Brazil unveils compensation funds in proposed tax reform

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BRASILIA (Reuters) -Brazil’s proposed tax reform will include compensation funds to benefit states that lose money under the changes, the bill’s coordinator, Congressman Aguinaldo Ribeiro, said on Thursday, as the proposed constitutional amendment was unveiled.

The restructuring of Brazil’s notoriously complex consumption taxes, which has been attempted previously by various governments multiple times without success, is a key step in President Luiz Inacio Lula da Silva’s plan to boost growth.

The proposal, which must still be debated by Congress, plans to over eight years merge various levies into a value-added tax (VAT) with separate federal and regional rates.

The proposal, which would shift the tax basis from where goods are produced to where they are consumed, is expected to benefit the coffers of Brazil’s wealthier and more populous states.

While the VAT change is set to take eight years, the proposal sets out a 50-year transition period for the place-of-consumption reform, starting in 2029 in a bid to soften the opposition of some state governors.

The federal government would also finance a fund devoted to the states’ development, at a cost of 8 billion reais in 2029 and rising to an annual amount of at least 40 billion reais ($8.38 billion) from 2033.

A second fund would be created to compensate for tax benefits already granted by states, to which the government would allocate a total of 160 billion reais from 2025 to 2032.

Prior to the official presentation of the bill, Speaker Arthur Lira said it should be voted on in the Lower House in the first week of July. Finance Minister Fernando Haddad has emphasized that his team’s immediate focus over the next two weeks will be solely on securing its approval.

The proposal acknowledged exemptions in standard tax rates, including a reduced rate for some goods and services related to health, education, public transportation and rural production.

($1 = 4.7729 reais)


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