Felipe Salto: Tax Reform ended disfigured – 07/07/2023 – Market

Formerly a supporter of Tax Reform, economist Felipe Salto has become one of the toughest critics of the change in taxes approved in the Chamber this Thursday (6th) and which, after analysis of highlights, goes to the Senate.

“The original proposal of the Tax Reform, the PEC [Proposta de Emenda Constitucional] 45, had the correct bases: the migration of taxation to the destination [isto é, para o local de consumo de um produto ou serviço], full non-cumulativeness and the idea that there would be a general simplification, with a uniform rate throughout the national territory. This was all positive”, says Salto.

“The problem is that the text was being modified, so that it ended up being disfigured.”

According to the approved text, five taxes that affect consumption —PIS, Cofins, IPI (federal), ICMS (state) and ISS (municipal)— will be unified into one IVA (Value Added Tax), divided into two parts. CBS will replace federal taxes and IBS will replace state and local taxes.

Among the points criticized by Salto are what he considers:

• an excessive power of the Federative Council that will administer the portion of the taxation that belongs to States and municipalities;
• the various exceptions that will allow a series of products and services to be less taxed, leading to a higher overall rate;
• the transition to the IBS, which may not guarantee the end of the tax war between states, one of the original objectives of the reform;
• and the double exemption of the basic food basket, with a zero tax rate and a “cashback” mechanism at the same time, with no clarity on how the two things will work together.

Currently Chief Economist and partner at investment manager Warren Rena, Salto was Secretary of Finance and Planning for the State of São Paulo (2022) and Executive Director of the Independent Fiscal Institution of the Senate (2016-2022), being one of the most active voices in the debate on public accounts in the country.

The critical points of the Reform, according to Salto

Federal Council

The first problematic point, according to the economist, is the forecast for the creation of a Federative Council —a body that will be responsible for collecting and distributing the IBS, a tax that will replace the state ICMS and the municipal ISS— with broad powers.

According to the approved text, the council will be able to collect, standardize, regulate, initiate a complementary law, share resources among federated entities and return credits to taxpayers.

“There is a federative autonomy problem there”, assesses Salto, echoing the criticisms of mayors and governors, which were one of the sensitive points of the proposal’s processing in the Chamber.

In addition to the loss of autonomy for states and municipalities, the economist sees a problem with the issue of refunding credits to intermediary taxpayers, who are those in the middle of production chains.

In the current taxation model, goods and services are taxed at all stages of the chain, and taxes are levied on one another. The idea with the return of credit would be to put an end to this “cascading effect”, guaranteeing the so-called full non-cumulativeness.

“When you say that the board, through a central account, will automatically guarantee these returns, you can produce a perverse incentive, which is the generation of cold bills to produce credit that should not be paid”, says Salto.

“This can only be resolved with inspection, which is why the collection should be the responsibility of each federal entity”, defends the analyst.

Exceptions to the general rate

A second problem, according to Salto, are the various exceptions to the general IBS rate, expanded in the final text approved by the Chamber on Thursday.

The list of goods and services that will have a reduced rate (equivalent to 50% of the standard rate, not yet defined), includes the following sectors: education, health, medical instruments and equipment, medication and menstrual health items, public transport services, agricultural products and inputs, and artistic and cultural activities.

“With all the approved exceptions, the general rate will have to be higher [para que não haja perda de arrecadação]”, says Salto.

“And a complementary law will detail all of this, which may increase the number of exceptions. All of this breaks the idea of ​​uniformity, of there being no exceptions.”

Tax war may not end

A third problem cited by Salto is that one of the objectives of the Tax Reform would be to end the so-called “tax war” —a practice adopted by states of offering ICMS exemptions to companies to attract investment. This goal, according to him, may not be achieved.

Salto observes that the incentives will be replaced by a Tax Benefits Compensation Fund, with contributions that will add up to R$ 160 billion between 2025 and 2032.

“The problem is that there is an article in the PEC, which guarantees that the Union will have to fund all and any incentive that proves to be validated under the terms of the complementary law. So, at the limit, if the BRL 200 billion of incentives that exist today are all considered legitimate, the Union may have to invest a lot more money”, says Salto.

This would represent the maintenance of incentives that distort economic allocation and produce negative effects on economic growth until 2032, considers the economist.

Transition to IBS

Another factor that may prevent the end of the fiscal war is the transition window for the creation of the IBS, assesses the chief economist at Warren Rena.

Under the proposal approved by the Chamber, the IBS will be instituted at a rate of 0.1% in 2026. Until 2028, the new tax will coexist with the ICMS and the ISS without changing the rates in the old taxes.

As of 2029, old taxes begin to be reduced, by 10% per year, until 2032. Thus, according to Salto, at the end of 2032, ICMS and ISS will have rates equivalent to 60% of the current ones.

