May 19, 2021

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BRAZIL: Bolsonaro’s weakness explains green “conversion”

BY Mario Marconini

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The Senate inquiry (CPI) into the handling of the Covid-19 pandemic continues to harm President Jair Bolsonaro and his government. Polls already show for the first time a greater number of voters favoring an impeachment than opposing it (49-46%). Congress will not focus on impeachment, however, unless the president’s persistent 35% approval melts away, which remains unlikely. Instead, legislators are looking for a feasible agenda to follow. As noted previously, economic reforms are at risk. Congress was not able to move the reform agenda before being overtaken by the CPI.

Talk of a tax reform continues. House Speaker Arthur Lira, who had blocked the continuation of the tripartite (House, Senate and government) special committee on tax reform and extinguished the House committee that focused on constitutional amendment PEC45, still favors refocusing the discussion to the modest government proposal on the unification of federal social contributions (PIS and COFINS) into one tax (CBS). In the meantime, the former rapporteur in both of the defunct committees, Aguinaldo Ribeiro, presented a consolidated proposal on 3 May including changes that made the reform more palatable. The proposal by Ribeiro has no formal status since neither committee exists anymore.

It would make sense for Lira to create a new committee in the House to move forward with Ribeiro’s proposal. PEC45 would turn five federal and sub-federal taxes into one national value-added tax (VAT), providing a transition period for states and municipalities and differentiated rates for economic sectors. However, this still seems unlikely since Lira does not want to look as if he is simply putting into practice his opponents’ proposal. Of late, with the reemergence of former president Luiz Inácio Lula da Silva as the likely contender against Bolsonaro in a runoff election in October 2022, Lira has tended to strengthen his alliance with the president as other contending forces in Congress veer towards Lula. A tax package starting with the government’s CBS and then evolving piecemeal as political conditions allow combines a pragmatic approach to the government with the achievement of a feasible objective.

Two likely scenarios are therefore at play: (1) Lira creates a new committee in the House to start anew on the basis of the government’s proposal for a CBS and the “slicing” of the reform into parts; (2) Representative Aguinaldo Ribeiro’s “personal” proposal is introduced in the Senate as a substitute amendment to the Senate PEC110 on the tax reform. While PEC110 is broader in scope than Ribeiro’s proposal, unifying nine taxes into one VAT, it is still less comprehensive in terms of transition periods and applicable rates. It is therefore likely that both the House and the Senate move separately. The main difference between the two processes is that, contrary to the Senate, the House will not need to reach a three-fifths majority in two votes to approve bill 3887/2020 on the CBS since, unlike PEC110, it does not require a constitutional amendment.

Economy Minister Paulo Guedes still insists on including a financial tax in Lira’s package – which is staunchly opposed by all economic sectors. Lira is unlikely to accept fighting for such a tax despite his renewed alliance with the government.

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