Governors push for gasoline ICMS and loss compensation

Accounting for revenue losses with the reduction of ICMS rates that came into effect in mid-2022, governors are pressing the government of Luiz Inácio Lula da Silva (PT) to find a solution to recompose state budgets.

After a meeting with Lula and ministers at the end of January, heads of State Executives return to Brasília this Tuesday (7) for a meeting with the Minister of Finance, Fernando Haddad, and secretaries of the portfolio – among them, Bernard Appy, Extraordinary Secretary for Tax Reform. The main topic of the conversation, scheduled for 4 pm, is once again ICMS.

According to the Forum of Governors, complementary laws 192 and 194 – sponsored by the government of Jair Bolsonaro (PL) and approved by Congress last year – resulted in losses of more than R$ 38 billion per year to state funds. These laws altered the collection system and imposed a ceiling on ICMS on fuel, electricity, public transport and communications – products that came to be considered “essential” by the constitutional text.

In the states as a whole, ICMS collection fell by almost 8% in 2022, leading to a 4.7% drop in total tax revenues, which ended the year at R$ 680.2 billion, according to the newspaper “Valor Econômico “.

This Tuesday, Haddad hinted that the federal government is willing to help the states. “Today we have a meeting with the governors to correct the mess that was made last year with complementary laws 192 and 194”, said the minister when leaving a meeting with the Minister of Planning, Simone Tebet.

States and the Union signed an agreement at the end of last year, brokered by the STF, to maintain part of the exemption for diesel, natural gas and LPG (cooking gas). However, the issue of the gasoline ICMS ceiling and federal compensation for revenue losses remained undecided.

These two items, according to the agreement, should be discussed in new commissions this year, but the governors were quick to ask President Lula for a solution directly. At the meeting at the end of January, Lula committed to working with Haddad and Tebet to find a way out of the impasse.

Helder Barbalho (MDB), governor of Pará, said after that meeting that Haddad committed himself to “be with the group of governors who will discuss the recomposition of the ICMS by listening, in the first moment, to the STF regarding the constitutionality of certain measures that weaken the fiscal conditions of the States and the Union itself”.

“Minister Haddad said that he will deal with this issue with care, that he will set up meetings to deal with this ICMS issue”, added Celina Leão (PP-DF), acting governor of the Federal District. In addition to compensation for revenue losses, the issue of gasoline is the most sensitive issue for governors.

Still in 2022, the STF had already authorized several states to compensate their losses with the reduction of ICMS, through the abatement of debts with the Union, for example. Acre, Alagoas, Maranhão, Minas Gerais, Piauí, São Paulo and Rio Grande do Norte benefited.

This Monday (6), Minister Luís Roberto Barroso determined that the federal government should make immediate and monthly compensation for the losses suffered by Espírito Santo. He suspended, for that state, a rule by the Ministry of Finance that determined compensation based on the comparison between the last two months of 2022 and 2021.

Is gasoline essential? Governors think not.

Gasoline ICMS was the one that dropped the most after the approval of complementary laws by Congress. In many states the rates were close to 30%, reaching 31% in Minas Gerais and 34% in Rio de Janeiro. With the cap, the percentages were limited to the standard rate charged by the states in other operations – which was 17% or 18% and is now being readjusted to up to 22% in several states.

Added to the reduction in prices charged by Petrobras, the lower ICMS contributed to a 26% drop in the average price of gasoline in 2022.

Eduardo Leite, governor of Rio Grande do Sul, acknowledged that the rate charged before was high, but said that considering gasoline an essential item – and therefore subject to limited tax – is something that needs to be reviewed.

“This may be an agreement to charge lower rates, but [a essencialidade] it does need to be revised”, said the governor of Rio Grande do Sul after the meeting with Lula in January.

The eventual end of the gasoline ICMS ceiling, less than a year after its creation, would free the states to resume charging higher rates on this fuel – which would have the immediate effect of raising prices for the consumer.

In opposition to the pressure from the governors, the Legal Combustível Institute (ICL), formed by distribution companies, defends the essentiality of all fuels, combined with standardizing the ICMS in the country and charging the tax only once in the production and distribution chain – points that were also established by LCs 192 and 194, but which have not yet fully entered into force.

