Chamber approves first step of Tax Reform – 07/06/2023 – Market

In a historic vote, the Chamber of Deputies took the first step this Thursday (6) in the Tax Reform that unifies five taxes on consumption, in yet another attempt to bury the system created in the 1960s and which today fuels judicial conflicts and burdens companies operating in Brazil.

The base text of the PEC (proposed amendment to the Constitution) was approved in the first round by 382 deputies – more than the 308 votes needed to approve a constitutional amendment. There were 118 votes against and 3 abstentions.

The plenary will still appreciate the highlights, which may change the content of the proposal. Afterwards, the text also needs to be voted on in a second round before going to the Federal Senate.

Tax Reform has been under discussion in Congress for over 30 years. The first time that an attempt was made to unite consumption taxes in a IVA (Value Added Tax) was in the elaboration of the 1988 Constitution. It was also the first of a succession of failed attempts to change the system.

In view of this precedent, the approval of the reform could give the mayor, Arthur Lira (PP-AL), the desired emblematic mark of his administration, at a time when he is seeking to secure himself in front of the Planalto Palace and give a demonstration of strength policy.

To overcome such a thorny matter, Lira placed himself as a kind of guarantor of the Tax Reform and, in recent days, actively participated in the construction of agreements that allowed the unblocking of the vote on a proposal that has been skating for years in the Legislature.

In an unusual gesture, Lira left the command of the session to speak on the tribune and read a speech written “so as not to commit slips”. He also gave up his prerogative as president to vote in favor of the text.

“We are living a historic moment for the country and for our parliamentary lives. The country looks to this plenary waiting for our response for the approval of a fair, neutral Tax Reform, which provides legal security and promotes economic and social development. No We can evade this responsibility,” he said.

Without mentioning former president Jair Bolsonaro (PL), the mayor said that his candidate was defeated at the polls in 2022, and asked that “we leave the polls aside”. “Tax Reform is not a political toy. Tax Reform is not an instrument of political bargaining. Tax Reform is not a party-political battle. Tax Reform is not a government agenda. Tax Reform is a State agenda,” he said, to applause from the plenary.

The proposal also had decisive support from the government of Luiz Inácio Lula da Silva (PT). Since the beginning of the current administration, Minister Fernando Haddad (Finance) has chosen the Tax Reform as one of the main guidelines of the economic agenda.

“After decades, we approved a Tax Reform. Democratically. It seemed impossible. It was worth fighting for!”, wrote Haddad, the main articulator of the reform in the government, in a social network.

The minister even created an extraordinary secretariat at the Ministry of Finance dedicated to the subject, led by Bernard Appy — technical formulator of the initial version of the PEC voted on this Thursday.

Appy accompanied the vote on the text directly from the plenary of the Chamber. As soon as the result was proclaimed by Lira, he said he was happy, but pondered that there are still votes ahead. “[O placar] It was surprising, very positive,” he said.

Deputy Aguinaldo Ribeiro (PP-PB), who began his work as the rapporteur four years ago, gave an emotional speech before the end of the vote. He said that this is a “unique moment” and thanked Lira for her firm leadership and support in the negotiations.

The text had the support of government acronyms such as PT, PC do B, PSB, PSOL and Rede and a large part of members of centrist parties such as MDB, PSD, Republicans, PP, PSD and PSDB.

Despite public pressure from Bolsonaro, which included a public disagreement with governor and pupil Tarcísio de Freitas (Republicanos-SP), his party, the PL, cast 20 votes in favor of approving the Tax Reform.

The largest bench in the Chamber, with 99 seats, the party threatened to “close the issue” against the reform, which would force the unanimous rejection of the proposal, at the risk of punishment. After action by Tarcísio and the mayor, the party decided only to vote against.

The governor of São Paulo had scathing criticism of points of the reform, but managed to close an agreement with the rapporteur to improve the text. Shortly after the proclamation of the result, the Secretary of Finance of São Paulo, Samuel Kinoshita, said that the proposal was not as the state wanted, but “had a significant advance”.

“São Paulo accepted and helped. Our governor helped a lot in the last few days in this approval, even at a significant personal cost”, he said, who was in the plenary during the voting. According to Kinoshita, Tarcísio preferred to follow from a distance. “He didn’t want to come here to the plenary. The leadership certainly belongs to the Chamber of Deputies,” he said.

