agro, services and local governments contest proposal

Supported by the government of Luiz Inácio Lula da Silva (PT), the preliminary proposal for tax reform presented by the Working Group (GT) created to discuss the issue in the Chamber of Deputies is far from a consensus. For the time being, guidelines have been drawn up that will support a substitute proposal for an amendment to the Constitution (PEC) to be filed in the coming days, but even these general lines are already generating controversy.

The central point of the proposal is the creation of a single tax on consumption, in the Value Added Tax (VAT) model, based on the unification of five taxes: IPI, PIS and Cofins, currently under federal jurisdiction; ICMS, administered by the states; and ISS, which are the responsibility of the municipalities.

The Brazilian VAT would be called the Tax on Goods and Services (IBS) and would have single rules, but two distinct administrations, one at the federal level and the other shared between states and municipalities – hence the name “dual VAT”. The rate would be fixed, but the report makes room for exceptions for specific segments, such as health, education and public transport.

To offset losses with the end of tax benefits and reduce the economic imbalance between the federal units with the reform, it is also proposed the creation of a Regional Development Fund (FDR), which would also have a counterpart from the Union.

Among the few special tax regimes that would be maintained, according to the document drawn up by the WG, are the Manaus Free Trade Zone, which aims to attract industries to the Amazonian capital, and the Simples Nacional, aimed at micro and small companies.

The proposal, however, is questioned by representatives of municipalities, states and sectors such as services and agribusiness, as well as opposition parliamentarians.

Tax reform faces resistance from municipalities and states

Even before the presentation of the report, the mayor of São Paulo, Ricardo Nunes (MDB), criticized the idea of ​​unifying municipal, state and federal taxes. “São Paulo has 12.5 million inhabitants, a city that has people from all over Brazil. Imagine the city losing BRL 17 billion and being dependent on a committee that will define the value of the distribution of a single tax”, he said, in May, to GloboNews.

“We have tried to alert parliamentarians of the need to do this in a way, I am not saying not to do it, we understand the fiscal war, we understand the need to have a more dynamic process, but it is important that we do not create a problem for everyone and end up causing an inconvenience”, he continued.

Although the National Confederation of Municipalities (CNM) has declared support for the proposal sponsored by the government, the National Front of Mayors (FNP), defends another PEC for the reorganization of the tax system, 46/2022, authored by Senator Oriovisto Guimarães (Podemos- PR).

The alternative PEC preserves the current consumption taxes, but unifies the respective legislation. The main point is that the text preserves IPTU and ISS, the main sources of income for municipalities.

Among state representatives, there is also a lack of unanimity around the proposal. To the newspaper “Valor Econômico”, the governor of Rio de Janeiro, Cláudio Castro (PL), said he sees risks for the states of the South and Southeast with the model defined for the regional development fund. “When there are states wanting to remove entire regions from the fund, it becomes complicated”, he said, suggesting an initiative in this direction by Ronaldo Caiado (União Brasil), governor of Goiás, according to the newspaper.

In fact, Caiado is against the unification of state and municipal consumption taxes with those of the Union, as advocated by the government. “We cannot, in the name of a tax reform, compromise the federation”, said Goiano at the end of May, during the 14th Meeting of the National Forum of Governors. “We propose to advance in a regulation of what already exists. And not suddenly stop everything and Brasilia say what each one will receive. Each state has its reality, ”he said.

This Friday (16th), in an interview with the newspaper “O Estado de S. Paulo”, Caiado returned to the charge against the reform. He questioned the amounts directed at FDR and criticized the proposal to end tax breaks in the states. “What is the advantage for a ruler, whether he is mayor or governor, if he is going to receive an allowance? He will not be able to stimulate anything”, he said.

Economist Erik Figueiredo, former president of the Institute for Research and Applied Economics (Ipea) and now executive director of the Mauro Borges Institute for Statistics and Socioeconomic Studies (IMB), linked to the government of Goiás, draws attention to the fact that the reform deal more with regional taxes than with those of the Union. He estimates that for every R$1 in tax that can be modified by the reform, R$0.65 comes from state and municipal collections.

