Appy: Exceptions in tax reform will hurt everyone – 03/04/2023 – Market

The unification of taxes on consumption is the pillar of the reform in progress in Congress and is on the list of priorities of the Ministry of Finance, but the rate to be charged from consumers is still the great doubt in the discussions and will depend directly on the exceptions sectors to be negotiated.

Economist Bernard Appy, extraordinary secretary for Tax Reform at the Ministry of Finance, says in an interview with Sheet that one of the central objectives is to seek a model that is as homogeneous and simplified as possible. According to him, the more easing of the rules for certain economic sectors, the higher the rate for other taxpayers.

“The more exceptions there are, the more favored treatment for sector X, Y or Z, the higher the basic rate has to be in order to maintain the tax burden. What will the rate be? The rate is the one that maintains the current tax burden”, it says.

This discussion is one of the most important on the agenda of the first round of tax reform. The roadmap foresees that it will be sliced ​​into two stages, starting with the review of taxation on consumption, which will unify the different taxes that fall on goods and services in a IVA (Value Added Tax).

Appy confirmed that the government has already defined that it will not send a new reform proposal to Congress or impose changes, but rather build alternatives with parliamentarians and subsidize them in the search for the best technical solutions to the impasses that arise.

He and Minister Fernando Haddad (Finance) already had the first conversations with the working group formed in Congress to deal with the reform, which is coordinated by deputy Reginaldo Lopes (PT-MG) and has the rapporteur of deputy Aguinaldo Ribeiro (PP-PB ).

Technicians from the Treasury and Congress work from the two PECs (proposed amendment to the Constitution) that are being processed in Parliament.

PEC 45, by the Chamber, unifies five taxes (from the Union, states and municipalities) into a single IBS (Tax on Goods and Services). PEC 110, from the Senate, brings the tax in a dual format – states and municipalities would have one (IBS), while the Union would have federal taxes merged into the so-called CBS (Contribution on Goods and Services).

The assessment is that the two proposals bring the best existing VAT models, which can guarantee Brazil a modern tax system.

According to Appy, the final proposal must bring together aspects of the two PECs and the debate on a single or dual VAT ends up being secondary in the discussion. “The important thing is to have political sensitivity to enable the approval of the best possible reform”, she says.

So much so that he does not mark a position in relation to which PEC or type of IVA he prefers to defend in negotiations in Congress.

Appy collaborated with the elaboration of PEC 45, which brings the single VAT, with the argument that from a technical point of view it is simpler for the taxpayer. The dual VAT of PEC 110, however, is pointed out by politicians as the most viable option when considering the federative issue and the reform negotiations with the states.

Now, Appy claims that it will be up to parliamentarians to hit the gavel. He emphasizes that, although he has many personal positions on different tax issues, and they are well known, one must bear in mind that the Ministry of Finance’s definitions now apply.

“The best text is the one that helps politically to approve the reform”, he says. “Honestly, either one [IVAs] It’s infinitely better than what we have today.”

The work of unification is technically complex and politically thorny. There are currently five taxes on the consumption of goods and services: the federal PIS, Cofins and IPI (Tax on Industrialized Products), which are governed by numerous norms, the state ICMS, which has 27 regulations (one for each unit of the federation), and the municipal ISS, which has its own regulations drawn up by thousands of municipalities in the country.

NEGOTIATION WITH THE FREE ZONE

The technicians also outlined some guidelines for dealing with sensitive issues at this stage of the reform.

There will be no change to Simples, the special regime for smaller companies, for the time being. But both PECs open the option for a company that falls under this regime to migrate to other modalities, if convenient. It is an alternative for these companies to be entitled to credits —accumulated due to taxes paid on the acquisition of inputs and which serve to deduct the amounts due in the next stage.

The fate of the Manaus Free Trade Zone will demand negotiation skills from the government. With only eight deputies in the Chamber, the bench from Amazonas scored three nominations in the reform working group, the equivalent of a quarter of the members.

According to Appy, the proposal is to seek alternatives, together with parliamentarians, of tax mechanisms that allow a long and gradual transition to the new model, without traumatic changes for companies installed in the pole and capable of guaranteeing the preservation of jobs and local income. .