“For what [a tributação] migrate to the destination, we have to believe that there will be no pressure for those 60% ICMS not to continue to be in force beyond 2032. In other words, that overnight this 60% ICMS will go to zero”, says Salto .

“This is a risk because, by maintaining a large rate for a bad tax that gives rise to tax benefits – which is not prohibited by the PEC -, you can give rise to the granting of new tax incentives. There is a risk of not having migration to fate not even in a decade.”

Basic food basket

Finally, Salto cites as a last problematic point of the Tax Reform approved in the Chamber the double exemption of the basic food basket.

Currently, the products in the basic basket are 100% exempt from PIS and Cofins, taxes on consumption charged by the federal government. The exemption is considered poorly targeted, as it benefits rich and poor alike.

The original idea of ​​the Tax Reform was to increase the cost of the basic food basket and start returning taxes paid to the low-income population, a mechanism called “cashback”.

However, under pressure in the processing process, the continuation of the basket exemption was approved, the composition of which will be established in a supplementary law. But the possibility of refunding taxes was also maintained in the text.

Thus, the poor focus remains and there is still no clarity on how the cumulative exemption and cashback will work.

“They did this because of pressure from supermarkets”, evaluates Salto.

“Focused cashback would be better, which could be made feasible because there is, for example, the experience in São Paulo of Nota Fiscal Paulista, which refunds tax to people who ask for invoices at establishments. Other states have similar models, with citizenship programs tax that make it possible to return part of the ICMS to people.”

Ball in the Senate area

Despite the various problems pointed out by Salto, he considers that not all is lost, since there is still the possibility that the Senate will improve the text, which should be voted in the House in the second half.

“I hope that the Senate makes this contribution, because the Chamber trampled over the entire traditional process of processing – there was no committee, there was no due debate on the new proposal, the text took a while to be released, both the preliminary and the two final texts” , says the economist.

For Salto, the Senate should extinguish the Federative Council and return responsibility for their respective collections to states and municipalities; revisit the issue of exceptions to the general rate; discuss the transition to the IBS, made too long by the Chamber, in the economist’s assessment; and re-examine the benefit compensation fund issue.

“The Senate is the home of the federation and I think that senators, even because they have a smaller number of parliamentarians than in the Chamber, tend to promote more in-depth discussions and exercise this role of reviewing house”, he says.

The turn of Tarcisio

On his journey to make the criticisms of the Reform heard, Salto even met with Tarcísio de Freitas (Republicans), governor of São Paulo and who was one of the most vocal against the Federative Council and the loss of autonomy of the States.

Tarcísio, however, ended up backing down, through the concession by the rapporteur of some changes in the governance of the Federative Council.

The turnaround by the governor of São Paulo was considered decisive for the approval of the Reform before the parliamentary recess and led to a rift between Tarcísio and former President Jair Bolsonaro, who was against the Reform.

Questioned about Tarcísio’s change of position, Salto claims that the governor achieved relevant changes in the format of the council.

According to the approved text, there will be 27 state representatives, 14 representatives elected by the municipalities and another 13 elected by the municipalities, but taking into account the number of inhabitants.

“With this, populous states will have a great influence on the council”, observes Salto.

“I’m not saying that’s enough – for me, I had to fulminate the Federative Council. Now, he [Tarcísio] earned that and made the decision he thought he had to make.”

debate among economists

The debate over Tax Reform among economists has been heated in recent weeks.

On the opposite side of the proposal, Salto, and fiscalists like Everardo Maciel, Fernando Resende, Jorge Rachid, José Roberto Afonso, Marcos Cintra and Selene Peres Nunes.

The party in favor gathered a manifesto with more than 60 names, including Arminio Fraga, Affonso Celso Pastore, Maílson da Nobrega, Guido Mantega, Octaviano Canuto and Edmar Bacha.

“I think that’s how democracy is,” says Salto, when questioned about the experience of being on the opposite side of economists he admires.

“The divergence in the technical field has to be exalted and the points have to be put on the table. I think that’s life, sometimes you are on one side, sometimes on the other — the important thing is to have technical conviction of the things you are doing defending, and that I have.”

With passages through the Senate and government of São Paulo, Salto was quoted for the economic team of the Lula government, but ended up not being chosen and took a position in the financial market. But he admits to wanting to return to the public sector.

“I really enjoyed the passages I had in the public sector. I spent eight years in Brasília and one year at Fazenda de São Paulo, which was the most rewarding professional experience I’ve ever had”, he says.

“I’m having a good experience in the financial market, it was a gap I had in my professional career, but I really like the public sector a lot and, at some point, I intend to return.”

This text was originally published here.