural reforms” and new or improved sector-specific legal frameworks.
  • 2024 will be an electoral year, but President Lula and Congress have a busy policy agenda.
  • Companies doing business in Brazil should pay attention to the implementation of the 2023 tax reform, which will be crucial to deliver on the reform’s promises to simplify the tax system and reduce compliance costs for companies.  They should also pay attention to further tax-related proposals to reform income and payroll taxes and potential legal frameworks on AI, cybersecurity, space activities, bioinputs, carbon market, offshore wind power, and green hydrogen, among others.

Analysis

President Luiz Inácio Lula da Silva’s main goal of 2023 was to reignite economic growth and job creation with a particular focus on promoting gender equality, social inclusion, and environmental sustainability (details here).

Growth and Job Creation

Market players begun 2023 expecting Brazil to grow 0.78% and improved their expectation up to 2.92% by December.  While the official GDP growth rate will only be published later in 2024, the improved expectation points to a reasonably stable economic policy and a successful year for the administration.

In January 2023, players also expected annual inflation to reach 5.36%, but reduced it to 4.46% by December, a signal that monetary policy conducted by an independent Central Bank has yielded a positive result.  The benchmark interest rate (SELIC), set at 13.75% since August 2022, was steadily reduced to 11.75%.Continue Reading Brazil Under Lula: The First Year

Latin America

Scope and format

The Brazilian National Congress approved a historic tax reform that revamps the existing consumption tax system, in place since the 1960s.  The reform generally simplifies the Brazilian tax system, reducing the compliance cost for business.  However, it also creates a new tax on certain goods and services.

The reform takes the form of a constitutional amendment and requires implementing legislation and regulation. The administration must introduce implementing legislation to Congress within 180 days.  Implementation dicussions will be relevant because they will set the new system tax rates and, in some cases, scope, as well as detail exceptions.

Although primarily focused on the consumption tax system, the reform also includes provisions related to taxes on property and financial operations.

Why a constitutional amendment?
Brazil adopts a descriptive constitutional model in which the principles and limits of the tax system, as well as all federal, state, Federal District and municipal taxes, and their respective scope and revenue distribution, are detailed in the Constitution.  Therefore, any substantial change of the system requires a constitutional amendment.

Need for reform

Over decades, the consumption tax system increased in complexity and compliance costs, ranking Brazil as one of the most inefficient tax jurisdictions among large economies.

The system, built upon thousands of tax-related norms and judicial interpretations, generated legal uncertainty and capital misallocation, creating negative incentives for investment, exports, and economies of scale and proximity, among others.  It also generated numerous tax disputes, with estimates as high as 75 percent of Brazil’s GDP, increased tax inequality, and reduced private sector competitiveness.

Many of the existing inefficiencies were created by federal government policies, or state and local governments providing tax incentives to attract investment, as well as economic sectors lobbying Congress and the administration for special tax regimes.

The need for a redesign of the consumption tax system was clear since the 1990s, when Brazil successfully curbed hyperinflation.  With a stable currency, structural issues impacting business competitiveness resurfaced.  These issues were grouped under the catch-all “Brazil Cost” concept, with the tax system as a prominent component of it.Continue Reading Brazil’s Historic Tax Reform: A Primer

The Government of Brazil has initiated a public consultation offering companies, business associations or civil society organizations an opportunity to comment on the country’s proposed new foreign trade strategy.

The consultation was initiated by the Foreign Trade Board (CAMEX), Brazil’s federal government interagency mechanism to coordinate the country’s trade policy. …

Continue Reading Brazilian Government Opens Consultation on New Foreign Trade Strategy

As early as this week, the Federal Senate of the Brazilian National Congress may vote a potentially historic tax reform, revamping a tax system that has been in place since the 1960s and has increased in complexity, inefficiency, and compliance cost over the years.

The reform is a draft constitutional amendment (PEC) that requires a favorable vote by at least three-fifths of the members of each chamber of Congress in two rounds of voting (308 in the House of Deputies and 49 in the Senate).

