Tax reform: cashback for Manaus Free Zone – 05/28/2023 – Market

The solution for the Manaus Free Trade Zone within the tax reform could involve the creation of a “cashback” so that companies can be returned, in cash, the value they currently have in the form of tax benefits. This is one of the pillars of a proposal for the region being prepared by the CCIF (Centro de Cidadania Fiscal), the entity responsible for one of the reform texts under discussion in Congress.

Currently, there are several tax incentives in the region. Some based on four taxes that will be extinguished with the reform: the federal PIS, Cofins and IPI and ICMS, a state tax.

CCIF director and former minister Nelson Machado told Sheet that the devolution model is more transparent and gives more legal security to companies in the region, by replacing a system that is incomprehensible to many. “What the CCiF proposes is to create a model that replaces this paraphernalia with a clear, auditable and calculable flow.”

The idea is that the Industrial Pole of Manaus is treated as a region “outside Brazil” from the point of view of the new IBS (Tax on Goods and Services). As a result, its imports and exports (purchases and sales to other countries) would be completely exempt from the new consumption tax.

Sales of inputs from other regions of Brazil to the Free Zone would be treated as exports, with the right to a tax credit for the supplier, which means total exemption.

Sales of products from the region to the rest of Brazil would be taxed with IBS-Importation, collected by the buyer. The company in Manaus does not collect anything.

This design still does not guarantee the tax advantage for the region. For this reason, the CCiF proposes to return part of the collection of the new tax to local companies.

The cash refund will be equivalent to the incentives with the taxes that will be replaced, calculated as a proportion of the value of sales to other regions of the country.

Machado explains that this is different from fully refunding the tax on these sales, which would generate a loss of revenue greater than the current tax benefit.

CCiF is building a devolution calculation model that will be presented through a technical note. It will be up to the political actors to follow this suggestion or not or to improve the proposal.

The entity proposes that the cost of the return be shared between the federal government and the states, but states that the way in which this will be done is a political decision. The same happens with the application of the formula to define the cashback: a calculation can be made by company, sector, company with the same type of benefit or even a general average.

The current counterparts of companies to have the tax benefit, such as resources for the University of the State of Amazonas, would be deducted from the cashback budget.

The PECs (Proposals for Amendments to the Constitution) that deal with the reform foresee that the special rules for the Free Zone will be created later, by means of a complementary law.

“This does not need to be in the PEC, but it helps to unlock the discussion. It shows that it is possible to build a model that guarantees the competitiveness of the Manaus industrial hub”, says Machado. “Cashback comes in to guarantee the region’s competitive edge.”

Free Zone until 2073

The CCIF director states that the region’s development model cannot end overnight and that many companies have made investments based on the current tax system. The institution draws a formula based on what currently exists and says that the decision to reduce or maintain these rules is a political matter.

The entity’s original proposal was to end the differentiated tax treatment and make compensation through the transfer of resources to the region, but this solution proved to be politically unfeasible.

The Manaus Free Trade Zone accounts for 7% of the tax incentives classified by the Federal Revenue Service as tax expenditures. It is among the five biggest benefits, with an estimated waiver of around BRL 30 billion for 2023 in federal taxes. The benefits of the region are effective until 2073.

In April, CIEAM (Industry Center of the State of Amazonas) and Abraciclo (association of motorcycle and bicycle manufacturers) released a document with three proposals to be incorporated into the tax reform.

They ask for the maintenance of the IPI until 2073 for products manufactured in the Free Zone, favored treatment in the new taxes on consumption (with exemptions, presumed credits and reductions in the calculation base, individually or combined) and the creation of a Constitutional Bioeconomy Fund.

A new tax reform proposal should be presented in early June by deputy Aguinaldo Ribeiro (PP-PB). The text will replace the current version of PEC 45 and may be voted directly in the plenary of the Chamber, to be later analyzed in the Senate.

The Ministry of Finance and the mayor, Arthur Lira (PP-AL), believe that the text should be approved by the House before the parliamentary recess in July.

One of the ideas of the tax reform is to do away with virtually all exemption mechanisms by product. They would be replaced by a system in which the government charges everyone and returns the money to a taxpayer with certain characteristics (the poorest or companies in the Free Zone, for example). It is called personalized taxation or “cashback”.

This model is used in several countries and is also being tested in Rio Grande do Sul. Returns can be made in real time, in advance (a supplement to Bolsa Família, for example) or later, as a kind of Nota Fiscal Paulista (SP) or Nota Legal (DF).

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Free Zone in numbers

41,773
Companies registered with Suframa*

18,054
Companies registered in Amazonas

430
Large industries in Manaus

107 thousand
Jobs in these big industries

412 thousand
indirect jobs

2.2 million
Manaus population

BRL 158 billion
Billing of the industrial pole of Manaus in 2021

Source: Suframa. *Benefits have been extended to an area that includes the states of Amazonas, Acre, Rondônia and Roraima, and the cities of Macapá and Santana (Amapá)

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