Senate approves tax reform that should create VAT at the highest rate in the world

The Senate approved this Wednesday (8), in the first round, the basic text of the tax reform proposal that has been in progress since 2019 in the National Congress, after decades of frustrated attempts to make a broad change to the current Brazilian tax system, in in force since the 1988 Constitution. Now, the senators continue discussing the text. The expectation is that the second round of voting will take place this Wednesday, due to a special calendar request approved on Tuesday (7).

Supported by the government, the proposed amendment to the Constitution (PEC) 45/2019 has as its main premise the creation of a Value Added Tax (VAT) system, a model already adopted in 174 countries. The Brazilian particularity will be due to the tax rate, which should be the highest in the world, around 27.5%, according to an estimate by the Minister of Finance, Fernando Haddad. Among analysts, the projection reaches up to 33.5%.

With a score of 53 to 24, and no abstentions, in the first round, the approval of the PEC can be considered a victory for the government of Luiz Inácio Lula da Silva (PT), which has reforming the tax system as one of its priorities in the area. economic. To gain minimum support – at least 49 votes were needed –, however, there were a series of concessions to independent and opposition parliamentarians.

Due to the changes since it reached the Senate, the text will still need to be reviewed by the Chamber of Deputies, where the previous version was approved in July, before it can be promulgated. The PEC rapporteur in the Senate, Eduardo Braga (MDB-AM), accepted six plenary amendments during the discussion of the text this afternoon.

Among the changes foreseen in the plenary amendments are the inclusion of the events sector in the categories benefiting from a 60% reduction in the total tax rate (amendment 825), presented by the government’s deputy leader, Daniella Ribeiro (PSD-PB); and the possibility of equating the remuneration of career civil servants in municipal and state tax authorities with that received by civil servants from the Union (amendment 807).

With a major change in the current model of taxation on the consumption of goods and services, the PEC is, in fact, the first stage of a modernization of the Brazilian tax framework. The Executive still intends to forward, from 2024, a reform in income and wealth taxation.

Under the proposal, the current ICMS, ISS, PIS, Cofins and IPI will be abolished. Instead, the Contribution on Goods and Services (CBS), which is the responsibility of the Union, and the Tax on Goods and Services (IBS), whose responsibility will be shared between states and municipalities. Together the two taxes will make up a “dual” VAT system, having the same generating factors and calculation bases.

Taxes will also comply with the principles of non-cumulative (collection at a single stage of the production chain) and collection at destination, in order to put an end to the “fiscal war” promoted by states to attract investment. The IBS legislation will be unique for all of Brazil, putting an end to the thousands of laws that govern current taxes on goods and services in each municipality and each federative unit in the country.

Each tax will have a different transition period, with the full validity of the new model for taxpayers and consumers reached in 2033. The rules for the distribution of IBS between states and municipalities, however, will have a longer transition period, of 50 years.

Exceptions must increase standard tax rate

The original idea of ​​the reform was to simplify consumption taxation, extinguishing or reducing as much as possible the number of tax exemptions or benefits granted to certain areas of the economy.

Pressure from representatives of different sectors, however, caused the list of exceptions to grow at each stage of the PEC’s processing, which should cause the standard IBS and CBS rate to increase, directly affecting sectors that were not on the list of beneficiaries. .

Agribusiness and service providers in general, for example, should see an increase in tax burden after the transition to the new model. The percentage that will be charged for each tax will still be defined after the promulgation of the constitutional amendment through a complementary law.

The list of categories benefiting from a 60% reduction in the total rate includes health and education services, medical devices, medicines, products aimed at menstrual health, public transport, food, personal hygiene products, agricultural inputs, artistic productions, among others.

Liberal professionals subject to federal council, such as doctors, lawyers, accountants and engineers will also have a 30% discount on taxation. Incentives for car manufacturers located in the North, Northeast and Central-West regions will be extended.

Other items will be exempt from taxes, such as those that make up the basic food basket; medical devices in the case of acquisition by the public administration; higher education education services under the terms of the University for All Program (Prouni) and those provided by non-profit innovation, science and technology entities (ICTs).

There are also provisions for special taxation regimes for certain sectors. Fuels and lubricants, for example, will be subject to tax only once, whatever their purpose. There may be different rates per product, but they must be uniform throughout the country.

Other sectors that will have different taxation include financial services, real estate operations, health plans and prognosis competitions; cooperatives; hotels, amusement and theme parks, travel and tourism agencies, bars and restaurants and regional aviation; operations achieved by international treaty or convention; sanitation and highway concession services; among others.

To maintain the neutrality of the reform, that is, to avoid an increase in the total tax burden, the PEC rapporteur in the Senate, Eduardo Braga (MDB-AM) inserted a device into the text that requires the reduction of CBS rates in 2030 if the revenues with the tax measured in 2027 and 2028 in proportion to the Gross Domestic Product (GDP) are greater than the average collection with PIS/Pasep, Cofins and IPI from 2012 to 2021.

In 2035, there will be another reevaluation period, in which all taxes created by the PEC may be reduced if the revenue measured between 2029 and 2033 is greater than the average collection, between 2012 and 2021, of the extinct taxes. Both calculations will take GDP into account.

Selective tax and cashback

The text also provides for the creation of a Selective Tax (IS), of a regulatory and extra-fiscal nature, aimed at discouraging the consumption of certain products or services considered harmful to health or the environment. The list of products that must be surcharged, however, must still be defined by complementary law.

The PEC also opens up the possibility of refunding part of the tax paid to individuals with the aim of reducing income inequalities. The mechanism should be similar to what already occurs with ICMS in some states, where, by informing the CPF at the time of issuing the invoice, the taxpayer may be entitled to a credit for a discount on the payment of another state tax or even for transfer in current account.

The text provides more specifically for cashback options for low-income citizens on electricity consumption, the reversal of which can be made on the electricity bill itself, and on the purchase of cooking gas cylinders.

Funds to finance states

The reform will also create two financial funds aimed at supporting state governments, whose contributions will total R$790 billion over the next twenty years. The first will be a compensation fund for ICMS tax and financial-fiscal benefits, with the aim of replacing the current state incentives that today cause tax wars.

The second will be the National Regional Development Fund (FNDR), which will aim to reduce regional and social inequalities by delivering resources from the Union to the federative units.

IPVA, IPTU and ITCMD also change

Although the approved PEC focuses on the reform of consumption taxes, the text provides for some provisions that change taxation on wealth. One of the changes, for example, allows states to charge progressive IPVA rates due to the environmental impact of vehicles.

Another device includes water and air vehicles among the vehicles on which IPVA will be levied, which means that owners of boats and aircraft will start collecting the tax in the same way as car owners. However, agricultural aircraft and vessels used for water transport or industrial, artisanal, scientific or subsistence fishing are exempt from the tax.

In relation to IPTU, charged by municipalities, the text provides that the updating of the calculation base may be carried out by means of a decree, based on general criteria provided for in municipal law. Today, adjustments must necessarily pass through the Legislature to enter into force.

The reform also provides for changes in the Death and Donation Transmission Tax (ITCMD), which is the responsibility of the states. Today, each federative unit can establish its own rate, with a limit of 8%, and the possibility of tax exemption. The PEC provides for the tax to be progressive according to the value of the inheritance or donation transmitted, as is already the case in some states, such as Rio de Janeiro. Payment will be made in the state of residence of the deceased person.