Market welcomes tax reform, but awaits next steps

The consumer tax reform, approved in two rounds early this Friday (7), pleased the market. One of the main thermometers was the performance of the stock exchange and the exchange rate. The Ibovespa, the main indicator of the B3 – the Brazilian stock exchange – closed up 1.25% to 118,898 points and the real appreciated again against the dollar after four trading sessions of decline, ending the day at R$ 4.86 indicators were also influenced by the weaker performance of employment data in the United States.

The consensus is that the best tax reform was not approved, but the possible one. The market awaits the next steps. The assessment is that the approval of the PEC was the first to be given. The next ones may be more complex, highlight economists from brokerages and banks.

In addition to defining the standard rate for the Tax on Goods and Services (IBS) and the Contribution on Goods and Services (CBS) – which form the “dual” Value Added Tax (VAT) – other issues need to be resolved. This is the case of the definition of the concept of operations with services; differentiated and favored regimes; tax distribution; definition of credits for calculating non-cumulativeness: definitions on the Federative Council and distribution of funds.

Simplification of rules creates a more efficient regime than the current one

The chief strategist at RB Investimentos, Gustavo Cruz, assesses that Brazil is no longer “shameful” in the world for having one of the most complex tax systems. According to the Global Business Complexity Index (GBCI), by TMF Group, Brazil is the third most difficult country to do business.

“Tax chaos drove away foreign and domestic investment and generated billionaire tax litigation,” he says. More than 5 million tax proceedings were initiated last year, according to the National Council of Justice (CNJ), At the administrative level, the Administrative Council of Tax Appeals (Carf) alone accumulated more than R$ 1 trillion in disputes, according to the Ministry of Finance.

Economist Pedro Renault, from Itaú BBA, points out that the new rules, which still need to be passed in two rounds by the Senate, create a more efficient tax regime than the current one.

“We live in a tangle of rules. Hours and hours are spent in tax and accounting departments and no result is seen in the GDP. Tax reform brings more hope”, adds Piter Carvalho, chief economist at Valor Investimentos.

Bradesco analysts point out that, despite new concessions to some sectors, the main points of PEC 45 were maintained. “The proposed changes have the potential to simplify the tax system, reduce its cumulativeness and mitigate the tax war at the subnational level”, they point out.

PicPay’s chief economist, Marco Caruso, points out that these are “historic days in the economy”. Tax reform is an issue that has been under discussion for more than 30 years and its processing has gained strength in the government of former President Jair Bolsonaro (PL).

He recalls that despite the president of the Chamber, Arthur Lira (PP-AL), being the “political father” of the tax reform, Lula placed the “intellectual father”, Bernard Appy, in his economic team as extraordinary secretary. And the governor of São Paulo, Tarcísio de Freitas (Republicans), expressed support for most of the measures. “Are we seeing the creation of some bridges with economic rationality”, asks Caruso.

Creating a path that favors long-term growth

Experts believe that a more reasonable path has been reached, which favors long-term growth. A study by the Institute for Applied Economic Research (Ipea), an arm of the Ministry of Planning, points out that the country’s GDP could expand by up to 2.39% by 2032 with the tax changes.

Jennie Li, equity strategist at XP Investimentos, says the main asset visible right now is on the macroeconomic side. “There is a positive long-term trend with the simplification of a complex tax system.” The expectation is for a reduction in fiscal risks and an increase in the potential for GDP growth.

The broker’s assessment is that the impacts are more positive for the industry, which can grow up to 25% above the scenario without reform in 15 years. Agriculture and services would also benefit.

The effects, however, should only be felt in the long term, since the changes must occur gradually and their effects tend to be smaller at first and grow over time.

XP also points out that there are also indirect effects generated by the tax reform. With greater potential growth, tax collection tends to grow more and the public debt ratio to decrease, leading to a drop in country risk and in the long-term interest rate.

“These indirect effects tend to anticipate economic gains and positively affect interest rates and activity”, informs the brokerage in a report.

Concerns in the air with the standard rate

But there is concern in the air. The chief economist at Genial Investimentos, José Márcio Camargo, points out that the discussion on the tax reform has focused primarily on defining which sectors should have a lower rate than the standard one.

“Little has been discussed about the value of the standard rate. The problem is that this value will depend on the number of sectors and products that will have lower rates than the standard”, he points out.

Expert assessments indicate that the standard rate should be between 25% and 30%, very close to Hungary, which has a rate of 27%, the highest among the 175 countries that adopt VAT. The country with the lowest rate is Andorra, at 4.5%.

According to Camargo, the high level of the standard rate is the result of an excessively high level of public spending and the large number of exceptions and will mainly penalize the services sector, which will have its tax burden substantially high.

“The fiscal framework under discussion in Congress exacerbates this problem by proposing to increase government spending by 70% of the increase in revenues in the coming years. A bad sign for the competitiveness and growth of the economy”.

Changes made in the Chamber also raise reservations

Warren Rena considers that the principles of non-cumulativeness and taxation at destination, in addition to simplification, are correct and should be pursued. But analysts Felipe Salto, Josué Pellegrini and Fernanda Castro make reservations:

“We understand that the exceptions placed in the text, the poorly calibrated transition, the governance of the tax (through the Federative Council), the preservation of ICMS incentives through subsidies (with the ICMS Incentive Compensation Fund), among other difficulties that were left to be treated by complementary laws, put a negative bias on the final result”.

They also point out that the Senate will still be able to make changes or change the course of discussions and appreciation of the text that will come out of the House.

Tiago Sbardelotto, economist at XP, points out that in the negotiations during the course of the project in the Chamber, the goods and services that may have reduced taxation or zero rate were expanded, with emphasis on the creation of a basic basket and the possibility of presumed credit for some activities.

According to him, the expansion of exceptions reduces the potential of the reform because:

• It increases the complexity of the system, making room for litigation;
• Reduces transparency for the final consumer,
• Increases the standard rate and allocative distortions, since the loss of revenue has to be compensated by other sectors of the economy

Another caveat made by Sbardelotto concerns the preservation of benefits related to IPI and PIS/Cofins until the end of 2032 for the North, Northeast and Midwest regions. The benefits were created by law and were expected to end in 2025.

The economist warns that the postponement within the tax reform proposal is foreign to the text and opens the way for other benefits to be postponed. “It certainly reduces the potential for reform and could undermine efforts towards a simpler, fairer and more transparent system.”