Congress tries to approve tax reform after failures – 7/2/2023 – Market

After decades of failures, the Chamber of Deputies tries this week to move forward in the discussion of tax reform with the vote on a PEC (proposed amendment to the Constitution) that unifies five taxes on consumption.

With decades of delay, the change could put Brazil on the map of countries that charge a VAT (Value Added Tax), reducing bureaucracy for companies and opening doors for the entry of greater international investments.

The feeling among members of the government, parliamentarians and specialists is that there has never been a better chance. Not so much because of the consent of the actors involved, but because of the consensus that the current system is bankrupt and needs to be abandoned.

The design in force began to be structured in 1965, when a constitutional amendment created the National Tax System and instituted the basis of some of the taxes in force until today, such as the IPI (Tax on Industrialized Products), the ICM (Tax on Circulation of Goods, which later came to earn the S for services) and the ISS (Tax on Services).

The decentralization of collection, with the segregation of economic activities into different tax bases and the distribution of powers between the Union, states and municipalities, is one of the main characteristics of this system. Another principle is the collection of taxes not only where there is consumption (destination), but also where the goods are produced (origin).

The choice ended up linking Brazil to a model that already in the 1960s was outdated, as European countries began to migrate to VAT.

France implemented its excise tax in 1954, initially levied only on products. The French incorporated VAT calculation-based services in 1968. A year earlier, in 1967, Denmark implemented the first complete VAT.

Today 174 countries adopt the VAT system to tax consumption.

The PIS/Cofins legislation, two taxes that would be replaced by the new IVA, has more than 2,000 pages, of which 60 pages are index only. It is a tangle of rules, often defined according to the sector or type of product, with special regimes that seek to alleviate the burden on a certain segment with the power of pressure.

In the ICMS legislation, the problem is even more complex. In Minas Gerais, for example, there are 15 rates, 41 hypotheses of presumed credit, 61 situations of reduction in the calculation base, 82 of deferral and even 233 exemptions involving thousands of items. The tax regulation in the state alone has about 1,000 pages, not to mention normative instructions, resolutions and ordinances.

As ICMS is a state tax, all this complexity is multiplied by 27 — one regulation for each state.

Economist Vanessa Canado, coordinator of the Research Center on Taxation at Insper and former special advisor to the Ministry of Economy, illustrates the difficulties faced by taxpayers.

As the collection of the tax is done “from the inside”, embedded in the price even before the product reaches the shelves, the states publish the so-called fiscal tariff with an approximation of what the final price would be to then be able to charge the tax at the factory exit. . “If the company sells soap, there are many types, and the fiscal tariff changes every two months. And you need to discover that in 27 states”, he says.

In the case of fuel, the law already says that the tax is due at the place of consumption, but the states want to charge it at the source, where the product is refined. There is a system designed exclusively to match accounts between those who collected and who are entitled to the revenue, considering a tax tariff that changes every 15 days. “These are bizarre ways of trying to coordinate a system without much rationality”, criticizes Canado.

The ISS, in turn, has its own rules in each of the 5,570 municipalities. According to her, Congress tried to minimize the tax chaos in this area through complementary law 116, which established a list of services that municipalities can tax.

“It’s super hard to see that service on the list, the economy is increasingly complex. So now the difficulty is to classify the service, some may end up not being taxed. “, he states.

The logic of a VAT is completely different: taxing consumption, regardless of the item purchased (whether product or service), and ensuring that no tax is levied on another tax.

In the elaboration of the 1988 Constitution, congressmen even debated a proposal for the adoption of a VAT, but even the states that would benefit resisted in the face of uncertainties about how the collection would take place only at the destination, in an environment of little computerization and difficulties for the inspection, explains Melina Rocha, international VAT consultant.

Rocha wrote his doctoral thesis on the history of attempts at tax reform in Brazil. She assesses that the context of the current proposal is “well differentiated” in comparison with previous attempts. “There is a conjunction of converging interests in favor of reform.”

She points out that the Lula government (PT) created an extraordinary secretariat for tax reform, led by Bernard Appy, one of the most experienced technicians and engaged in the discussion, in addition to having other important actors in defense of the proposal, such as Vice President Geraldo Alckmin (PSB) and ministers Fernando Haddad (Finance) and Simone Tebet (Planning and Budget).

“They are supporting not only politically. The federal government is going to contribute resources to a regional development fund and also another fund to offset validated tax benefits”, says Rocha, emphasizing that the injection of federal money has always been a stumbling block.

“We also see a House very aligned for approval, the rapporteur [deputado] Aguinaldo Ribeiro, the [presidente da Câmara, Arthur] Lira wanting to vote next week, and also aligned with the Senate. It’s a climate of full support for reform,” she says.

The climate distinguishes itself from previous attempts. In the FHC government, PEC (proposed amendment to the Constitution) 175/1995 rescued points from the VAT proposal debated in the Constituent Assembly and even had an opinion approved by a special commission in the Chamber, in 1999. However, in a context of economic crisis, the proposal lost support from the Executive itself.