With data from countries that adopted the VAT, Figueiredo also contests the thesis that the reform will generate economic growth. “When you look at the international evidence, you can’t find any concrete experience that actually looks at this,” he says. Governor Caiado hits the same key: “When you talk about consumption, you have to understand that there is no country in the world that has grown because it was for VAT”, he said to “Estadão”.

Service sector fears increased tax burden with tax reform

Agribusiness representatives also question points of the reform. The Confederation of Agriculture and Livestock of Brazil (CNA) calculates that the single rate for goods and services would raise the price of the basic food basket by more than 22%. “Considering that the national population is concentrated in classes C, D and E, if the tax burden of taxes on consumption rises to 25% or more, Brazilians would have less access to services and food”, says a note signed by the entity.

The service sector also wants change. After the presentation of the preliminary report by the Chamber’s WG, the president of the National Confederation of Trade in Goods, Services and Tourism (CNC), José Roberto Tadros, evaluated the inclusion of part of the sector’s claims as positive, but stressed that “it is necessary to move forward to ensure a favorable economic environment for the entire Brazilian population”.

“We are confident that parliamentarians want the best for Brazil and, therefore, that they will not penalize the service sector, which is the largest generator of employment and income in the country,” he said in a note. According to the entity, the report “includes, in part, the assumptions defended by entrepreneurs in the Brazilian tertiary sector”.

The CNC defends that the substitute that should be presented in the coming days includes different rates for the entire service sector. The proposal presented in the report is that there should be a distinction only for the areas of health, education and public transport. According to the entity, if the IBS rate is 12%, the increase in the tax burden for the service sector could reach 84%.

The sector also defends that Simples Nacional companies grant credits, at the risk of loss of competitiveness of micro and small companies. “Finally, full non-cumulativeness must be explicitly stated in the text, without the need for a complementary law for its regulation”, says the institution.

According to Figueiredo, from IMB, any increase in the tax burden of sectors such as services could result in mass layoffs. Around 500,000 formal jobs are threatened, by his calculations.

Faced with the questions, the Minister of Planning and Budget, Simone Tebet (MDB), said on Monday (12) that agribusiness will not be harmed. “We are working hard with the agro sector to show that agro will not be impacted. Agribusiness pays more taxes today than you might think because, from inputs to fertilizer imports, everything has to be priced in this process,” she said in conversation with journalists.

Still according to her, the possibility of differentiated rates for the service sector is being studied. “Some sectors, especially the services sector, [terá discussão] to see the issue of a slightly different rate in relation to this chain of some service sectors. We know it is a relevant issue”, he said at a Febraban event.

Resistance to tax reform in Congress

In Congress, the text backed by the government must also face resistance from the opposition. Federal deputy Luiz Philippe de Orleans e Bragança (PL-SP) has already stated that he will vote against the proposal. Author of an alternative PEC for tax reform, inspired by the North American standard, the congressman is critical of the VAT model. His proposal provides for the extinction of 15 taxes to make way for only three taxes, on income, consumption and property.

“The VAT system is very complex – it would be replacing one system with another equally complicated one; and worse, for several years consumers, workers and entrepreneurs will have to live with both systems until the new absorbs the old”, writes Orleans and Bragança in a column in this People’s Gazette.

Also opposed to the adoption of the VAT, Senator Oriovisto Guimarães (Podemos-PR) believes that the change would increase the tax burden for some sectors, deepening social inequalities, and would mainly affect low-income Brazilians.

“The poor will have to pay the most expensive rice. The poor will have to pay for the most expensive sugar, the most expensive beans. The government will take this money from the poor, because they paid more, because VAT made it more expensive, and it will return it to them. Who bankrolls the cash flow [fluxo de caixa] of the poor? What will happen is that he will stop eating! Injustice will increase,” he said recently in a speech on the Senate floor.

For him, industry is the only sector that would benefit from VAT. “But it won’t benefit as much, because it will lose consumers right away.”

According to the rapporteur for the tax reform WG, deputy Aguinaldo Ribeiro (PP-PB), the mayor, Arthur Lira (PP-AL), would have committed to putting the matter to a vote in the plenary of the House in the first week of July.