Reform: End of phantom benefits scares governors – 06/24/2023 – Market

One of the main obstacles to tax reform is the possible end of hidden tax benefits that allow certain companies to obtain tax credits that were never paid, based on incentives given by some governors at the expense of other states.

As they can only be seen by the beneficiary companies, they are called phantom benefits by some specialists. Current legislation determines that they must be extinguished by 2032, but there is an attempt to revive them within the new consumption tax. Therefore, they are also classified as zombie incentives.

According to a survey by Febrafite, an entity that represents state tax inspectors, these privileges represented an annual waiver of more than R$ 60 billion in ICMS, the main state tax, in 2021. In 2023, the value may be close to R$ $100 billion, within a total waiver of this tax of BRL 228 billion.

This is the so-called presumed or granted credit, which can be described as a kind of discount on the payment of tax that is not informed on the invoice —so that it is possible to request full reimbursement of the tax— and can be granted to a company in particular, without benefiting competitors.

Among the distortions generated by these incentives is the possibility of pushing the benefit account to other states. A good part of the loss goes to São Paulo, which bears benefit credits from other locations — and reacts by granting its own incentives.

Another effect is to generate “negative taxation” on some products. That is, instead of paying the tax, the company earns a hidden subsidy, when considering the final balance of the operation. This system benefits, for example, large exporters in agribusiness and the mining sector and imports in the retail sector.

How incentives work

One of the ways to use this tax benefit is with the “sale” of a company’s product to another company of the same group, each located in a different state.

In an example cited by Febrafite, the seller includes a 12% ICMS tax on the invoice, the rate provided for by law for all taxpayers, but only 3% is effectively collected by the benefited company, which is entitled to a 9% discount on presumed credit .

The buyer, which can be a company from the same economic group, uses the tax value that is on the invoice (12%) as a tax credit against the state of destination of the goods.

This last location is responsible for bearing a 12% credit, with 3% going to a neighboring state and the other 9% to the selling company.

The credit can be used to offset other expenses with the same tax. The company can also sell them to other companies to make cash. Electric power companies are among the main buyers.

This system is also used in imports, which has become known as the port war. There are cases in which a 12% ICMS on foreign products can turn into a 1% actually paid plus an 11% credit. This can eliminate other import costs and give the imported product an advantage over the national one. The expedient is used in the purchase of wine and other Mercosur food products by supermarket chains, for example.

Another common situation is when agribusiness or mining companies export through branches in other units of the Federation. With this, a hidden subsidy is created that can offset even the tax residues that would be eliminated with the reform.

“The primary instrument of the tax war is the presumed credit, because it has the effect of reducing the tax payable at origin and transmitting the full credit to the destination”, says Ângelo de Angelis, member of Febrafite’s Technical Commission and author of several studies on the topic.

According to him, benefits such as low rates and exemptions do not have the same effect, as they do not fully transfer credits. In addition, the mechanism makes it possible to hide export subsidies, circumventing the rules of the WTO (World Trade Organization).

“This figure of presumed credit has to be abolished from our legal system. The credit does not correspond to the tax actually paid in the previous operation, and the private company appropriates the money”, he says.

How reform can end these incentives

By ending ICMS and other taxes, including federal ones, which generate presumed credit, prohibiting tax benefits and changing the location of taxation from origin to destination, the tax reform may make some of these operations unfeasible.

The discussion also affects governors in another way. With the reform, benefits to companies can no longer be granted via the tax system, only through the Budget, in a transparent manner and with the approval of the Legislative Assemblies.

Over the decades, many incentives were given in a hidden way. A 2017 law regularized irregular benefits and set 2032 as the deadline for extinguishing them all.

The version of the reform presented last Thursday (22) maintains the current benefits until that date. Part of the account for this and other ICMS incentives, however, will be paid by the Union from 2025, with the disbursement of at least R$ 160 billion divided over eight years. Governors demand higher amounts.

The proposal also provides for the granting of presumed credit within the new taxes on consumption. For example, in the case of companies that purchase goods and services from individual rural producers who do not pay the new tax.

“This is the question that basically holds back the tax reform. Brazil is the only country in the world where the tax paid, or supposedly paid, to one state can be deducted from what is owed in another. This rule does not exist in the Union. does not exist in the American ‘sale tax'”, says Rodrigo Frota, member of Febrafite’s Technical Commission and researcher at FGV-SP’s Tax Studies Nucleus.

He claims that most of these ‘ghost credits’ have little transparency and public exposure, although they cannot be considered illicit. “After Complementary Law 160 [que regularizou os incentivos em 2017]even those that were illegal became legal”, says Frota.

Tax war without winners

One of the arguments for state benefits is the need to redistribute revenue and encourage economic activity. According to a study by Febrafite published in April, as they are granted by all states, the fiscal war no longer has a positive impact on development, even in poorer states. São Paulo, for example, grants benefits in amounts even higher than other places.

Regarding the activity, many companies can enjoy the benefits of having only a representative address in another location.

Melina Rocha, director of Courses at York University, in Canada, says that one of the great challenges of tax reform, in a country as unequal as Brazil, is to promote regional development without resorting to tax wars.

“If you don’t have a regional development policy, what incentive will companies have to leave São Paulo? This is the challenge of tax reform, having mechanisms to attract investment to these regions, but not because of the tax war.”

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Examples of incentive use for not paying tax – export

1. Soy producer in the Midwest sells BRL 100 million to a commercial exporter from the same economic group located in the Southeast
2. Producer registers ICMS of R$ 12 million (rate of 12%) on the invoice
3. Producer is entitled to presumed credit of 9%. Therefore, it only collects BRL 3 million (3%)
4. Commercial exporter is entitled to R$ 12 million in tax credit when exporting soy, owed by the state of the Southeast
5. State of the Midwest collects R$ 3 million; the Southeast loses R$ 12 million
6. Company that owns soy production and commercial export earns R$ 9 million

Examples of incentive use for not paying tax – import

1. Office imports wine from Mercosur in state A with 12% ICMS, but presumed credit allows to collect 1%
2. Product is sold to a retailer of the same economic group in state B, entitled to a 12% credit
3. State A collects 1%. State B loses 12%
4. Company keeps the 11% credit for rebate or sale to third parties

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