States give up R$1 for every R$5 of ICMS due to tax benefits – 12/09/2023 – Market

The states and the Federal District gave up 21.6% of gross ICMS revenue last year through the granting of tax benefits, according to the most recent edition of the Financial Bulletin of Subnational Entities, released by the National Treasury.

This means a waiver of R$1 for every R$5 that could be collected from the main state tax. The total impact of the incentives was calculated at R$211.2 billion.

There are states where the weight of benefits is even greater.

In Amazonas, with the Manaus Free Zone, ICMS waivers reached 52.4%. In Santa Catarina, the proportion was 37%. Federal District, Mato Grosso and Goiás come next, giving up around a third of their revenue in favor of companies and sectors.

The Treasury’s calculation considers the sum of waivers in relation to what would have been collected by the state if the incentives did not exist. This is called gross tax receipts, before grants.

The ICMS tax benefits are at the center of two strategic agendas for the economic team: Tax Reform and MP (provisional measure) 1,185, which deals with the taxation of profits from companies covered by state incentives unrelated to investments.

The most structural measure is the Tax Reform, which aims to put an end to the so-called fiscal war, characterized by the race by states to attract companies by granting generous incentives.

Studies show that the practice did not boost activity to the expected magnitude and served to waste the entities’ revenue.

With the migration to the new VAT (Value Added Tax) system, the ICMS will be extinguished and, with it, its incentives. The logic for promoting economic activity will also change, becoming dependent on a fund with budgetary resources.

Until then, however, the federal government has already promised R$160 billion (in today’s values) to reimburse companies that received benefits for a fixed period and under conditions (with compensation) and were negatively affected by the reform transition.

Not all incentives will qualify for federal compensation. Only 48.1% of resignations have a fixed term, and even within this group it is necessary to observe which ones were validated by the National Congress.

Even so, if the amount is insufficient, the PEC (proposed amendment to the Constitution) obliges the Union to bear the excess cost of reimbursement.

Economist Cristiane Alkmin Schmidt, a consultant at the World Bank, assesses that the ICMS tax exemption is quite high. “The fiscal war was very harmful to state coffers.”

According to her, when few states granted incentives to attract investment, the economic impacts may have been positive. But, when others equalized the benefits, only the corrosive effect on revenue remained.

Schmidt, who headed the Goiás Finance Department between January 2019 and April 2023, states that “the lobbies are very big.” “There is a lot of pressure on the governor and the secretaries,” he says.

“It is hoped that, with the reform, there will not be a fiscal war as it exists today. It may exist in the sense that governors may want to make public policy, but it will be transparent in budget laws”, he states.

A Sheet looked for the Finance departments of the states with the five highest waiver rates. Amazonas, Distrito Federal and Mato Grosso did not respond.

The Goiás Economy Secretariat stated that it has made “an important reduction” in its tax benefits since 2019.

“A general review of the incentive policy was carried out, which resulted in relevant changes to tax legislation, reducing the amount of revenue waived, especially in benefit programs aimed at the industrial sector,” said the body in a note.

According to the secretariat, since then, incentives in Goiás have remained stable, a trajectory considered important to “maintain an environment of legal security and predictability” for companies. The ministry also attributed positive results to growth and employment in the state to the policy.

The Santa Catarina Finance Department said, in a statement, that incentives have a “strategic role” in attracting investments, making companies competitive, promoting specific sectors and reducing prices of some products “with a social character”.

“A large part of the incentives does not correspond to revenue that was no longer collected, since the benefiting companies would not be in Santa Catarina if they did not have the benefit”, said the ministry.

The body also stated that local benefits “are conditioned on investment projects and job creation in the state” and that it launched, at the end of March, a program to review waivers “that have already fulfilled their role and are subject to adjustment” , with potential savings of R$1 billion.

Impact of ICMS waivers on federal revenue is in Haddad’s sights

In the short term, Minister Fernando Haddad (Finance) is seeking support from the National Congress to stop the negative effect that part of the ICMS waivers have had on federal revenue.

Companies have the right to deduct from the profit tax calculation base subsidies linked to investments to increase their production capacity.

The problem is that companies also deduct subsidies linked to funding, reducing the Union’s revenue — unduly, in the view of the Ministry of Finance.

“Where does this money go? In many cases, it goes directly into the pocket of the company’s partner”, said the Secretary of the Federal Revenue, Robinson Barreirinhas, in an interview at the beginning of September.

For the government, it is as if the states were giving an incentive with someone else’s hat — a loophole that the Treasury wants to close with the approval of the MP.

The measure does not interfere with state benefits, but prevents funding subsidies from being deducted from the federal tax calculation base. The expectation is to raise R$35 billion with the initiative in 2024.

The Treasury bulletin sheds light on the size of the incentives involved and their main characteristics.

According to the document, 51.9% of ICMS waivers have an indefinite period, that is, they have no deadline to end. Although it is still a significant amount, it is a lower percentage than that seen in 2021 (59%).

Regarding the modality, the predominant format is the granting of presumed credit (49.4%). Through this instrument, the state grants a credit of a certain amount that companies can use to reduce the tax to be collected.

This is an incentive that is simple to implement, but which, according to the Treasury, can generate inefficiencies in the efficient allocation of productive resources.

Another 21.7% of ICMS waivers are granted via tax exemption. There are also benefits from changing the calculation base (20.6%), changing the rate (3.4%) and others (4.8%).

The manufacturing industry is the main beneficiary of tax incentives, with 46.1% of the amounts involved. Next is the segment of commerce, repair of motor vehicles and motorcycles (33.2%). Special regimes account for 8.2% of waivers.

In addition to the waivers, ICMS revenue in states in general was also negatively affected in 2022 by the cut in fuel rates, approved in federal law with the support of the Jair Bolsonaro (PL) government on the eve of the election.

On average, there was a real drop of 3.2%. However, there was quite heterogeneous behavior between states.

While Santa Catarina still achieved an expansion of 8%, Rio Grande do Sul recorded a 13% drop in tax collection compared to 2021.