Brazil's Lula loses political momentum for tax reform

BRASILIA, Nov 23 (Reuters) Brazilian President Luiz Inacio Lula da Silva has pledged to send a bill to Congress by the end of the month designed to simplify the country's complex tax system and help attract investments.

But the bill may get hung up in Brazil's notoriously slow and belligerent legislature, analysts said.

''The chances that the reform will go wrong are very big,'' said Rogerio Schmitt, from consulting firm Tendencias.

Lula, who started his second four-year term in January, may face only a small window of opportunity to push controversial reforms ahead of next year's municipal elections, analysts said.

Congress is expected to be virtually paralyzed during next year's second semester, when many politicians will be involved in campaigning.

Experts also question whether Lula will be willing to oppose the interests of some of Brazil's 26 states, which risk losing revenues with the reform.

''Parties from the government's own coalition will split up on this issue as the government did not succeed in obtaining an agreement over the reform with the states beforehand, as was the plan,'' Schmitt said.

The government wants to substitute its main cascading wholesale tax charged by states and others for a single value-added tax.

To compensate states and municipalities for potential losses, Finance Minister Guido Mantega has agreed to create a development fund that should redistribute resources to poorer regions.

But governors from Brazil's poorer northeastern states have complained that it is not yet clear how the fund will work, and have denied support for the tax package.

''Lula first promised to send this reform by August, but he lost precious time trying to obtain an agreement with governors,'' said economist Ricardo Ribeiro, from consulting firm MCM.

''We could see advances along 2009, but it is difficult to know how the political environment will be then,'' Ribeiro said.

This is not the first time Lula has tried to improve Brazil's highly criticized tax system. In 2003, the president sent a first reform draft to Congress, which failed to advance.

Brazil has a tax burden of over 35 per cent of GDP, one of the highest in Latin America.

Reuters TB VP0102