The entity considers this combination to be fundamental to fight tax evasion – a fight that, in its assessment, would compensate for the loss of revenue with the change in tax rates.

Emerson Kapaz, president of the ICL, claims that the government fails to collect R$ 14 billion a year for fraud committed, mainly in the sale of fuel from one state to another. In a meeting with the vice-president and minister of Development, Industry, Commerce and Services (MDIC), Geraldo Alckmin, last Wednesday (1st), Kapaz stressed the importance of discussing this in law, as “it gives revenue predictability and facilitates inspection work.

One of the ways out, according to him, is the characterization of the figure of the habitual tax debtor, established by the complementary bill 164/2022, which is being processed in the Senate. The text, authored by former senator Jean Paul Prates (PT), current president of Petrobras, proposes that the States and the Federal District may charge taxes on sight from taxpayers who are identified when they deliberately fail to pay taxes.

Kapaz says that the vice president was favorable to the return of the discussion in the Senate, interrupted at the end of 2022 by the parliamentary recess.

The president of the ICL observes that the exemption of PIS and Cofins for gasoline and ethanol should end at the end of the month, which will cause an increase in fuel prices as of March.

This tax increase will add to the expectation of rising oil prices in the international market, with the reopening of China after the easing of measures to combat and control Covid-19, and the long-term perspective of Russia’s war against Ukraine.

“Therefore, it is essential that the government consider measures to ensure that the internal fuel market is not responsible for the increase in inflation”, completes Kapaz.

Tax reform promised by Haddad could lead to another standoff with governors

In addition to the discussion of compensation for losses with the reduction of ICMS, the tax reform on consumption, which Haddad wants to approve this semester, could generate another impasse between the states and the government.

The main reform projects under discussion merge ICMS and federal and municipal taxes on consumption into a Value Added Tax (VAT), which will be shared among the entities of the federation. The issue will depend on a lot of negotiation, since ICMS rates vary from one state to another.

“If this effort [da reforma tributária] towards the middle of the year, we will have to pay attention to the fuel chapter, how fuel taxes will be, which could change this whole discussion [da incidência e da compensação das perdas do ICMS]. There may or may not be a policy of a lower tax burden on fuel prices,” says Adriano Pires, director of the Brazilian Center for Infrastructure (CBIE).

Davi Marques, professor of Law at Faculdade Presbiteriana Mackenzie Rio, says that, if the tax reform goes ahead, this ICMS discussion could take years – he estimates something around 25 years to “digest the effects”.

The proposals pending in Congress, according to him, remove the ownership of taxes from states and municipalities and leave them “at the mercy of the goodwill of the Union” in the division of collections corresponding to ICMS, state, and ISS, municipal.

A study carried out in December by the National Committee of Finance Secretaries of the States and the Federal District (Comsefaz) found that the ICMS collected on gasoline alone corresponds to 6% of the amount collected in 18 of the 20 states surveyed, followed by diesel (5.6 %) and other fuels (4.1%).

It was based on this study that 12 states readjusted the general tax rates, to offset part of the losses caused by complementary laws 192 and 194.

However, for João Elói Olenike, executive president of the Brazilian Institute of Planning and Taxation (IBPT), this readjustment of rates and even the request for compensation of losses are fragile and lack more transparency – something that, according to him, not even the federal government nor STF would be taking into account.

“The exemption, in fact, has the opposite effect to what the governors say. When the tax is reduced from 30% to 17% or 18%, there is more money for the taxpayer to spend on other consumption items, which will also generate ICMS, PIS and Cofins collections”, says Olenike. “The governors say that had losses with fuel, but do not show if other sectors had increases in collection, are based on only three items of products and services”, he adds.

The tax expert assesses that the states are taking decisions to collect more in the short term without thinking about the benefits that could arise ahead, such as increased consumption and consequent growth in collection through other products.

For Olenike, the ideal would be to analyze the entire collection of ICMS from one year to the next, comparing which sectors had losses with those that collected more and, based on that, discuss possible compensations.