🧾 Brasília, we (may have) a VAT rate

Good morning! The Brazilian government unveils its proposal to give the tax reform teeth with a new VAT. Petrobras chooses its board. iFood plays ball. And the race for São Paulo.

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Government aims at 26.5 percent average VAT rate

Finance Minister Fernando Haddad and Tax Reform Secretary Bernard Appy presented congressional leaders with their proposal to regulate aspects not covered by the sweeping reform of the tax system approved by Congress in December.

State of play. The tax reform will radically change Brazil’s consumption tax system by consolidating five multi-tiered taxes into two VAT-like levies: one at the federal level (CBS) and one for states and municipalities (IBS). Currently, the state-level ICMS tax on goods and services is by far the main source of revenue for state governments.

• Moreover, the bill will change Brazil’s tax system from an origin-based sales tax to a destination-based sales tax, meaning that levies will be collected where buyers are or where products are headed, rather than where a business is headquartered.

 Why it matters. The post-reform regulations are what will give teeth to the new rules. The new VAT rate will be defined by how many special tax regimes are created: the more sectors are granted tax breaks, the higher the standard rate will have to be.

• Mr. Appy told reporters that the government expects the new VAT rate to fall between 25.7 and 27.3 percent, with an average of 26.5 percent, which he says should be the reference value.

• If that rate is confirmed, which will depend on how much lawmakers water down the government’s proposals, it would place Brazil’s VAT tax rate as among the world’s highest.

Yes, but … The tax reform is not about reducing the tax burden, but rather simplifying the system. According to World Bank data, in no other country do companies spend more time complying with over-complicated tax rules — a staggering 1,500 hours a year.

Uphill battle. Sectoral corporate lobbies will work intensely to get better rules for themselves. One should expect heated battles over what makes the list of essential goods and services that will pay discounted rates, or those that will have to pay the so-called “sin tax.”

Tailwinds? Political tensions are high in Brasília, but making the tax reform functional is in Congress’s interests — which should mean that the new regulations will pass. The question is how much lawmakers will cave to lobbies within this process.

You should also read:

• The Lula administration’s waning influence over Congress

• Brazil gets tax reform over the hump

• Podcast: Lira’s latest Lula feud

Petrobras decides on new board and dividends today

Shareholders of Brazilian oil and gas giant Petrobras will elect the company’s new board of directors at a general meeting today. They could also go back on decisions about the government-controlled firm’s dividend policy.

State of play. President Luiz Inácio Lula da Silva’s administration is trying to expand its influence by appointing new board members. In March, it announced eight nominations, three of which do not already sit on the board. 

• As Petrobras’s controlling shareholder, the government holds six of its 11 board seats, meaning that not all its nominees will have a place on the table, competing with other names put forward by other shareholders.

Board map. Of the 11 positions on the board, one is always reserved for a representative of Petrobras workers — the current one, Rosângela Buzanelli, was re-elected and will remain for another two years.

• Another two seats are reserved for representatives of minority shareholders, who compete among themselves for the nominations.

• The remaining eight seats will be contested between ten candidates from the government and private investors. 

• Until 2020, the government occupied all of the seats, but private shareholders began to come together to dispute them and expand their influence. Today, the government has six seats, and minority shareholders have two.

Other rules. A quarter of the chairs must be renewed every four years. Furthermore, 40 percent of the members must be independent, that is, unrelated to the controlling shareholder.

Last-minute request. Shareholders with just over 5 percent of Petrobras’s common shares requested the election be carried out through cumulative voting. The company responded that the remote voting bulletin process already allows this possibility. Cumulative votes allow shareholders to boost participation by concentrating votes on specific candidates.

 Why it matters. The vote takes place weeks after a crisis that almost led to the ousting of Petrobras chief executive Jean Paul Prates. The crisis revolved around the company’s extraordinary dividends, which the shareholders will also have to decide about today. 

• As we showed on Monday, the Petrobras board suggested paying 50 percent of the dividends previously withheld in early March.

• Since Q2 2023, Petrobras has distributed 45 percent of its free cash flow to shareholders, down from the 60 percent earmarked under the former Jair Bolsonaro administration.

Backdrop. Several members of the Lula administration — including the president himself and Mines and Energy Minister Alexandre Silveira — want Petrobras to reinvest its profits, while others, including Mr. Prates, believe that it should reward shareholders with more dividends. 

• In March, Mr. Prates claimed that the decision not to pay extraordinary dividends, withholding BRL 43.9 billion (USD 8.53 billion) for its “capital remuneration reserve,” came from the government, which made investors jittery about political interference in the company. Mr. Silveira contested that statement.

• Tensions increased to the point where unnamed sources began to say that the current chair of BNDES, Aloizio Mercadante, was going to replace Mr. Prates. That possibility displeased investors, given that Mr. Mercadante is not considered to be pro-market.

