Brazil has traditionally been known for its bureaucracy and high taxes. Lately, however, its individual states have aggressively sought new foreign investment by engaging in what have been called the “tax wars.” Brazilian regions compete against each other to provide the most attractive incentives. The tax wars generally stem from incentives offered by states against Brazil’s value-added tax (“VAT”). Incentives must first be approved by all other states. This rule may make approving another state’s incentives detrimental to one’s own state.
Further complicating matters, it appears many states have pushed through incentives without the approval of their fellow states. This has led to a plethora of law suits. Recently, the governor of the state of São Paulo filed eight constitutional complaints with the Brazilian Supreme Court against laws enacted by Rio de Janeiro and Mato Grosso do Sul.
São Paulo alleges that tax benefits offered by these states infringe the constitutional principles of free enterprise and freedom of economic activity. The governor seeks an injunction and a declaration pronouncing the incentives unconstitutional. U.S. businesses operating in Brazil may have benefited from the incentives in question. If the incentives are found unconstitutional and the finding is applied retroactively, U.S. businesses operating in Brazil that have taken advantage of them may have additional tax obligations. All U.S. businesses operating in Brazil should follow this and similar suits closely and prepare for the possible consequences of an unfavorable ruling.
The views express in this article are those of the author and do not necessarily reflect the position or policy of Berkeley Research Group, LLC.
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