With decades of delay, the approval of the Tax Reform could put Brazil on the map of the 174 countries that already charge a VAT, reducing bureaucracy for companies and opening doors for the entry of greater international investments.

Author of PEC 45, the basis of the text voted on this Thursday, Deputy Baleia Rossi (MDB-SP), president of the acronym, highlighted that this could be the “first Tax Reform of the democratic era”.

The current design in force began to be structured in 1965, under the Military Regime, when a constitutional amendment created the National Tax System and instituted the basis of some of the taxes in force until today.

“We live in a true tax asylum. We have different rates for perfume and scented water, for bonbons and wafer biscuits. It’s insanity”, stated Baleia Rossi.

The approved text provides for the merger of PIS, Cofins and IPI (federal taxes), ICMS (state) and ISS (municipal) into one IVA (Value Added Tax).

The system will be dual: it means that a portion of the rate will be administered by the federal government through the CBS (Contribution on Goods and Services), and the other, by states and municipalities through the IBS (Tax on Goods and Services).

A selective tax will also be created on goods and services whose consumption is considered harmful to health (such as cigarettes and alcoholic beverages) or to the environment.

The implementation of the taxes will begin in 2026, with a test rate of 0.9% for CBS and 0.1% for IBS.

“The objective of this stage is to know the taxable base, allowing the calculation of the CBS and IBS rates necessary to replace the current collection”, says the opinion.

In 2027, PIS and Cofins will be completely extinguished and replaced by the new CBS reference rate. The IPI rates would also be zeroed, with the exception of products that have industrialization in the Manaus Free Trade Zone.

The migration of state and municipal taxes to the new IBS will be more gradual and will only end in 2033.

Until 2028, the rate will remain at 0.1%. In 2029, ICMS and ISS charges will be reduced by 1/10 per year until 2032. In 2033, current taxes will be completely eliminated.

The final rates for each tax will be detailed later, in a supplementary law, as they will depend on calculations carried out jointly with the Ministry of Finance.

The reform provides for a standard charge on most consumption and a reduced rate (equivalent to 40% of the full value) for some goods and services listed in the text, such as health services, education, public transport, agricultural products and inputs, medicines , medical devices and artistic, cultural and journalistic productions.

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UNDERSTAND THE TAX REFORM ON CONSUMPTION

extinct tributes

• IPI (federal)

• PIS (federal)

• Cofins (federal)

• ICMS (state)

• ISS (municipal)

tributes created

• CBS (Contribution on Goods and Services), at the federal level

• IBS (the Tax on Goods and Services), of state and municipal competence

• Selective tax (on products harmful to health or the environment)

Rates

There will be a single rate as a general rule (to be defined) and a 60% reduction for the following sectors:

• education services

• health services

• medical devices and accessibility for people with disabilities

• menstrual health drugs and products

• public road, rail and water transport services

• agricultural, fishing, forestry and vegetable extractive products in natura

• agricultural inputs, food intended for human consumption and personal hygiene products

• national artistic, cultural, journalistic and audiovisual productions

Other reductions that may be made by supplementary law:

• Exemption for public transport

• 100% reduction in the rate for medicines and medical devices for people with disabilities, in addition to vegetables, fruits and eggs

• Reduction by 100% of the CBS rate levied on Prouni

• Annual revenue limit of BRL 3.6 million so that individual or legal rural producer may not pay IBS and CBS

Cashback

Funds

• Text creates National Fund for Regional Development, with Union resources for states, to reduce regional and social inequalities

• Text provides for the Sustainability and Economic Diversification Fund of the State of Amazonas, with Union resources and managed by it (to be created and detailed by complementary law)

• Establishes the Compensation Fund for Tax Benefits or Financial-Tax Benefits, intended to offset benefits to companies that are compromised after reform, with annual transfers from the Union to states from 2025 to 2032, starting at R$ 8 billion and reaching a peak of BRL 32 billion per year

Federative Council (which will manage IBS) composed of:

• 27 members, representing each state and the Federal District;

• 27 members, representing municipalities and the Federal District (14 representatives based on the votes of each municipality with equal value for all, and 13 representatives based on the votes of each municipality weighted by the respective populations)