Haddad wins. As the company’s main shareholder, the government is set to get at least BRL 6 billion in extraordinary dividends, which Finance Minister Fernando Haddad very much welcomes given how hard it will be to fulfill the zero-deficit fiscal target for the year.

Crisis? What crisis? Lula on Wednesday said that “there has never been a crisis” in Petrobras and that the recent conflicts were “because it is a huge company” with “greater investment capacity than the country.”

Accusations. At least three potential board members are accused of having conflicts of interest. Pietro Mendes (appointed by the government) is the Mines and Energy Ministry’s secretary for oil, gas, and biofuels. 

• Additionally, two representatives of minority shareholders drew red flags from Petrobras’s personnel committee. Marcelo Gasparino is a board member at energy giant Eletrobras, and Juca Abdalla has investments in the energy sector.

You should also read:

• Petrobras announces new oil discovery

• Court suspends Lula-appointed Petrobras board member

• The future of nuclear power in Brazil’s diversified energy infrastructure

iFood sits at the negotiating table

After months of reluctance, meal delivery app iFood is ready to negotiate gig work regulations for its drivers. João Sabino, the company’s senior director of government affairs, met with Labor Minister Luiz Marinho earlier this week and said iFood wants to be “part of the solution, not the problem.” 

 Why it matters. iFood is the largest delivery app in Brazil. According to market intelligence company Conversion, the app has a market share of 88 percent. Its 3.16 million daily users are 31 times more than those of second-place Rappi. 

• No solution for labor regulations for delivery drivers can take place without iFood.

By the numbers. On its website, iFood claims it has currently 300,000 restaurants enrolled and over 200,000 active couriers, who currently make almost 90 million monthly deliveries across 1,700 municipalities.

State of play. iFood was a massive no-show in negotiations between the government and gig work apps. In March, the Lula administration sent a bill to Congress to create gig work regulations and labor protections, but the legislation only concerns drivers on ride-hailing apps.

• Last week, the bill was assigned a rapporteur, Congressman Augusto Coutinho, a key step for advancing legislation.

• For months, the government publicly scolded iFood’s lack of cooperation, pointing to its non-involvement as the reason for the bill not including delivery drivers in its scope.

What they are saying. Mr. Sabino on Wednesday told the House Transportation Committee that the government’s proposal for ride-hailing apps was incompatible with the reality of delivery workers. 

• He says couriers mostly work fewer hours (mostly during lunch and dinner time), drive shorter distances, and mostly ride cheaper vehicles (bikes as opposed to four-wheeled cars). 

• Thus, the social security contributions and minimum wage proposed for ride-hailing app drivers, he argued, would be too high for delivery drivers.

Yes, but … Mr. Sabino nevertheless praised the Lula administration for “innovating” and proposing a new regulation that underscores that gig workers are not formally employed.

You should also read:

• Lula splits the baby on gig economy regulation bill

• Digital platforms continue to fail workers in Brazil

A two-horse race in São Paulo?

Atlas Intel published its second poll for the São Paulo mayoral race, and so far, the contest seems to be a two-way dispute between incumbent Ricardo Nunes and Congressman Guilherme Boulos.

• All frontrunners saw significant jumps in their voting intentions, suggesting that voters are becoming more aware of the candidates as the October Election Day looms closer.

Dynamics. Municipal races traditionally have very different dynamics from federal disputes, with voters more interested in issues such as policies for bus networks and daycare centers, as well as matters of city upkeep and maintenance. 

• Betting on that, Mayor Ricardo Nunes is investing heavily in beautification projects to increase his stock. Meanwhile, the left is trying to make the election a referendum on President Lula, who supports Mr. Boulos.

• Mr. Boulos has relentlessly tried to attach Mr. Nunes to the image of former far-right President Jair Bolsonaro — whose support the mayor has embraced, albeit timidly.

 Why it matters. The wide gap between Messrs. Nunes and Boulos is a testament to the growing polarization in Brazilian society. “The centrist electorate used to be very strong, but the group seems to be shrinking at every election,” said Atlas Intel CEO Andrei Roman on Wednesday. 

You should also read:

• Brazilians’ polarization hits cartography, in new world map

• ‘No room for tantrums in politics,’ says São Paulo mayor hopeful Tabata Amaral

Quick catch-up

Mining giant Vale saw a 9 percent yearly drop in Q1 net profits due to lower iron ore prices. Vale share prices have crashed over 17 percent since the start of the year.

Congress approved new regulations to allow several types of human clinical trials for new drugs in Brazil, which currently can’t be carried out due to a lack of regulation. Lawmakers expect to unclog BRL 5 billion in investment.

Supreme Court Justice Alexandre de Moraes shelved an investigation into whether former President Jair Bolsonaro sought refuge at the Hungarian Embassy in February, aiming at dodging criminal investigations. The justice cited a lack of evidence of Mr. Bolsonaro’s intent.

 Mr. Bolsonaro caught another legal break — the prosecutor general said the Federal Police must deepen their investigation into a scheme to defraud vaccination records, including those of the former president and his teenage daughter.

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