Maurin Almeida Falcao
Brazil was one of the first countries in the world to implement a Value Added
Tax in the context of the overhaul of the consumption taxes on goods and
services in the sixties. The new consumption tax system proposed by Maurice
Lauré in 1954 replaced cascading taxes which were incompatible with the
project to establish a Single Market in Europe. In this way, the conclusion of
the famous Neumark Report in 1962 showed that only the implementation of a
value added tax would allow for European integration and dismantling of tax
borders. Hence, the EEC adopted the VAT in 1967 as the only neutral
consumption tax. This laid the foundations for a modern taxation of
Coming back to Brazil, the country adopted a new framework for taxation of
consumption at the time of the fiscal reform of 1965. This was an important
step in the modernization of the Brazilian tax system. On the other hand, there
was also a need for a tax framework able to support the growth foreseen for
the 1970’s. Nevertheless, this tax reform was subject to the directives from the
military government in place since 1964. The trend to economic and political
centralization imposed a model where the federal government benefited from
the revenues considered at that time as the most promising.
It is important to stress that the political system in Brazil is based on three
levels: Federal Union, States and municipalities. Hence the current difficulties
to reform a tax system where each level of government manages its own fiscal
resources, and to move forward in the context of globalization.
To explain the Brazilian experience in implementing a VAT system, according
to the widespread model, this document will comment on political and
economic aspects of the distortions created by the fiscal reform of 1965.
As stressed above, Brazil implemented the VAT at the time of the 1965 tax
reform. The political and economic context was dominated by the need to
ensure both local autonomy and centralization of the main powers in the
hands of a central military government. Therefore, services were taken out of
the scope of VAT and a Tax on Services –ST- was established at the
municipality level. At the State level a tax on goods –GT- was created (which
has the characteristics of VAT and includes since 1988 the telecommunication
and transport services). In order to also allow the Federal Union to benefit
from the excellent perspectives offered by consumption taxation, a wholesale
tax was levied on industrial products. This system replaced the old cascading
tax. In parallel, these changes reflected the political needs in a difficult context.
This “fiscal federalism” was adapted to the demands of the new military
government. Despite the adoption by Brazil of a widespread model, it differed
to a certain extent from the one proposed by Maurice Lauré.
Once those reforms were implemented, the Brazilian Government was
confronted by new international challenges. As for many developing countries,
the problems caused by an increasing public debt raised the need for new
reforms of the tax system faced with the difficult overall economic situation.
But the consumption tax system complexity is due to the reforms implemented
in the 1970’s.
Due to this sharing of tax powers, the federal government doesn’t have useful
tools to manage its tax policy. So, when discussing tax policy or international
negotiations for tax harmonization, the analysis should take into account the
full span of taxes.
This question also refers to other important points. In the 1960’s many surveys
on public finance and in particular on taxation, shared the common view that in
the next few years there would be a trend in favor of income taxation rather
than consumption taxation in developing countries. Maybe those analyses
influenced the managers in charge of the Brazilian tax reform. Hence the
Federal Union took the responsibility for income taxation management.
Anyway, the 1970’s were the turning point for consumption taxes. According to
studies made by international organizations, including the Organisation for
Economic Co-operation and Development (OECD), VAT experienced an
unexpected growth, even among developed countries.
From this point it’s easy to assess the difficulties of the Brazilian government.
The sharing of taxing powers on consumption generated complex situations
for the Federal Union. Policy tools are missing to facilitate negotiating
international agreements on free movement of goods and services placed
under the responsibility of, respectively, States and municipalities. In addition,
the share of revenues from consumption taxes is rising in the total revenue. As
a consequence, taking account of its choice to keep only revenue taxation
under its authority, the Brazilian government loosened the freedom of action
which would be necessary to take any major tax policy decisions.
As a conclusion, the contribution of VAT to the modernization of the Brazilian
tax system and its importance in the whole of tax revenues should be
recognized. It is now crucial to consider reviewing the sharing of tax powers in
the current economic, political and social reality of the country and its
relationships with the rest of the world.
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