The House approved the amendment on July 7, 2023, with 382 and 370 votes in the first and second rounds, respectively.  The Senate must now vote on the amendment.

Pressure Politics in the Senate

The reform is largely focused on consumption taxes, creating a full-fledged value-added tax (VAT) for Brazil, although it also includes changes in property taxes.  Its outline, political economy, and approval process was discussed in this blog post.

The Senate rapporteur’s report includes key changes to the House-approved draft text.

The Senate is under pressure to establish a tax ceiling for the VAT.  President Luiz Inácio Lula da Silva’s administration is pursuing a strategy to increase government revenue in order to achieve the country’s ambitious new fiscal framework goals.  Private sector groups are concerned the administration might push for a VAT rate higher than the existing tax level, increasing the burden on companies.  They are also concerned about the scope of the proposed Selective Tax on goods and services with negative health and environmental externalities.  The opposition in Congress in echoing these fears.Continue Reading Key Vote on Tax Reform Expected in Brazil’s Senate

August 28, 2023

Latin America, Public Policy

Executive Summary:

  • The new fiscal framework introduced by President Lula da Silva in March 2023 was approved by the Brazilian National Congress, the first major legislative victory for the administration.
  • Congress made adjustments to the text in order to reduce the framework’s main vulnerability: its over reliance on revenue increase.
  • As a next step, the administration will likely continue to push its revenue-increase agenda to sustain the new framework while congressional leadership might opt for a debate on spending cuts, including a potential reform of the federal government payroll cost.

Analysis:

On Tuesday, August 22nd, the House of Deputies of the Brazilian National Congress held a final vote on President Lula da Silva’s proposed new fiscal framework for the country (discussed in this blog post). The bill was approved with 379 votes in favor and 64 against, a demonstration of the political strength of the Speaker of the House, an ally of President Lula.

The new fiscal framework is part of an economic policy focused on three main goals: fiscal stability to reduce inflationary pressures and allow the Central Bank to continue to reduce the benchmark interest rate (SELIC), tax revenue increase to sustain the new framework, and the approval of a major tax reform to simplify the Brazilian tax system on consumption (discussed in this blog post).

The approval on Tuesday is the first major legislative victory of the administration, that has seen more successes than losses in its initial months (discussed in this blog post).Continue Reading Brazil’s New Fiscal Framework Approved by Congress

Next week, the House of Deputies of the Brazilian National Congress may vote a potentially historic tax reform, revamping a tax system that has been in place since the 1960s and has increased in complexity, inefficiency, and compliance cost over the years. The reform has been debated for nearly three decades and is widely perceived as key to increase Brazil’s competitiveness by making the tax system simpler, more transparent, and less burdensome for businesses.

By adopting a full-fledged, value-added tax approach, the reform will likely result in a decreased tax burden for companies with longer supply chains, such as manufacturers, while potentially increasing the current tax burden for companies with a shorter supply chain, such as those in the agribusiness and services sectors.

The proposal encompasses two main areas: a complete reform of the taxation of consumption and a partial reform of property taxes. Other aspects of the tax system, in particular taxing of income, payroll, and financial transactions, are not included in the proposal.

Consumption Taxes Changes

In the area of consumption, the reform will merge five federal, state, and municipal taxes into a so-called “dual” value-added tax (VAT), charged both at the national and subnational levels.

At the national level, the VAT will be called Contribution on Goods and Services (CBS) and will be the result of the following three existing taxes, merged:

  • Federal tax on manufactured goods (IPI);
  • Federal contribution for the financing of Social Security (COFINS); and
  • Federal contribution for the financing of the private sector Social Integration Program (PIS).

At the subnational level, the VAT will be called Tax on Goods and Services (IBS) and will be the result of the following two existing taxes, merged:

  • State tax on the movement of goods and services (ICMS); and
  • Municipal tax on services (ISS).

