Brazilian Senate Approves Tax Reform for Potentially Highest VAT Rate in the World

On November 8, the Brazilian Senate passed a tax reform bill potentially positioning Brazil for the highest Value-Added Tax (VAT) globally. The bill introduces a dual VAT system to replace five existing consumption taxes, bringing Brazil in line with over 170 countries already using VAT.

While specific sectors like fuels, hotels, events, education, and healthcare will enjoy reduced or zero VAT rates, other industries might face an increased standard rate. The Treasury Ministry’s initial estimate, based on an earlier draft of the bill, suggested a VAT rate as high as 27.5%. The Institute of Applied Economic Research (IPEA), using Federal Revenue data, indicated it could even reach 28%. The Treasury plans to conduct a new analysis.

Importantly, the proposed constitutional amendment does not set a definitive VAT rate, leaving it to complementary legislation to determine the exact figure.

Potential to Exceed Hungary’s 27% VAT Rate

If the Treasury and IPEA projections are accurate, Brazil’s VAT could exceed that of any other country. In contrast, India, which introduced a multi-tiered VAT system with rates from 0% to 28% in 2017, took 11 months for a full transition. Brazil’s phase-in period is planned from 2026 to 2033.

Currently, Hungary has the highest VAT rate at 27%, while Andorra offers the lowest at 4.5%. The non-weighted average VAT rate among 28 OECD member states stood at 19.2% in 2023.

Globally, the average VAT rate is around 15%, with regional variations. The US, in contrast to major economies, relies on state and local sales taxes, averaging 6.6% in 2020, instead of a national VAT.

The European Union’s standard VAT rate is 21%, six points above the minimum required in the region. The OECD notes that consumption taxes typically make up about 30% of total tax revenues in member countries.

Implications for USD/BRL Exchange Rate

Amid these developments, the U.S. Dollar (USD) has shown strengthening against the Brazilian Real (BRL). On November 10, the forex market closed with USD trading at R$4.90, having tested a support zone near R$4.85 per dollar.

The Relative Strength Index (RSI) hit the oversold threshold at 30 points on November 7, indicating a potential short retracement to the 30-day exponential moving average (EMA) at R$4.97. This EMA is near a significant psychological resistance level of R$5.00 per dollar.