Last-minute deals change tax reform to meet pressure

The Proposed Amendment to the Constitution (PEC) 45/2019, which deals with tax reform, underwent important changes presented by its rapporteur in the Chamber, deputy Aguinaldo Ribeiro (PP-PB), on Wednesday night (5). The changes were the result of intense negotiations and pressure involving party leaders, governors, mayors and representatives of productive sectors in recent days and aim to overcome resistance and guarantee the vote on the PEC this Thursday (6), in the first round.

The new version of the text of the proposal incorporated several demands, and additional adjustments may still occur before being submitted to the plenary.

The mayor, Arthur Lira (PP-AL), confirmed that the vote on the PEC is scheduled for 6 pm, after the debate session opened at the end of the morning. With the advancement of consensus, the general expectation is that the matter exceeds the 308 votes necessary for approval. Coordinator of the reform group, Deputy Reginaldo Lopes (PT-MG) estimates a score of 370.

Among the amendments forwarded are those in favor of the interests of governors, the zero rate for the national basic basket, the entry into force at the same time of the CBS (federal) and IBS (state and municipal) taxes, the automatic transfer to the municipalities of the of the IBS and issues related to the Manaus Free Trade Zone.

1. Governors demand clarity on revenue distribution and destination of new compensation

Among the definitions expected for the eve of the vote is the one that deals with the criteria for the governance of the Federative Council, the main requirement of the governors of the South and Southeast, as well as criteria for sharing resources from the Regional Development Fund (FDR), to compensate incentives given by the fiscal war. “We are in the final stretch of adjustments”, warned the rapporteur on Wednesday night (5).

Favoring the general conception of the reform, the governors led by Tarcísio de Freitas (Republicans), from São Paulo, had their biggest objection partially contemplated by the rapporteur. Based on the group’s suggestions, the Federative Council will be improved to ensure transparency and technical criteria in the management of the new body. On Wednesday morning, Tarcísio said that “he agrees with 95% of the reform”.

Contradicting the request of governors and leaders, Ribeiro left the definition of the composition of the council to be made in a complementary law. But he could concede more this Thursday (6).

Regarding the FDR, the Minister of Finance, Fernando Haddad, maintained a proposal of BRL 40 billion to finance the fund, well below the BRL 75 billion charged by the states. The minister also presented the rapporteur with a suggestion to regulate the release of funds by the Federative Council according to the size of the population.

The governors of the South and Southeast asked that at least 30% of the fund’s resources be directed to the states of these regions. The Committee of Finance Secretaries (Comsefaz) asked, however, for the calculation of distribution taking into account the inverted GDP, that is, the poorest states. The text of the PEC left these definitions to the complementary law.

Finally, the rapporteur complied with the state’s demand in the reform transition: implementation of the IBS will start in 2026 for the Union, with CBS, and for states and municipalities, with IBS, unifying taxes. Starting rates are 0.9% for CBS and 0.1% for IBS. In the previous version, the IBS would only come to 2029. States feared the overlapping of federal legislation over state legislation.

2. A zero rate on the basic food basket is the solution to overcome the criticism of rising food prices

Target of great criticism from the opposition, especially from the PL bench, the prospect of increasing the tax burden on food made the rapporteur change the text of the PEC to create the national basic food basket with a zero rate. With this, the foods on the list will not be charged taxes.

The change was also a request from the market sector and food producers, such as the Brazilian Association of Supermarkets (Abras). The text also brings an update on products that will have a 50% reduced rate, including menstrual health care products and devices for people with disabilities.

Former President Jair Bolsonaro (PL) still maintained criticism of the project, despite this last-minute change.

3. Manaus Free Zone and Simples Nacional will have their tax benefits maintained

Rapporteur Aguinaldo Ribeiro responded to the request of the states and made an adjustment in the transition phase of the IBS tax, which will unify ICMS and ISS. The process will begin in 2026, both at the federal level, with the Contribution on Goods and Services (CBS), which unifies Pis, Cofins and IPI. But CBS will exclude the incidence on the Manaus Free Trade Zone from this rule, maintaining the current exemptions for the local industry.

With this, a special exception is created in the new project, although it already details the transition rules for the transition from the current tax system to the new one. Simples Nacional should also have its benefits maintained, yielding to a concern of the commercial sector.

The extinction of current taxes, both federal and state and municipal, for the new dual VAT should take place over eight years, from 2026 to 2032. Regarding the transition from tax collection from origin to destination, the main pillar of the reform, it will be staggered over 50 years, between 2029 and 2078. In the case of the Free Zone, the expectation is that this transition will also maintain incentives, but that they will be guided by more nationalization of production and incorporating environmental products.

4. Novo, PL and some city halls still resist and ask for more time

Parliamentarians from Novo and PL asked for the withdrawal of the agenda of the Tax Reform PEC on the grounds that there are still uncertainties. Deputy Adriana Ventura (Novo-SP) said that despite the need to change the tax collection system in the country, there are no guarantees that there will not be an increase in the tax burden and risks to the autonomy of states and municipalities.

The main demand of the municipalities that oppose the text involves the administration of taxes. The National Front of Mayors (FNP) indicates that the reform, by ending the ISS (which will join the ICMS to form the IBS), will increase the dependence of cities on Union cash. To guarantee the vote, the government released BRL 2.1 billion for parliamentary amendments in just one day.