ICMS: Governors want to discuss compensation with Lula – 01/26/2023 – Market

The payment of compensation by the Union to the states due to losses in collection with the change in the ICMS (Tax on Circulation of Goods and Services) on fuels should be one of the main items of the meeting between the 27 governors and President Luiz Inácio Lula da Silva (PT) this Friday (27).

The new government has intensified negotiations to end the stalemate. In December, the STF (Federal Supreme Court) gave the Union and states a period of 120 days to reach an agreement.

In addition to the reduction of part of the debts of the states with the Union, the possibility of an extra transfer of resources is also on the table – depending on the existence of fiscal space for this.

The fight over the issue began when former President Jair Bolsonaro (PL) obtained support in Congress to approve, in March 2022, a law that standardized the ICMS rate on gasoline, diesel and ethanol, with the aim of reducing prices. of fuels in the country in an election year.

State tax was levied at a fixed amount per liter (“ad rem”) instead of a percentage. The measure had a billionaire impact on the states’ cash flow, hence the request for compensation made by the governors.

Three months later, a second law was approved providing compensation to states that had losses greater than 5% in tax collection, but the wording of the norm left room for different interpretations. The way to calculate this compensation is the main disagreement between the Union and the states.

This Thursday, the state finance secretaries prepared a letter with the main demands. The document, obtained by the report, lists the issue of ICMS as one of the “federal matters of urgency”.

In the text, the states defend the calculation of compensation specifically for each fuel and the full calculation of losses for all states, within or outside the fiscal recovery program for debtors — thus, the 5% trigger would be valid for all and would trigger payment of the full damage.

The secretaries also advocate that losses in 2022 be estimated on the basis of 2021 corrected for inflation. Without this update, according to them, few states would trigger the compensation trigger, since tax revenues rise naturally, accompanying the price level.

Another request is the monetary restatement of the loss calculated up to the effective compensation date.

The Union disagrees with several of these claims, but may end up complying with one or two items in order to accelerate the outcome of the agreement. The payment method is also being studied.

On the one hand, some states have already obtained injunctions and are reducing their debt installments. On the other hand, the federal government has fiscal restrictions to be observed in the case of choosing to transfer to the states —among them the primary result and the spending ceiling, which limits the growth of expenses to inflation.

The federal government will also submit a bill restoring the possibility for states to opt for percentage rates on fuel (called “ad valorem”).

The states, in turn, also ask that gasoline be removed from the list of items considered essential — a label that imposes the application of a lower rate, in line with the basic charge of ICMS in the state. In practice, the measure would give governors the power to raise the tax on gasoline again.

An outcome is not expected for the dispute this Friday. “I was governor until December 31st, and it is not reasonable for the Union to arrive in the middle of the year, as it was in the pre-election period, and say ‘oh, this is how it is now’. In Bahia, it was R$ 5 billion less It doesn’t work like that”, said the chief minister of the Civil House, Rui Costa (PT), to Sheet.

The governor of Mato Grosso, Mauro Mendes (União Brasil), stated that he will bring the issue of compensation to the meeting. He said that reducing the tax burden is a “dream that all of us Brazilians and us governors want”.

“The right recipe for you to break a government, a city hall or a country is to reduce revenue and increase expenditure. It was exactly what happened last year. So we hope there is lucidity, that there is understanding”, said Mendes.

During the meeting, Lula will also propose the creation of a federative council to organize regular meetings and discuss matters of interest to states and municipalities.

The meeting is a campaign promise by the PT, who defends “reestablishing the federative pact”, in opposition to the bellicose relationship maintained by his predecessor with the governors.

At this Friday’s meeting, priority projects for each state and region will also be discussed. There will be three common projects for the regions, which were decided in preparatory meetings, and each state will present another three.

Also mentioned among the governors are topics such as the conclusion of the duplication of federal highways, the resumption of works that are unfinished and actions related to public safety and education.

Members of the federal government should also bring health-related topics to the meeting, such as actions related to the National Program to Reduce Queues, the National Immunization Plan and Popular Pharmacy, and measures to combat hunger and extreme poverty, flags of the president’s campaign Squid.