Brazil's Tax-Cutting Package Finally Moves Forward

by Mike Godfrey, Tax-News.com, Washington

26 August 2005

Brazil's lower house has finally ratified a tax-cutting bill that was announced in May by Brazil's Commerce Minister Luiz Fernando Furlan but has been becalmed amid a bribery scandal which has undermined the government.

The 99-item tax package includes a series of measures focused on strengthening investment in R&D initiatives and provides guarantees for exporter investments in new factories and equipment.

The plans include a proposal to reduce welfare taxes on local purchases and imports of capital goods for companies whose exports make up at least 80% of sales. The same tax break will be extended to the assets of companies operating technology-services export platforms and exemptions will be offered for retail purchases of computer equipment up to a value of 2,500 reals (US$1,000). There will also be an increase in tax-exemption limits for purchases of small-scale capital goods to 35,000 reals from the current 20,000 reals.

"This legislation will give important incentives for industry in terms of employment and income and will benefit broad sectors of the society," said bill sponsor Custodio Mattos following the vote. The bill will eventually have to be ratified by the Senate.

Brazil is highly taxed for a developing economy, with the total tax take exceeding 35% of GDP; and it grew in 2004. Business leaders have criticized the administration of (socialist) President Luiz Inácio Lula da Silva for gradual increases in the country's tax burden over recent years that discourage investment. High government investment has also tended to crowd out the private sector.

Officials said the tax cuts would cause losses of more than 2 bn reals a year, but hope that this will be offset by increased economic growth.

The government has also promised not to increase the overall tax burden; but tax service joint secretary Ricardo Pinheiro says that this commitment was only for tax revenue barring welfare contributions. "There's no way of taking on a commitment to cut the tax burden with a R$ 40 billion ($1 = R$ 2.37) welfare deficit," said Pinheiro.

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