A Panorama View of COVID-19 and Resulting Tax Gaps in Brazil

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As across the world, everyday life and business in Brazil have been severely impacted by the unexpected global economic crisis caused by the coronavirus (COVID-19), which has brought notable consequences in all sectors of the global economy.

As the pandemic rages on, and vaccination plans are still under discussion, stock markets continue to fluctuate and schools, colleges and businesses are sometimes closed or working with limitations, measures are being taken to mitigate the situation and prevent its consequences over an inordinate period of time. Some of these stop gaps involve increased health spending and transfers to vulnerable sectors; combined with the predictable drop in revenues, have generated even greater deficits. Although, for now, these will be financed by an expansion of public debt, but after the economic reactivation phase, an improvement to Brazilian tax policy will be needed.

In addition, we have seen a significant decrease in tax collection of both the rate of Imposto Sobre Serviços (“ISS” or tax on services) and the rate of Imposto sobre Circulaçao de Mercadorias e Serviços (“ICMS” or tax on commerce and services) due to social distancing and reduced capacity requirements imposed on businesses. As some businesses are forced to permanently shut their doors, there is also a potential impact to Imposto sobre a propriedade predial e territorial urbana (“IPTU” or property tax and urban territorial tax).

Similar to many countries around the world, Brazil has also implemented measures to help those impacted by the economic crisis including:

  • The postponement of social contributions payment, such as PIS (Program of Social Integration - unemployment) and COFINS (Contribution for the Financing of Social Security), as well as taxes collected under the “Simples Regime;” and
  • Temporary Import Tax, Imposto sobre Produtos Industrializados (“IPI” or tax on industrial products) and ICMS rates reductions (in some states) for products directly related to the treatment and prevention of coronavirus such as medical gloves and face masks and certain medicines related to COVID treatments.

Although these measures are necessary, they don’t come without a significant cost. According to the Ministry of Economy, the fiscal impact of measures to combat COVID-19 in Brazil as of September 2020 is over R$ 605 billion.

One of the biggest impacts on government accounts comes from the payment of emergency aid, representing approximately R$ 322 billion to public coffers – last year, eligible Brazilian citizens received five installments of R$ 600 and four installments of R$ 300.

In addition, states and municipalities are expected to receive more than R$ 120 billion through measures that include financial assistance from the government, as well as debt renegotiations with the Union, banks and international organizations.

With all expenses, the federal government's deficit could reach over R$ 866 billion, more than 12% of Gross Domestic Product (GDP).

In my next post, I’ll outline some recommended measures Brazil can implement to help alleviate the economic distress and tax gaps caused by COVID-19.

Blog Author

Industry Influencer Ana Maciel

Ana Maciel

Senior Manager, Tax Research

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Ana Maciel is a senior tax research manager responsible for new tax content that supports the Vertex Indirect Tax O Series solution in Brazil. Based in São Paulo, she has more than 24 years of experience in Brazilian indirect tax and has worked at Vertex for over 11 years. Previously, she worked as a tax advisor to multinational companies in Big 4 accounting firms. Ana holds a B.S. in law and a B.S. in business administration, as well as a post-graduate degree in international trade from Universidade Paulista.

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