Government offers BRL 40 billion for tax reform fund, and states ask for BRL 75 billion; text should be out today – 06/22/2023 – Market

The Ministry of Finance proposed to governors to inject BRL 40 billion into a fund to accommodate existing ICMS tax benefits and guarantee future instruments for regional development. The states, however, ask for a higher value, of R$ 75 billion.

The final value is not yet closed and must be subject to negotiations. A first version of the PEC (Proposed Amendment to the Constitution) of the tax reform will be released this Thursday (22), said the president of the Chamber of Deputies, Arthur Lira (PP-AL).

Lira was the host of the meeting that took place this Thursday between members of the government, Congress, governors and finance secretaries.

According to the proposal under discussion, the transition from ICMS (state) and ISS (municipal) to IVA (Value Added Tax) should be longer, precisely to accommodate the tax benefits already granted and which were validated until 2032 by the Legislature in law 2017 — as anticipated by Sheet in early June.

The rapporteur for the reform, Deputy Aguinaldo Ribeiro (PP-PB), expects to keep state and municipal taxes unchanged until 2028. From 2029, the rates would begin to fall gradually, until in 2033 the VAT was completely implemented in place of ICMS and ISS.

The extraordinary secretary for tax reform at the Ministry of Finance, Bernard Appy, said that the government closed its proposal based on the model proposed by the rapporteur. The fund will have a dual function: offsetting benefits already granted and serving as a source of funding for regional development policies.

The first contribution would occur in 2025, in the amount of R$ 8 billion. The value would gradually rise to R$16 billion in 2026, R$24 billion in 2027 and R$32 billion in 2028. During this period, the figures would be fully allocated to compensation for existing benefits and validated by Congress.

In 2029, the fund would reach the BRL 40 billion promised by the Treasury, but there would be a division: BRL 32 billion would go towards validation and BRL 8 billion would finance regional development policies. The composition change coincides with the beginning of the reduction of ICMS and ISS rates.

Thereafter, the total size of the fund would remain at R$40 billion a year, but the distribution of amounts would change over time. The amount allocated to current benefits would fall by R$ 8 billion per year, until zero in 2033 — when the transition is completed, IVA will be fully operational and the period for validating benefits will have ended.

The coordinator of the tax reform working group in the Chamber, Deputy Reginaldo Lopes (PT-MG), said that the government’s proposal was well received among the governors. “At least R$40 billion are already guaranteed. The rest is up for negotiation,” he said, admitting that states and parliamentarians will fight for a higher amount.

Lira said that the text to be made available later this Thursday by the rapporteur will not “necessarily” be the one that will go to the plenary of the House.

“The text will be made available for everyone to criticize and it will not necessarily be that [texto] to be voted. Here, many themes and suggestions given by governors and finance secretaries were dealt with. I understand that they will be accommodated in the face of the text, as well as some situations that will be resolved, either with amendments, or with highlights in plenary, “he said.

Lira again said that the expectation is that the matter will be considered in plenary in the first week of July. According to him, the deputies will be summoned for sessions from Monday to Friday, in an attempt to have “the longest possible period of clarification”.

The governor of São Paulo, Tarcísio de Freitas (Republicans), attended the meeting and was in favor of approving the tax reform.

“From the moment we establish a consensus text, we will work for the text. I will support the tax reform because it is good for Brazil. São Paulo has traditionally opposed the reform because of the fear of taxation at the destination. there is no such fear, we have been doing simulations and, as much as you lose something in the short term, you gain in the medium and long term”, he said.

On the background, Tarcísio said that what is missing now is “fine adjustment” to calibrate value and period of validity. “Conceptually, I think it’s settled. One issue that was fundamental was funding. Who finances? The Union will finance, that’s decided,” he said.

“It wasn’t hit [o valor]. Appy explained a little about the tax limitation, how much would be the ceiling from the perspective of the Union. Obviously this will be subject to negotiation in Congress,” he added.