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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