council to manage tax weakens federative pact

Controversial point of the proposed amendment to the Constitution (PEC) of the tax reform, approved by the House and now in progress in the Senate, the Federative Council promises to be the target of impasses in the Senate. The collegiate will have the function of managing the resources destined to states and municipalities.

Economists and tax experts heard by the People’s Gazette point out that, in addition to the implications for the federative pact, due to the loss of autonomy of states and municipalities, the creation of the new body, if maintained, will add new complexities to the tax system, in addition to increasing the potential for tax litigation.

The Council was included in the final text of the PEC, approved by the Chamber, which established a dual VAT (Value Added Tax), separating the taxes charged by the Union from state and municipal taxes.

Federal taxes (PIS, Cofins and IPI) started to constitute the CBS (Contribution on Goods and Services). The ICMS, state, and the ISS, municipal, were consolidated in the IBS (Tax on Goods and Services). To manage the IBS, the Federative Council was created, which will still be regulated by a complementary law.

In practice, it will be the Council, and no longer governors and mayors, who will handle the taxes to be passed on to states and municipalities. It will be up to him to legislate, collect, distribute the resources and also settle the probable controversies.

There are countless criticisms of the body’s centralized structure. The Council was even classified by the former secretary of the Federal Revenue, Everardo Maciel, in an interview with “Poder360”, as a “federal contraption”, with the competence to “supervise, collect and even create law”.

For jurist and professor Ives Gandra, by centralizing management and decision-making power, the Council drastically reduces the financial competence of states and municipalities. “Our federalism presupposes administrative, political and financial autonomy. The Council weakens the federative pact”, he says.

He remembers that the initial proposal of the PEC did not foresee the Council, because it proposed a single VAT. It was the parliamentarians themselves, encouraged by governors who feared losing their autonomy, who pushed for the creation of a dual VAT, which would not be borne by the Union. In practice, according to Ives, it did not help and the principle of centralization remained.

Centralization is also criticized by Roberta de Amorim Dutra, specialist in Tax Law. According to her, the PEC is a true “attack” on the autonomy of federal entities to collect and manage their own revenue, guaranteed by Article 60 of the Constitution, which cannot depend on a central agent.

Fernanda Terra, Master in Tax Law from FGV and partner at Terra & Vecci, points out that as serious as replacing the management of governors and mayors is the creation of a “new entity to define the guidelines of the tax that is the main source of revenue for the states”.

Economist sees risk of fraud and erosion in tax collection

Specialist in public accounts, economist Felipe Salto, from Warren Rena and former Secretary of Finance and Planning of São Paulo, is one of the critics of the reform, which he says has been misconfigured.

About the Council, he refutes the argument of defenders of centralization as a basis for the functioning of the VAT. “The transfer of collected revenues to the state of destination, and no longer of origin, provided for by the PEC also does not justify the creation of a paternalistic body”, he says.

In addition to the federative issue, Salto anticipates problems in returning credits to intermediary taxpayers. With the implementation of VAT, each company effectively collects only the tax on the value added to the product or service. This is the so-called “full non-cumulative” principle. All taxes paid on the purchase of inputs from the seller, including expenses with energy, telephony, marketing and transportation, are credited to the taxpayer.

According to the approved text, the Council will also be responsible for the return, which will be done automatically, through a central account. For Salto, the mechanism is not adequate and will encourage fraud, especially with counterfeit bills. “This can lead to a true erosion of tax collection”, he warns.

Therefore, new efforts will be necessary to ensure proper inspection, with a deadline for approval of notes and release of credits. “All of this could be avoided through coordinated management by the states. There is no need to create a structure to resolve any of the problems pointed out”, he assesses.

If the Council is not revised, Salto hopes that the Senate will at least separate the interstate operations from the internal operations of the ICMS, future IBS, which take place within the same state. “A halfway point would be to reserve to the Federative Council only the management and interference in interstate operations and preserve the autonomy of the states in internal transfers”.

Composition of the Council is also the subject of dispute between governors

In addition to the loss of autonomy, the criteria for the composition of the Federative Council were also, from the outset, a source of dissatisfaction and distrust among governors and mayors, who sought to guarantee the representativeness of states and municipalities.

