Tax reform: ICMS benefit exceeds BRL 200 billion – 06/22/2023 – Market

ICMS tax benefits, the main state tax, should reach the mark of R$ 227.9 billion this year and pose a challenge to the progress of the tax reform proposal in the National Congress.

Governors want guarantees that the maintenance of part of these incentives until 2032, already approved by the Legislature in the so-called “convalidation”, will be respected. They also demand a robust fund, supplied by the Union, to maintain access to regional development policy instruments in the future.

The theme of benefits is at the center of the negotiation of two sensitive points in the reform: the transition period from state and municipal taxes to the new IVA (Value Added Tax) and the size of the FDR (Regional Development Fund).

How did you anticipate the Sheetthe transition period may be longer to accommodate the benefits already granted, provide legal certainty to the companies covered and dilute the impact of this point of the tax reform on public accounts.

A faster migration to the new system could require the Union to disburse compensation for the reduced incentive. Therefore, the transition of state and municipal taxes can be made over eight or ten years.

In the case of the FDR, the discussion is the amount to be injected by the Union annually so that states and municipalities can provide new benefits, since the design of the IVA makes it impossible to reduce isolated rates or grant credits to certain sectors.

In principle, the FDR does not mix with the validation of existing benefits, since its objective will be to finance future incentives. According to interlocutors, the Ministry of Finance has been talking about a value close to R$ 40 billion, but parliamentarians and governors want to reach at least R$ 50 billion.

In the federal government, there is also a desire to include some mechanism to “calibrate” the size of the FDR in case regional inequality falls over the years – which would reduce the need for the fund.

The mayor, Arthur Lira (PP-AL), meets this Thursday morning (22) with governors in an attempt to resolve these impasses.

The size of the current ICMS waiver was estimated by Febrafite (Brazilian Federation of State Tax Inspector Associations) based on data from the LDO (Budget Guidelines Law) projects of the State Executives.

The values ​​contemplate only what the governments themselves declared. In practice, actual tax waiver figures can be even higher, as some states avoid delivering their strategies in granting incentives, while others face difficulties in accurately measuring the benefits given in previous administrations.

“The number could be higher, because the states have their own disclosure criteria”, says the president of Febrafite, Rodrigo Spada.

On the other hand, not every BRL 227.9 billion bill is reached by the tax benefit validation law, approved in 2017, nor is it directly linked to the so-called “tax war”, in which states grant presumed credits in an attempt to attract companies to their territories, allowing them to collect less taxes.

According to technicians heard by the report, the approximate amount of ICMS benefits connected to the tax war should be around R$ 120 billion a year.

The estimated value for 2023 is greater than the R$ 160.3 billion expected in waivers last year. In the technical note, Febrafite estimates that about 60% of the amount for 2022 is related to the fiscal war between the states (about BRL 100 billion).

If the proportion is the same for this year, the number would be close to R$ 137 billion.

The need to maintain the validation of tax benefits until 2032 entered the federal government’s radar in the face of internal warnings about a “not small legal risk” of any negative impact of VAT on incentives being questioned in court.

The risk exists because, by gradually reducing the ICMS rates to increase the new VAT rate, the benefited companies will have a lower credit than the signaled when they made their business decisions and planned to carry out investments (under the expectation of a certain return ).

From a legal point of view, this would be considered a kind of breach of contract, leaving the door open for a flood of lawsuits. States that granted a large volume of benefits, such as Goiás, are pressing for a firm position on validation.

There is also an attempt to adopt a broad interpretation of the scope of the 2017 law, but the federal government understands that only benefits granted with a certain period and under conditions (such as making an investment) are validated.

In this scope, industrial incentives last until 2032, while non-industrial incentives begin to gradually fall in 2029. The idea of ​​a longer transition to VAT is to make the new tax gain more relevant space in collection only after this period.

The Ministry of Finance assesses that a faster transition of ICMS and municipal ISS would be the best scenario, but admits that this creates a problem for the validation of incentives. Reimbursing companies to escape the legal threat would be very expensive for the Union.

In addition, transferring these benefits to the structure of the new IVA or opening a loophole for the states to be able to arrange a last-minute extension of this validation is everything the federal government wants to avoid. Therefore, there is a diagnosis that Congress cannot waste the current chance of approving the reform.

“The states are much more vulnerable to pressure and collusion between political and economic power than the Union. It is more difficult to reach the president than the governor”, says Spada, from Febrafite.

In addition, according to him, businessmen cannot hold an “auction” with a federal tax, since the granting of benefits in this case would apply to the entire national territory. “In ICMS, each state has its own management of the tax. They manage to make an auction to maximize their interests”, he criticizes.