“We have this commitment not to harm the region”, says Appy, who says he still does not have details because the process has barely begun.

Both items are the target of much lobbying by those who currently benefit from the exemptions. Simples and Zona Franca correspond to the highest federal tax expenditures, as the exceptions in the collection of taxes that seek to promote economic and social benefits are called.

As a whole, tax expenditures planned for 2023 amount to around BRL 450 billion. Simple corresponds to the main slice (21%), followed by Zona Franca (12%).

The two PECs under discussion, he says, guarantee elements he considers fundamental: a broader charging base, non-cumulativeness and taxation at destination.

SLOW AND GRADUAL TRANSITION FOR STATES AND CITIES

The change in the collection of origin and destination has already undermined previous attempts at tax reforms, because it will reallocate the participation of states and municipalities in the total cake collected, with effects on finances.

However, Appy points out that there has been progress in migration alternatives to this model and improvement in the perception of its benefits. “It improves the system and, over time, promotes growth, reduces tax evasion and raises revenue”, she says.

The reform under discussion, he says, has good mechanisms for sustaining change in the system.

So that states and municipalities have time to adapt to the legal changes and also absorb the beneficial effects of the reform, the change in the mechanism for transferring Union resources, from the current system to the new model, will occur through a long transition.

The term will have to be negotiated in Congress, but PEC 45 provides for a 50-year transition period. PEC 110, 40 years.

For consumers who pay taxes on a daily basis, the change in the system will be felt in a relatively short period of time. In PEC 45, two years of testing are foreseen for the new charge and four years of transition. In PEC 110, two test and five transition.

As taxation at destination also nullifies the so-called tax war (when government officials cut taxes to attract companies), the creation of a Regional Development Fund is taken for granted. The alternative is mentioned in PEC 45, but is not detailed in the text.

However, it is defined in PEC 110. The fund would be financed with 5% of IBS revenue and the distribution criteria will have to be defined by complementary law.

Appy has already mentioned simulations with the perspective that the rate of this single tax could be 25%, with 9% for the Union, 14% for the states and 2% for the municipalities.

A study by the CCIF (Centro de Cidadania Fiscal), an entity that Appy helped to create, arrived at this percentage. Another survey, by Ipea (Institute of Applied Research), estimated that the rate could go up to 27%. These are values ​​that would keep Brazil among the biggest taxers of consumption.

Appy, however, says that it is still not possible to spike the value.

REDUCING INEFFICIENCY AND COSTS

According to Appy, it is important to keep in mind that the reform will redistribute the load, with some products and services paying less, others more. However, the government’s commitment in the consumption reform is to maintain the same level of tax burden.

In the end, he says, as the system becomes simpler, there will be a reduction in the cost of inefficiencies, which reduces amounts paid by companies and the final consumer.

“The cost for the population will fall, this is an important effect of the tax reform that people need to know about”, he says.

“People already pay a very high tax burden on consumption and, without knowing it, they also pay for the inefficiency of the current tax system. Because they pay the cost of bureaucracy and the cost of litigation, for example, which burden the company and are passed on to the price of the product”, he says. “When I make the system more efficient and simple, that cost drops.”

Simplification will also give more transparency to the collection, and people will know how much they pay in tax, something difficult today.

An example is the electricity bill. People pay 18% ICMS and 9.25% PIS/Cofins, which generates a final bill of 34.38% (see infographic). In this case, if the rate is 25%, estimated by the CCiF, or 27%, as provided for by Ipea, taxation on the electricity bill after the will be lower after the reform, says Appy.

The reform of income taxation, which includes changing the taxation of companies, is still an ongoing process, and the ministry has not defined the position for the numerous themes of this phase.

According to Appy, the important thing is to bear in mind that these two stages of the renovation, despite being carried out at different times, will be complementary.

“Consumption reform has an impact from the point of view of distribution and regional inequalities, but its focus is to increase the country’s growth potential. The discussion of Income Tax, in turn, involves a question of tax justice”, he says. Appy.

“Thus, as a whole, they complement each other. The final effect of both is a fairer country that grows more.”