Continue Reading Key Vote Expected on Brazil’s Historic Tax Reform

Executive Summary:

  • President Lula da Silva is trying to balance his administration’s economic agenda and what it describes as a democracy-strengthening agenda. Both require congressional action but have different chances of approval in a National Congress controlled by conservative and pro-business blocs and with a strong opposition linked to former President Jair Bolsonaro.
  • President Lula is also trying to balance his administration’s foreign policy priorities in a context of increasing great power competition between the United States and China, which diminishes the efficacy of a strategy based on soft power and focused on multilateralism and multipolarity.
  • The 2003 playbook President Lula seems to be applying to both domestic and foreign policies has limits as both Brazil and the international system changed substantially in the past two decades. Using the same strategy risks poor results and paralysis.

Analysis:

Domestic policy priorities

President Lula was elected in October 2022 for his third term with the narrowest margin of votes since Brazil’s return to democracy in 1985. Despite defeating the incumbent, then President Jair Bolsonaro, the 1.8% additional votes Lula received to win were a clear symptom of Brazil’s polarization.

The new administration’s domestic priorities have largely encompassed two objectives. First, to reignite economic growth and job creation with a particular focus on promoting gender equality, social inclusion, and environmental sustainability. Second, to curb what the administration perceives as threats to Brazilian democracy by the far right.

The economic agenda is anchored on three key goals. First, the establishment of a new fiscal framework (that requires a congressional vote) to stabilize public debt and create an incentive for the Central Bank to reduce the benchmark interest rate, set at 13.75% since August 2022. Second, eliminating tax loopholes and strongly enforcing tax rules, through both legislative and administrative action, with an aim at increasing government revenue. Third, to get the National Congress to approve a major tax reform to simplify the Brazilian tax system at the federal, state and local levels — an initiative that requires amending the Constitution.Continue Reading Brazil: Lula’s balancing act in domestic and foreign policy

On March 30, the Lula administration officially presented its proposed new fiscal policy framework for Brazil.

Minister of Finance Fernando Haddad and Minister of Planning and Budget Simone Tebet presented the framework to the press after several rounds of negotiation within the administration and with the congressional leadership, in particular the Speaker of the House and the President of the Senate.

Key takeaways:

  1. The new framework tries to strike a balance between fiscal responsibility and social responsibility, combining fiscal adjustment measures with the preservation of budget for key social policies, in particular the conditional cash transfer to the poor, minimum wage, healthcare and income tax exemption for workers and the middle class.
  • The new framework’s ‘fiscal anchor’ is based on an annual primary budget surplus target (excluding debt interest payment), from -0.5% of GDP in 2023 to 1.0% of GDP in 2026, growing in 0.5 pp increments per year.
  • The annual primary budget surplus target will be pursued within a tolerance range between +0.25% and -0.25% of GDP of that year’s target (e.g., if the target for the year is 0.5%, the range will be from 0.25% to 0.75%). This tolerance range mechanism mirrors the existing inflation target mechanism used by the Central Bank.
  • In addition to the target, growth in spending will be pegged to revenue increase at 70% (e.g., if revenue increases BRL 10 billion, spending can increase only up to BRL 7 billion). If the annual primary budget surplus target is not achieved, the spending growth peg is reduced to 50% to slow down further spending.

Continue Reading Brazil’s Lula Administration Presents New Fiscal Framework

On March 4, 2021, Brazil deposited with the United Nations its ratification of the Nagoya Protocol (“Protocol”) (see here the announcement of Brazil’s Ministry of Foreign Affairs).  This represents Brazil’s formal commitment to be bound by the Protocol.

On August 6, 2020, the Brazilian Senate passed a Decree that ratifies the Nagoya Protocol. The Protocol complements Brazil’s existing access and benefit sharing rules relating to Brazil’s genetic heritage and associated traditional knowledge (“ABS Framework”).  One important effect of this ratification is that other countries parties to the Protocol will have to ensure that users of Brazilian genetic heritage and associated traditional knowledge comply with the Brazilian ABS Framework.  However, the inverse is also true.  Brazil will need to ensure that Brazilian users of foreign genetic heritage and associated traditional knowledge comply with the access and benefit sharing regime of the country of origin.Continue Reading Brazil Ratifies the Nagoya Protocol