VAT rate in Brazil will be at least 70% higher than the world average

Back in the Chamber of Deputies, the tax reform proposal approved in the Senate should create a Value Added Tax (VAT) system in Brazil with the highest rate in the world.

While the Ministry of Finance projects a standard taxation of 27.5% after the reform, the average percentage (not weighted) among the more than 170 countries that adopt the same taxation model is 15.9%.

The most common rate internationally is 16%, according to data updated in October 2022 by the International Bureau of Fiscal Documentation (IBFD).

In other words, the standard VAT in Brazil, post-tax reform, will be more than 70% higher than the world average and the most common rate abroad.

Today, the lowest VAT rate is applied in Andorra, a European microstate with just over 77 thousand inhabitants, where the tax on goods and services weighs 4.5%. At the top of the ranking is Hungary, where the tax reaches 27%.

Among the 37 member countries of the Organization for Economic Cooperation and Development (OECD) that adopt the taxation model, the average unweighted rate is 19.2%. Of the economies that make up the so-called “rich club”, the United States is the only country that does not use VAT.

The model is the most adopted in the world to tax the consumption of goods and services and is characterized by focusing only on the added value at each stage of the production chain, unlike what occurs in the current Brazilian system, in which taxes are cumulative.

According to the Proposed Amendment to the Constitution (PEC) 45, the local version of the tax will be “dual”, that is, composed of two taxes: the Contribution on Goods and Services (CBS), which is the responsibility of the Union, and the Tax on Goods and Services (IBS), whose management will be shared by states and municipalities. The rates will be defined later, through complementary law.

The original reform proposal envisaged more equal taxation between the different sectors of the economy and, thus, could reduce the average tax rate for all taxpayers. During the various phases of the PEC’s progress in Congress, however, more and more exceptions were added to the text, which should increase standard taxation.

The existence of exceptions is not a particularity of Brazil. An OECD report shows that only eight countries that adopt VAT do not provide for a reduced rate or exemption for certain goods or services.

According to the version of the PEC approved by the Senate, the Brazilian system will have three different rates for certain areas, with discounts of 30%, 60% and 100%.

Although high compared to the world average, the government’s estimate, if confirmed, may not necessarily represent an increase in the tax burden. A study by the Fiscal Policy Observatory of Fundação Getúlio Vargas (FGV) published in August shows that in 2022, the effective burden on aggregate consumption in Brazil was 27.8%.

Independent economic analysts, however, calculate that the total charge, adding CBS and IBS, could be even higher than the government estimates, reaching up to 33.5%.

To avoid an increase in the tax burden, the proposal’s rapporteur in the Senate, Eduardo Braga (MDB-AM), included in the text a reference ceiling, based on the average collection of the public sector between 2012 and 2021 in proportion to the Gross Domestic Product (GDP) . According to the provision, every five years, if revenue is higher than this average, the rate of new taxes will have to be reduced.

The high burden of taxes on consumption in Brazil is not only a consequence of the amount of tax exemptions and exemptions that already exist in the current model, but also of the composition of the system, in which the taxation of goods and services weighs more than the collection of State on income and assets.

The total taxes collected in Brazil in 2021 corresponded to 33.5% of GDP, a rate slightly lower than the average for OECD countries, which was 34.1%. Consumption taxes, however, represented almost half of the amount (15%), while among the entity’s members they represented less than a third (10.6%).

Income taxation, in turn, was equivalent to 8% of GDP in Brazil. Among the countries in the “rich club”, the average was 11.3%.

For the president of the Brazilian Institute of Planning and Taxation (IBPT), João Eloi Olenike, the country could advance further if a broader tax reform was carried out, which also included taxes on income and assets, in order to align the Brazilian system with practices of more developed countries. “It’s a simple thing: taxing according to the citizen’s effective ability to pay,” he says.

The economic team of the government of Luiz Inácio Lula da Silva (PT) intends to present a proposal to reform the Income Tax in 2024. The initial intention of the Minister of Finance, Fernando Haddad, was to send the proposal this year.