The PEC establishes that each of the 27 units of the Federation will appoint a representative on the Council. The group of 5,568 municipalities will elect another 27 members, of which 14 will be elected based on the votes of each municipality and 13 based on the weighted average of the votes of each municipality by the respective population.

The governor Tarcísio de Freitas (Republicans) of São Paulo, critical of the centralization of the Council, withdrew when he obtained the alteration to balance the decision-making power. Along with other governors of the South and Southeast regions, he managed to get the rapporteur to include a rule that states that the group of winning states in deliberations will need to represent at least 60% of the Brazilian population.

The composition, however, is far from pleasing everyone. For some governors, the division increases the decision-making power of the South and Southeast, which is why the established criteria should consume a good part of the Senate’s discussion.

The governor of Goiás, Ronaldo Caiado (União Brasil), the only one frontally opposed to the reform, says he will appeal to the STF if this composition is approved. For him, who will command the Federative Council are the states of São Paulo, Minas and Rio de Janeiro. “We cannot admit that the states are divided between high and low clergy, where the ‘best’ decide how the resources allocated to the others will be divided”, said Caiado to the newspaper “O Estado de S. Paulo”.

The senators, who will discuss the proposal after the recess, promise a more serene discussion, but it is certain that there will be changes. Unlike the Chamber, where the number of deputies is proportional to the population of each federation unit, the Senate has equal representation, with three senators for each state, which can give a new outline to the composition and system of deliberations.

Review of the PEC in the Senate should not avoid increasing rates

The Council is the biggest point of contention in the arduous task that the Senate has ahead of it, but there are countless other impasses. Improving the approved text without in-depth discussion will consume, according to more optimistic expectations, almost the entire second half of the year. “Today we have a constitutional text of principles that proposes a sea of ​​uncertainties”, summarizes the jurist Ives Gandra.

The main one is the VAT rate. The sum of IBS and CBS was initially estimated at 25%, taking into account that some products and services will have a 60% reduction and others will be exempt. But the calculations were based on the premise that all sectors and companies would have the same tax burden over a ten-year transition period.

The big problem was the exceptions that parliamentarians included in the PEC for various sectors of the economy, including education and health services, medicines, agricultural inputs, personal hygiene products, cultural and journalistic productions, fuel, restaurants, hotels and financial services.

A study by the Institute of Applied Economic Research (Ipea) pointed out that the standard rate can be higher than 28% to compensate for exceptions, which would make it the highest in the world.

For Ives Gandra, it is likely that the rate exceeds 30%, considering the exceptions and compensation funds for states that were harmed by the ICMS reduction during the transition of the tax system. The extraordinary secretary for Tax Reform, Bernard Appy, ruled out the possibility of the rate being higher than 30%.

To approve the tax reform, the Union committed to finance the Regional Development Fund (FDR) with a contribution of R$ 8 billion, in 2029, and gradual increase, until reaching R$ 40 billion from 2033, in values ​​corrected for inflation. The transfer criteria, which were the subject of controversy in negotiations with governors, ended up not being included in the PEC and may be regulated by a Complementary Law.

For Ives Gandra, this means that it is already known that there will be states that will win and states that will lose. “If someone is going to lose and will be compensated, it means that the taxpayer is going to pay the bill”, he says.

The same point is emphasized by Felipe Salto. For him, the Senate needs to remove from the text the obligation for the Union to cover any and all ICMS benefits through a fund. Salto argues that article 9 of the PEC, which allows exceptions to specific sectors to be multiplied by means of a Complementary Law, should also be suppressed. All this means an increase in the tax burden.

In addition, according to him, the increase in the federal transition time from one system to another, estimated at 50 years, needs to be shortened, and the logic of estimated rates has to give way to the setting of rates. “It is necessary to provide predictability for taxpayers”, he says.

For Ives Gandra, predictability is everything that the text does not offer. According to him, there is no projection of the impacts of the reform for the various sectors throughout the transition. “The coming years will be very complicated for companies that will have to live with both systems”, he says.

There is also no information, no draft of a Complementary Law that will regulate the future of taxpayers. “All we have is a promise that the system will be equalized in 50 years”, sums up the jurist.