Brazil’s Taxes Going from Bad to Worst

November 3, 2014

The European Union (EU) has requested that the World Trade Organization (WTO) establish a panel to review Brazil’s discriminatory taxes. Brazil has a series of tax exemptions for domestic firms and customs duties on imports that increase the price of EU goods by up to 80 percent in Brazil. In addition, the tax exemptions require Brazilian manufactures to use locally sourced components. The EU argues that these tax provisions constitute a prohibitive barrier to trade and violate WTO rules.

The request by the EU comes as Europe is struggling to stave off a recession. Leveling the playing field to increase exports would certainly help the Member State, but Brazil has fallen on hard times as well. High inflation has destabilized the economy and a hotly contested presidential election has added to the uncertainty.

Part of the uncertainty relates to Brazil’s tax code, which has been in flux ahead of the Brazil’s national elections. Brazil’s President Dilma Rousseff introduced tax breaks as her popularity waned in the spring of 2014. Income levels on tax brackets were pushed up by 4.5 percent to alleviate the effects of high inflation while businesses received an extension on tax cuts for IT goods and machinery as well as a special tax refunds of up to 3 percent of exports’ value.

The Brazilian government may not be able to sustain these cuts in the long-term. Brazil’s central bank posted data showing the primary budget deficit of 25.5 billion reais ($10.4 billion), which far exceeded market prediction for September, continuing the trend from August. If the country continues these deficits, the tax cuts may no longer be feasible and President Dilma Rousseff may have to make hard choices.

Now that Brazil’s national elections are over and President Dilma Rousseff has her second term securely in hand, the political incentives to keep the cuts have faded. Pressure from an expanding deficit and angry trading partners will test the Presidents resolve to maintain the tax cuts she has promised her constituents. It seems likely that 2015 will bring a change in President Dilma Rousseff’s promises.

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