Lula 1 presented PEC 233/2008, whose technical formulation was by Bernard Appy. The text was also approved by the committee, but it did not go beyond that and was blocked by resistance from the richest state in the country. “São Paulo was the main ‘veto player’ because it did not accept the principle of destiny”, analyzes Rocha.

The federative conflict is always one of the most delicate points. With a model already established, albeit complex, states and municipalities fear losing sources of revenue.

Now it’s no different. Although the reform agenda is a priority for the government, there are still points of divergence.

One of the main ones is the creation of a Federative Council to collect the portion of the IBS (Tax on Goods and Services) that will be borne by the states and municipalities where consumption took place. In the experts’ assessment, this design is crucial to guarantee the transfer of resources, since the body will be autonomous.

Different governments have tried to reform the tax system since the 1960s

Military regime

1965

• Constitutional amendment establishes a National Tax System, replacing the autonomous systems in force until then.
• Reform provided for the creation of the IPI (Tax on Industrialized Products), the ICM (Tax on Circulation of Goods), transformed into the current ICMS, and what is the basis of the ISS (Tax on Services)

1966
Approval of the National Tax Code, in effect until today

1970
Government creates contribution to PIS, from federal collection.

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Sarney

1988
Constitution promotes changes in the National Tax System, maintaining decentralized collection with ICMS and ISS.

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Collor

1991
Complementary law establishes the Cofins, of federal collection.

1992
The “Executive Commission for Tax Reform” is created, but there was no political environment for advancement.

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FHC

1995
Government presents PEC 175, based on a project developed by Ipea and adopted by the Ministry of Planning. In one of the versions, it created a IVA (Value Added Tax) for the Union and the States, and an IVV (Retail Sales Tax).

1996
Government creates, in October, the CPMF (Provisional Contribution on Financial Movements) to finance health.

1998
Joint PIS/Cofins law instituted

1999
Special commission approves PEC 175 report. The government withdrew political support for fear of loss of revenue.

2000
Tripartite commission, with deputies, federal government and states, is created, without success.

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squid 1 and 2

2003
Government presents PEC 41, which sought, among other points, to standardize ICMS collection. It was transformed into constitutional amendment 42/2003, centered on measures such as the extension of the CPMF, reimbursement to the states by the Kandir Law (which exempted exports from ICMS) and provision for the DRU (Unlinking of Union Revenues).

2004
Government presents PEC 255, in a new attempt at tax reform. Proposal was later broken down into PECs 285 and 293 – the latter served as the basis for PEC 110/2019, filed in the Senate based on the work of then-deputy Luiz Carlos Hauly.

2007
Congress overthrows the CPMF.

2008
Lula’s government presents PEC 233, with the extinction of five taxes, creation of a federal VAT, unification of the ICMS legislation and exemption from the payroll. Bernard Appy was Secretary of Economic Policy at the Ministry of Finance. Proposal did not advance.

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dilma

2013
Government tries to move forward with a proposal to reform ICMS, but runs into resistance from states (mainly São Paulo).

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To fear

2017

• Government defends unifying PIS and Cofins legislation, but project does not advance.
• Congress approves a complementary law to validate ICMS tax benefits. Incentives are now guaranteed maintenance until 2032.

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Bolsonaro

2019

• Deputy Baleia Rossi presents PEC 45, whose original wording proposes a national VAT instead of PIS/Cofins, IPI, ICMS and ISS. Text, whose technical formulation was by Bernard Appy, is one of the bases of the discussion of tax reform today.
• The Senate files PEC 110, based on a text by Luiz Carlos Hauly, whose original wording envisages creating a IVA and a selective tax to replace IPI, Pis/Cofins, IOF, education salary, Cide, ICMS and ISS.

2020
Amid the dispute for protagonism in the discussion of tax reform, Congress institutes a mixed commission of deputies and senators to prepare a joint opinion on PECs 45 and 110.

2021
Deputy Aguinaldo Ribeiro presents the opinion of the joint commission on tax reform, but the proposal stalls.

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squid 3

2023
Government announces tax reform as one of its priorities and creates Extraordinary Secretariat for Tax Reform, headed by Bernard Appy.
President of the Chamber, Arthur Lira, creates a working group, based on PECs 45 and 110 and deputy Aguinaldo Ribeiro as rapporteur.

Jun.2023
Aguinaldo Ribeiro presents a new substitute for the tax reform, with dual VAT, different rates for some activities and two funds – FDR (Regional Development Fund) and the Tax Benefits Validation Fund. Voting is scheduled for early July.

Sources: Fiscal Policy Observatory (based on data from the Federal Revenue Service and the National Treasury), federal legislation, book “Tax reform in Brazil; ideas, interests and institutions” (doctoral thesis by Melina Rocha), Chamber of Deputies, Federal Senate and CNI (National Confederation of Industry).