Reform: A giant step towards transparency – 11/11/2023 – Samuel Pessôa

The Senate approved in a second round, last Wednesday, the constitutional amendment project (EC) that unifies the five indirect taxes —ISS, ICMS, PIS/Cofins and IPI— into a VAT shared between municipalities, states and the Union and a selective tax that will apply to items that are harmful to health and the environment, as well as weapons and ammunition for civilian use.

VAT is divided into two: the CBS (Contribution on Goods and Services), from the Union, and the IBS (Tax on Goods and Services), shared between municipalities and states. As the taxable event, the tax base and the tax regimes will be the same, they function as a single tax.

I elaborated in more detail on several aspects of Tax Reform in a text in this Sheet on July 5th.

There are 29 items that have a reduced rate or a specific tax regime to be defined by means of a complementary law. In addition to the most obvious — private education and health and basic food basket — items such as tourism, public transport, including interstate, artistic and scientific production, football clubs, and cleaning supplies entered some special regime.

We saw the logic of Mancur Olson’s collective action in action. Small, organized groups are successful in convincing the National Congress to approve measures that benefit them, despite the collective interest. We will all have to pay a higher rate to finance goods with reduced rates. Those under a special regime will not have taxation on added value, and will maintain all the bad characteristics of cumulative taxation, like the one that occurs today.

Despite these deviations, there is great simplification, and the other gain of the new legislation is transparency. The reform will make the cost of the Brazilian State transparent to society. I think this explanation will encourage policies that increase the efficiency of public spending. This should be, in association with gains in economic efficiency, the great long-term positive legacy of the reform: it promotes tax citizenship.

In addition to greater simplicity, gains in transparency occur because the sectors covered by the special regimes are clearly explained in the Federal Constitution.

There is a provision in the approved EC for reviewing exceptions accepted by the rapporteur, senator from the MDB of Amazonas, Eduardo Braga, at the suggestion of the TCU (Federal Audit Court). It was a big step for us to create the practice of permanent evaluation of public policies. According to the text of the EC, “the differentiated regimes referred to in this article will be subject to a five-year cost-benefit assessment, with the law being able to establish a transition regime for the standard rate”.

The reform established an FNDR (National Regional Development Fund) to compensate states for losing the fiscal war instrument to attract investment. The fund grows in value year by year until, in 2043, the Treasury will annually and permanently transfer values ​​to the FNDR at today’s prices of R$60 billion.

The criteria for distributing resources will be 70% from the FPE (State Participation Fund) and 30% depending on the population. These criteria concentrate many resources in small states in the North region. My colleagues Marcos Mendes and Sérgio Gobetti suggest a more equitable rule.

This is a reform that has been discussed for almost four decades. There was a lot of accumulation to get here. It is worth remembering that PEC 45 was approved by the Chamber’s Justice Constitution Committee in 2019. In fits and starts, and very slowly, we are moving forward. We have reasons to celebrate.

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