Tax reform faces resistance from governors and lobby – 07/04/2023 – Market

In a decisive week for the economic agenda of the government of Luiz Inácio Lula da Silva (PT), three priority proposals face obstacles to advance in the Chamber of Deputies amid merit resistance and also the demand for the release of parliamentary amendments.

If before the expectation was to line up the votes on the bill that deals with the Carf (Administrative Council of Tax Appeals), the new fiscal framework and the PEC (proposed amendment to the Constitution) of the tax reform, now influential leaders of the House are already privately evaluating that it will be difficult to carry out any vote this week.

The promise of a concentrated effort came from the mayor, Arthur Lira (PP-AL), who has had a good dialogue with minister Fernando Haddad (Finance) and also places himself as a kind of guarantor of the tax reform, as he wants to print this mark to his management in charge of the House.

The forecast was to start voting on the Carf project on Monday (3). The proposal is under a constitutional urgency regime and, therefore, has preference on the agenda of the Chamber. It is only after their vote that deputies can appreciate the new fiscal framework – which would also occur on Monday.

The lack of agreement on the text, however, has already postponed the Carf vote for two days. The rapporteur, Deputy Beto Pereira (PSDB-MS), presented his report on Monday night, without enough time for it to be analyzed by the other parliamentarians. Already on Tuesday (4), he recognized that the text would hardly be voted on in view of the need for adjustments.

“The process is still maturing. People need to know the text, make suggestions. There is one suggestion or another that is necessary”, stated Pereira.

As it is a PEC (proposed amendment to the Constitution), the tax reform is not achieved by the rule of urgency that impedes the progress of other proposals. From a technical point of view, Lira can change its schedule and reverse the votes, anticipating the tax reform.

From a political point of view, however, this inversion is considered delicate. There are still impasses involving excerpts from the text of the rapporteur, Aguinaldo Ribeiro (PP-PB), which make it difficult to now outline a scenario of approval until this Friday (7), as Lira announced and still wants.

In the government and in Congress, there is an assessment that the concentration of so many strategic agendas in the same week ended up disrupting the negotiations. Within the Executive, there were those who alerted to the danger of the concentrated effort ending up generating confusion, exposing the government on different articulation fronts at the same time.

A portrait of this tumultuous environment are the meetings of the parties themselves. A block representing 142 parliamentarians from parties such as the MDB, Republicans and PSD met to discuss the tax reform and CARF proposals. The meeting was attended by the respective rapporteurs and lasted about four hours, but until the beginning of the night there had still been no objective outcome on whether or not to support the proposals.

One of the main challenges of the tax reform is to gather support from governors who are currently resistant to the federative council to be created by the reform to centralize the collection of the IBS (Tax on Goods and Services), which will replace the state ICMS and the municipal ISS.

The governor of São Paulo, Tarcísio de Freitas (Republicans), is the main exponent of the resistance to the idea and defends a clearing house mechanism, according to which the states remain responsible for the collection, but later transfer the installments that fall to other states.

The rapporteur for the tax reform now seeks to build a middle ground between the two models, in an attempt to attract support from São Paulo. According to people involved in the discussions, there would be a withholding of the tax collected during the production process within the municipalities and states (such as in the acquisition of inputs), until the good or service is sold to the final consumer.

If all operations occur between municipalities in the same state, the clearing house would carry out the distribution of resources within the state itself.

If there are interstate operations, the process is a little more complex. Several experts have pointed out that the clearinghouse model creates a problem for taxpayers to collect their tax credits to offset the amount payable in taxes.

In this case, the intermediate proposal provides for the withholding of a portion of the tax amount from the federative council. This portion would work as a kind of guarantee for taxpayers to redeem their credits, even if the tax was collected in another state.

In addition to pressure from governors, the rapporteur has received complaints from business sectors. Agribusiness and services took a stand against the text.

Even after the rapporteur presents a list of segments contemplated by a reduced rate, the entrepreneurs of these activities say that they do not support the text without modifications. The entities’ complaint is that the proposal transfers the tax burden from industry and the financial sector to agriculture and services.

Agribusiness representatives had a meeting last Monday (3) with Ribeiro to ask for changes. “We understand that the report has evolved in some points, but not enough to have the support of the sector”, says Renato Conchon, coordinator of the Economic Nucleus of the CNA (National Confederation of Agriculture).

Ribeiro included in the text a device that authorizes rural producers with revenues of up to R$ 2 million a year to choose not to contribute to the IBS and CBS (Contribution on Goods and Services, which will replace PIS and Cofins), in a nod that, according to the rapporteur, includes 98.5% of individual rural producers in the country.

The CNA, however, wants this income limit to be increased to up to R$ 4.8 million. Agro also defends more clarity in the text on non-cumulative taxation.

Another claim is that the reduced rate for part of agricultural products, which in the proposal is 50% of the full charge, be even lower, equivalent to 20%, and apply to the entire sector. “From 35 countries with VAT [Imposto sobre Valor Agregado, modelo usado pela proposta]8 have exemption for agro –like Canada, Mexico and the United Kingdom”, says Conchon.

The rapporteur’s text provides for a half tax on agricultural, fishing, forestry and extractive plant products in natura, in addition to goods included in the basic food basket. Such a list would still leave out a series of products, defends the CNA.

The president of the FPA (Agricultural Parliamentary Front), deputy Pedro Lupion (PP-PR), says that he has been talking constantly with Lira and the proposal’s rapporteur in search of adjustments to the text, although he considers the postponement of the vote as an ideal scenario.

“We will never accept an increase in taxation on agro, obviously […]. We do not accept the reencumbrance of the basic food basket”, said Lupion at a meeting of the FPE (Parliamentary Front for Entrepreneurship), which received the Secretary of Finance of São Paulo, Samuel Kinoshita, and the governor of Goiás, Ronaldo Caiado, two other critics of the proposal.

Lupion called cashback, a tax-return mechanism for low-income people, a “complete utopia”. “[É] the housewife paying more under the government’s promise to return that money, something we know will never happen,” he said.

The service sector has also been emphatic against the text and claims to have had no dialogue with Aguinaldo Ribeiro. “It is a lost opportunity if this is approved”, says Luigi Nese, president of the CNS (National Confederation of Services).

One of the main arguments of the sector is the risk of increasing the tax burden. However, the government, the rapporteur and specialists in favor of the reform claim that a good part of the service companies are in the Simples Nacional – which will not be changed by the PEC. Others are in the health, education and public transport segments, which were covered by the reduced rate of 50% of the full charge.

Even the services that are impacted by the new tax will, on the other hand, benefit from the possibility of writing off credits that cannot be redeemed today. Taxes collected on the electricity bill, for example, can be used by companies to reduce the amount to be collected on their sales.

The rapporteur even predicted in his opinion that the government needs to submit a proposal to reform the Income Tax and that the collection from these changes “may” reduce the payroll. But the proposal did not please the CNS.

“Do you think it’s sensible? We’re going to increase the Income Tax and thus relieve the payroll? It’s irrational”, says Nese.

Before, the representatives of the area defended the exemption of the payroll based on the recreation of a tax along the lines of the former CPMF – an idea defended on several occasions by the then Minister Paulo Guedes (Economy) and his team, but which was the target of resistance until the then President Jair Bolsonaro (PL).

Faced with the difficulties of the idea, the CNS now hopes to articulate and approve a change in the text so that VAT has an even higher rate so that the resources are allocated to the payroll exemption.