Lula sanctions law that changes taxation of tax incentives and could increase the Union’s cash flow

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Text establishes rules for deducting ICMS benefit values ​​from the federal tax calculation base. The measure is part of the Ministry of Finance’s package to improve public accounts. Minister Fernando Haddad (Finance) and President Lula during the promulgation of the tax reform, in December CLÁUDIO REIS/ENQUADRAR/ESTADÃO CONTEÚDO President Luiz Inácio Lula da Silva (PT) sanctioned, without vetoes, this Friday (29) the measure provisional amendment that changes the taxation rules for tax incentives for investments granted by states in the Tax on Circulation of Goods and Services (ICMS). The decision was published in an extra edition of the “Official Gazette of the Union”. The text had been approved by the Chamber and the Senate this month. The MP was considered one of the priorities of Finance Minister Fernando Haddad’s economic team. The expectation is that the changes will help increase the Union’s cash flow in 2024, in order to achieve the goal of zero fiscal deficit in public accounts. The text establishes criteria for deducting ICMS benefit values ​​from the federal tax calculation base. The proposal determines that only the value of tax incentives that are used for investments can be deducted from the calculation of federal taxes, and not funding expenses (salaries, for example). The granting of ICMS benefits is a common practice of state governments and the Federal District. By reducing the tax charged on a certain good or service, the state tries to attract companies in that sector to set up shop in its territory — which increases revenue in subsequent years, even with the “discount”. Companies take the incentive and use it for their operating expenses. Currently, however, when calculating the payment of federal taxes, they do not consider the value of tax incentives received from the states. In a statement, the Ministry of Finance stated that the new legislation will “correct distortions in the Brazilian tax system, especially with regard to the reduction in the payment of federal taxes”. “This legislation excludes benefits that are not directly linked to the installation or expansion of projects, such as linear subsidies or funding funds, focusing on incentives that effectively promote productive investments. The new approach, therefore, seeks to balance the need for economic stimulus with responsibility and fiscal sustainability.” Interest on equity The text sanctioned by Lula also brings changes to Interest on Equity (JCP). JCP are a way of distributing the profits of a publicly traded company (which has shares on the stock exchange) to its shareholders, to remunerate the capital invested. The government wanted to end the JCP deductibility, expecting to raise R$10 billion. Congress, however, approved a dehydrated version of the proposal. There is still no forecast of how much will enter the Union’s coffers with the new version of the proposal. According to the approved text, deductibility was maintained as currently provided by law, but the scope of the measure was limited. According to the new rule, resources linked to capital reserves, profit reserves, except the tax incentive reserve resulting from government donations or subsidies for investments, treasury shares, among others, will be part of the calculations on JCP expenses.

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