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### Viewing cable 07BRASILIA32, BRAZIL'S NEW SMALL BUSINESS LAW

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07BRASILIA32 | 2007-01-08 14:30 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

    VZCZCXRO1975
    RR RUEHRG
    DE RUEHBR #0032/01 0081430
    ZNR UUUUU ZZH
    R 081430Z JAN 07
    FM AMEMBASSY BRASILIA
    TO RUEHC/SECSTATE WASHDC 7785
    INFO RUEHRG/AMCONSUL RECIFE 6076
    RUEHRI/AMCONSUL RIO DE JANEIRO 3652
    RUEHSO/AMCONSUL SAO PAULO 8961
    RUEHMN/AMEMBASSY MONTEVIDEO 6673
    RUEHAC/AMEMBASSY ASUNCION 5865
    RUEHBU/AMEMBASSY BUENOS AIRES 4499
    RUEHSG/AMEMBASSY SANTIAGO 6006
    RUCPDOC/USDOC WASHDC
    RUEATRS/DEPT OF TREASURY WASHINGTON DC

` `

    UNCLAS SECTION 01 OF 02 BRASILIA 000032

    SIPDIS

    SIPDIS
    SENSITIVE

    STATE PASS USTR FOR CRONIN
    TREASURY FOR OASIA - J.HOEK
    USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
    USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA
    STATE PASS USAID FOR LAC
    STATE PASS OPIC

    E.O. 12958: N/A
    TAGS: ECON PGOV EFIN SOCI BR
    SUBJECT: BRAZIL'S NEW SMALL BUSINESS LAW

    ¶1. (U) SUMMARY:  President Lula signed legislation on December 14,
    2006 that expanded the scope and coverage of previous efforts to
    simplify the taxation system as applied to small and medium
    enterprises (SME) in Brazil.  When it comes into full effect in July
    2007, the new law, known as "Supersimples", will consolidate into
    one tax eight different federal, state and municipal taxes,
    dramatically reducing the compliance and tax burden for businesses
    with revenues under a ceiling of Reais 2.4 million (roughly USD 1.1
    million).  The GoB has not estimated how many companies will benefit
    from the changes, but the 2.2 million SMEs that were beneficiaries
    of the predecessor regime (Simples) will be automatically included
    in the new regime.  The GoB estimated it would be giving up Reais 5
    billion (USD 2.3 billion) in federal tax revenue under the new law,
    although this estimate does not account for potential increased
    revenues generated by the reduction in informality that the law is
    expected to encourage.  The new law also aims to reduce
    substantially the amount of time necessary to register a business by
    creating a single registration for the national, state and municipal
    governments.  The legislation makes a modest effort to simplify some
    formulaic work-place rules.  The new legislation has the potential
    to have a positive impact on the business climate for SMEs in
    Brazil.  END SUMMARY.

    Background
    ----------

    ¶2. (U) The Brazilian Congress in December 2006 approved legislation,
    signed by Lula on December 14, which expands the scope of Brazil's
    previously existing "Simples" taxation regime for small businesses.
    The 2.2 million small businesses that currently make use of the
    Simples regime (i.e. small enterprises with annual revenues of up to
    Reais 240,000 or USD 114,00) will be transferred to the enhanced
    Supersimples system, which will include companies with annual
    revenues of up to Reais 2.4 million (USD 1.14 million).  When the
    new legislation takes full effect in July 2007, SME beneficiaries of
    the existing Simples regime are expected to see their tax burden
    fall an additional 15 to 20 percent.  Moreover, those SMEs
    newly-eligible to participate under the expanded eligibility
    criteria included in Supersimples may see their tax liabilities fall
    by 40 to 60 percent.  According to Federal Government data, micro
    and small companies account for 99% of all formal companies in
    Brazil.  They employ some 54% of the labor force and produce an
    estimated 20% of the Brazilian GDP.  The Supersimples legislation
    was submitted to Congress in 2004 after a period of public
    consultation under the auspices of SEBRAE, Brazil's small-business
    promotion agency.

    Consolidates and Reduces Taxes
    ------------------------------

    ¶3. (U) The new law expanded the previous consolidation of six
    federal taxes (income tax, the industrial VAT known as IPI, social
    security payments, and three "social contributions" known as PIS,
    COFINS and CSLL), the Supersimples program will also include the
    state-level VAT tax (ICMS) and a municipal tax (ISS).  Companies
    will make a single tax payment, dramatically reducing their
    compliance burden, on a scale that varies with revenue levels and by
    sector.  Industrial enterprises will pay between 4.5% and 12.1% of
    revenues, service providers (accountants, etc.) paying from 6% to
    17.42% of revenues and commercial enterprises (e.g. retail) paying
    between 4% and 11.61% of revenue.  Under the existing Simples regime
    companies were paying from 3% to 12.6% of revenues, but still had to
    pay the state-level ICMS and municipal ISS separately.  The three
    levels of government will share these tax revenues.  Self-employed
    individuals will see a reduction in their social security payments.

    ¶4. (U) The Supersimples regime expanded the scope of its predecessor
    regime by including additional sectors.  The new program extended
    the benefits to 21 new sectors, including civil construction,
    accounting firms, language schools, providers of technical training,
    real estate agents and publicity agencies.  Law firms and business
    consultancy firms were notably excluded.  Participants in the
    Supersimples regime will also receive other benefits.  Government
    entities will give preference to SMEs in the procurement of goods
    and services of up to Reais 80,000 (USD 38,000).  SME export

    BRASILIA 00000032  002 OF 002

    earnings will not be taxed.  In an attempt to ease the move into
    formality for potentially eligible companies, these will be allowed
    to restructure outstanding unpaid tax and social security system
    debt over a period of 120 monthly payments.  The law also allows for
    a credit guarantee system to improve small businesses' access to
    credit, but the details of the system remain to be worked out.

    Cuts Red Tape
    -------------

    ¶5. (U) In addition to lowering the tax compliance burden by allowing
    SMEs to make a single monthly tax payment in lieu of eight others,
    the new law simplifies the process for company registration and the
    procedures for opening and closing a company.  SMEs will now have
    only one official registration to complete, which will replace
    previous separate filings at the federal, state and municipal
    levels.  Certain classes of enterprises, those whose activities are
    judged not to pose risks to the environment, worker health or to be
    fire hazards, will receive permission to start functioning
    immediately, prior to receiving the approval of the environmental
    agency or fire department.

    ¶6. (U) The new legislation makes a modest effort at simplifying some
    of the formulaic requirements of Brazil's labor laws.  Eligible
    SMEs, for example, will no longer be required to enter into each
    employee's labor registration booklet the dates on which the
    employee took leave.  Organized labor groups resisted more ambitious
    reform to the labor code requirements applied to SMEs.  The
    Supersimples legislation also creates a standard nationwide
    definition of what constitutes a small or medium enterprise, so that
    benefits will be uniformly available across different states.

    ¶7. (SBU) Comment:  The new law is a very useful step towards
    improving the lot of small businesses in Brazil.  Most analysts
    believe it will contribute to reducing informality and increase
    SME's capacity to invest and hire new employees.  Much
    implementation work remains to be done.  That the modest easing of
    rigid work-place rules for SMEs contained in this law became one of
    the most controversial points of debate in Congress suggests there
    is little appetite for more expansive labor reform.  If successful,
    the new law could perhaps provide an impetus for broader-based
    reform, including tax simplification and labor reform.

    SOBEL

`