Senate faces contradictions and trinkets of tax reform

The Senate began the revision phase of the tax reform with the challenge of eliminating opportunism and contradictions present in the text approved by the Chamber in the early hours of Friday (7). Proceedings in the House will effectively begin in August, after the parliamentary recess, and will be hosted by the Constitution and Justice Commission (CCJ), chaired by Davi Alcolumbre (União Brasil-AP), with the report by the leader of the MDB, Senator Eduardo Braga ( AM). The goal is to complete the vote on the Proposed Amendment to the Constitution (PEC) 45/2019 by October. Controversial points are already being analyzed, with emphasis on the concessions made to economic sectors and the federative clash between the North, Northeast and Midwest, on the one hand, and the South and Southeast, on the other.

There was a previous clash in relation to the tax reform, with the possibility of modifying the PEC as a whole or slicing it up. Government leaders in Congress, Randolfe Rodrigues (no party-AP) and in the Senate, Jaques Wagner (PT-BA), defended the slicing, but did not receive support from the rapporteur or the president of the Senate, Rodrigo Pacheco (PSD-MG). . The Minister of Finance, Fernando Haddad, has expressed confidence in the approval of the PEC in the Senate, while Pacheco has highlighted the responsibility of the Senate.

The rapporteurs of the reform, deputy Aguinaldo Ribeiro (PP-PB) and senator Eduardo Braga (MDB-AM), met on Wednesday (12) with Haddad and Pacheco with the aim of identifying the most controversial articles and deepening the House and Senate alignment on the matter.

A problem previously presented by the opposition and recognized by the rapporteur and the government concerns the lack of studies on the impacts of the proposed changes in the tax reform. Braga demanded analyzes of the impact on tax revenues, the overall tax burden and the burden on each sector, and the economic team committed to providing the necessary data and carrying out tax rate simulations.

However, the main uncertainty in the reform, which feeds the main tension between the Northeast and Southeast regions, is related to the division of resources from the National Fund for Regional Development (FNDR), which will have a minimum equity of R$ 40 billion to reduce disparities regional. The Northeastern states, which represent a third of the 81 seats in the Senate, are coordinating with the North and Midwest regions to ensure favorable fund distribution criteria.

The mayor, Arthur Lira (PP-AL), decided to leave the definition of the fund division model out of the constitutional text, in complementary legislation, due to pressure from the governor of São Paulo, Tarcísio de Freitas (Republicans). Tarcísio also managed to include in the PEC a model of governance for the Federative Council, responsible for managing the Tax on Goods and Services (IBS), so that states in the South and Southeast can influence more. In addition to discussing this point, the Northeast seeks to increase the amount reserved by the Union to the FNDR to R$ 75 billion. One possibility discussed is to allocate part of the compensation fund resources to incentives, also provided for in the PEC, which total BRL 160 billion from 2025 to 2032.

Northeast governors propose the use of the “inverted GDP” criterion as a means of distributing resources, which would mean that the poorest states would receive a greater share of these resources. In turn, the governments of the South and Southeast agree to receive less, as long as a mechanism is included that takes into account the size of the population. The states in the Northeast, North and Midwest are concerned that, in addition to having influence on the Federative Council, the most populous states will also take the lion’s share of the FNDR’s resources.

Last-minute approved trinkets create distortions

In addition to the procedure at the Constitution and Justice Commission (CCJ), the Proposed Amendment to the Constitution (PEC) will also be discussed in public hearings at the Economic Affairs Commission (CAE). In these hearings, sensitive issues will be addressed, such as the tax benefits granted to car manufacturers until 2032. In the Chamber of Deputies, the Bill managed to approve a proposal to remove exemptions from the Tax on Industrialized Products (IPI) from the text of the reform. However, senators from the North, Northeast and Midwest regions are seeking to reintroduce them, with the support of President Luiz Inácio Lula da Silva (PT). Both the government and the senators agree that the most difficult challenge in the Senate is to eliminate most of the provisions foreign to the objectives of the PEC, known as “turtles”, as well as the various exemptions and deductions added at the last minute.

