Reforms and simplification measures indicate the resumption of investments in Brazil

Measures open the path to a more favorable economic environment for investors, but long-term policy is fundamental to ensure legal certainty.

João Henrique Brum

Data in the 2019 edition of Doing Business, an annual publication of the World Bank Group, show that Brazil needs to leverage its competitiveness, simplify laws, regulations and processes that hamper its development. Brazil appears in 109th place, among 190 economies, as to the ease level of doing business.

Reforms and other simplification measures are considered by the business sector as fundamental and urgent for the expansion of investments (public and private) in Brazil and, consequently, for the economic growth.

The business community has closely followed the Social Security reform process in Congress. More than just the interest in knowing the new social security rules that will be in force and influence their routine, companies are expecting that the change will contribute to the Brazil's return to growth, mainly due to the probable cash float that the government will have.

The reform vote goes to the second round, in the plenary of the House of Representatives, scheduled for the beginning of August, after returning from parliamentary recess. He will then be sent to the Senate, where it will pass through the approval process and then return to Congress for the final rite. The process is expected to extend through September.

In the sequence, it is expected that the tax reform will also advance and that its approval will put Brazil in a better competitive position. The central point of the proposal is the creation of a non-cumulative federal tax, the Tax on Goods and Services (IBS) - replacing five current taxes (IPI, contributions to PIS/Pasep and Cofins, ICMS and ISS).

The tax reform was approved by the Constitution and Justice Commission (Comissão de Constituição e Justiça - “CCJ”) and currently is being processed by a Mixed Committee in the House of Representatives. The expectation is that it will be analyzed over the next semester.

In the political sphere, five simplification projects for Brazilian tax system are under discussion, revealing even a space dispute to settle the proposal. In general, these lines defend the extinction of a range of federal, state and local taxes and the creation of new ones, but focusing on optimization, unification of taxes and reorganization of the competences.

The possibility of a friendlier situation has broadened the perspective of foreign investors to Brazil. Foreign companies, especially in the oil and gas sector, are interested in a less complex situation as far as taxes are concerned, at a time when a large number of assets are offered for sale in Brazil. The pre-salt mega auction, which should generate BRL 100 billion in bonus and BRL 400 billion in investments, expected to the end of this year, has also been a long awaited one.

Other initiatives for simplification

In addition to structuring reforms, the federal government has been conducting a series of actions aimed at simplifying business activity.

Facilitating access to credit - Simple Credit Companies and Fintechs

From this step, any person may establish as an individual limited liability company (empresa individual de responsabilidade limitada - “Eireli”), individual entrepreneur or limited company, a Fintech under the terms of Simple Credit Company aiming at granting credit.

In a certain way, the measure would be legalizing the practice of lending money between people and companies, which already informally occurs. The novelty is that this will allow the financial inclusion of small businesses, with interest for half of what is charged by banks.

The detail of this measure is that it contributes to increase competitiveness, to stimulate the decrease of interest rates, to generate better credit conditions and to stimulate the return of investments by companies.

MP 881 - Economic Freedom

MP 881 is another program announced by the government to restrict the state's role in the economy by eliminating bureaucracies and encouraging entrepreneurship in the country. The measure is expected to be voted by the House shortly after the July recess.

Among a number of items, which include simpler regulation for low-impact activities, labor changes and limiting the power of professional advice, this package also mentions eSocial, a system that brings together tax, social security and labor obligations informed by companies of all sizes.

ESocial Modernization

While the Legislature discuss the end of the platform, through amendments in MP 881, the Executive Power, through the eSocial Steering Committee, adopts a more conservative tone, announcing only the modernization, in which several fields would be eliminated.

As reported by the government, the technicians involved with the changes are working to make a new system available as soon as possible, so that it works from January 2020.

See also: Government announces eSocial modernization

Scenario still requires caution

In addition to the changes in Brazilian fiscal policy focusing on social security and tax reform and simplification, the macroeconomic agenda is beginning to move towards to withdrawal weight and control from State in various aspects and areas.

It is up to the business community to monitor all this political and economic movement, particularly the actions such as the agreement between Mercosur and the European Union, the declared intention of the government to privatize state-owned enterprises, the initiatives to facilitate the acquisition of credit, to reduce energy costs for the industry, among others.

Although business community is already responding optimistically to the proposals, the economy has reacted slowly to measures, and we will still have a long transition phase, especially in the case of reforms. Therefore, use caution and avoid speculation when drafting business plans.

The simplification is necessary and it will provide a favorable business environment, more attractive to domestic and foreign business community. However, the country needs to adopt a long-term policy, which is essential to ensure legal certainty for investors.

Specialized consultancy for your business

Tax and accounting planning should continue to receive the attention of companies, even signaling that changes would simplify the tax system and facilitate the provision of information in this area. The realization of what is being currently proposed may take a few years.

It is also important to consider that the crosschecking of information by the Treasury should not take steps backwards. Instead, the use of technology should be improved, as there is an interest in tightening the siege against inconsistent data and even omissions, in order to increase collection.

At this point, it is important that companies find advice on current patterns and on a possible transition to maintain efficient tax management.

Domingues e Pinho Contadores specialists provide customized tax consulting, analyzing the context and business strategy of the company, in order to offer solutions to domestic and foreign companies operating in Brazil, or those wishing to create business opportunities in Brazil.