Senator Efraim Filho (União Brasil-PE) was designated as rapporteur for the tax reform working group at the Economic Affairs Commission (CAE), which includes nine other senators, including Oriovisto Guimarães (Podemos-PR), considered the biggest critic of the PEC. The opposition argues that the risks of increasing the tax burden and concentration of power in the allocation of revenues to the Union are evident.

For this reason, the CAE approved requests from Senator Rogério Marinho (PL-RN), on Tuesday (11), and requested government estimates on the impact of the average rate of the Contribution on Goods and Services (CBS) and the Tax on Goods and Services (IBS), which will be created by the reform. Marinho, leader of the opposition group, highlighted the importance of having clear information “before proceeding with such a significant change”. He also pointed out that the text of the reform took shape just a few days before the vote, and that several demands were included hours before in a single block, without prior discussion and even without any government follow-up.

Repairing inconsistencies will require special dedication

According to Luis Henrique Macedo Cidade, director of the consultancy Focus Relations Government, Rodrigo Pacheco expressed to party leaders his intention to involve the Senate more actively in the preparation of the final text of the tax reform, promoting a debate at a slower pace. Pacheco would be open to including in the discussion other Proposed Amendments to the Constitution (PECs) pending in the House, such as PEC 46/2022, authored by Senator Oriovisto Guimarães, supported by large city halls and the Simplifica Já movement.

However, other analysts consulted by the People’s Gazette believe that the inconsistencies left by the Chamber will already require a large part of the efforts of senators, aiming to correct the text and reconcile interests in order to preserve the spirit of the reform, which will reach the peak of its effectiveness in 2033.

In terms of inconsistencies, the most controversial aspect of the PEC is the authorization for the states to create a tax to finance investments until 2043, which goes against the promise not to increase the tax burden. This authorization was included at the last minute during the vote in the Chamber to serve various sectors and the Lula government. This measure allows, for example, that governors tax primary and semi-manufactured products, a prerogative that today belongs to the Union. There is a risk that this will affect oil, energy and ore exports.

The global amendment included at the end of the vote also benefits churches, sports clubs and specific commercial sectors, by establishing new hypotheses of reduced rates by 60% for the new tax. Taxation experts point out that the greater the number of benefited activities, the higher the standard rate to be applied.

With regard to the position of the rapporteur in defense of the advantages for the Manaus Free Trade Zone, it is expected that the discussion on this topic will not be reopened in the Senate. Eduardo Braga has already actively participated in negotiations related to his status in the Chamber and has established a close relationship with the government and the President of the Senate. In addition to maintaining the Free Zone, Sudam and the North Development Fund, Amazonas managed to include a Sustainability and Economic Diversification Fund in the text of the reform.

Higher tax on beverages and cigarettes does not reach pesticides

The text of the reform established the implementation of a selective tax with regulatory purposes, which will focus on products that are harmful to health and the environment. As provided for in the PEC, this tax will be applied to alcoholic beverages, cigarettes and foods with excess sugar or salt. However, agricultural pesticides were excluded from this measure and will still receive a 60% reduction in the rate. Under the proposal approved by the deputies, the definition of this aspect will be made through complementary legislation, the result of negotiations conducted by the rapporteur in the Chamber with the agribusiness bench.

In the case of cigarettes and alcoholic beverages, no major changes are expected, since they have been taxed for decades at high rates of the Tax on Industrialized Products (IPI), as part of a public health policy. However, for other products with health and environmental risks, the implementation of the excise tax will likely result in a price increase.

In addition, the breakdown of the National Basic Food Basket, which will be exempt from taxes, will also be fixed by means of a complementary law. At this point, the agricultural sector will seek to expand the list of products that will benefit from the zero rate in the new taxation.