Tax reform is approved in the Chamber and should be enacted this year

In an extraordinary virtual session called for this Friday (15), the Chamber of Deputies definitively approved the final text of the proposed amendment to the Constitution (PEC) for tax reform. A previous version of the text had already received the approval of the House in July, but, as it underwent changes in the Senate, it had to undergo new consideration by deputies.

The voting score in the first round was 371 in favor against 121 contrary, with three abstentions. In the second round of voting, the score was 365 to 118. With approval, the text goes to promulgation.

The opposition tried to obstruct the vote, but upon realizing the consensus and the majority of parliamentarians in favor of the proposal, they decided to change the vote to no. The leader of Novo in the Chamber, deputy Adriana Ventura (Novo-SP), criticized the way the vote was conducted. “I regret this wasted vote, because we cannot vote on something that we cannot quantify or have clarity on, and according to the Senate’s text, there is clearly an increase in tax rates,” she said.

The opinion of the rapporteur, deputy Aguinaldo Ribeiro (PP-PB), was approved, who accepted most of the senators’ suggestions after negotiations with the aim of avoiding the return of the proposal (PEC 45/19) to the Senate. The proposal was put to a vote after a meeting between the presidents of the Chamber, Arthur Lira (PP-AL), and the Senate, Rodrigo Pacheco (PSD-MG), on Thursday afternoon (14).

“We did it in a way that there was no return to the Senate. We will speak out today about the opinion and will be ready to enact tax reform in the country”, said the rapporteur in the Chamber, before the vote.

To be enacted, the constitutional amendment text needed to be approved in both Houses in two rounds. In this way, if there is agreement on exclusions, they preserve an unmodified text that can be promulgated.

The government leader in the Chamber, deputy José Guimarães (PT-CE), stated in the vote that any changes proposed by the opposition do not prevent the measure from being enacted next week. “Even though we have highlights that the opposition will make, we will arrive at the vote with a rounded text ready for publication, because it was the biggest challenge to unify what we voted on in the Chamber and what was voted on in the Senate”, said Guimarães.

Supported by the government, the PEC’s main premise is the creation of a “dual” Value Added Tax (VAT) system, formed by the Contribution on Goods and Services (CBS), under the jurisdiction of the Union, and the Tax on Goods and Services (IBS), whose responsibility will be shared between states and municipalities. The current ICMS, ISS, PIS and Cofins will be abolished.

One of the main impasses between parliamentarians concerned the incidence of the Contribution on Economic Domain Intervention (Cide) on products that compete with similar products produced in the Manaus Free Trade Zone (ZFM). The charge was included by the PEC rapporteur in the Senate, Eduardo Braga (MDB-AM), with the aim of maintaining the region’s competitive advantage.

The revenue from the contribution would weigh on other states but would go to a fund that will benefit Amazonas. In the version previously approved by the Chamber, the additional charge to benefit the ZFM would be made through the selective tax, which is shared more equally among all states.

The solution found was to eliminate the mention of Cide and also exclude the provision that extinguished the IPI when the new contribution was instituted. As a result, at the end of the transition to the new model, the IPI rates will be reset to zero for all products, except those that have industrialization encouraged in the ZFM.

Among other points, the rapporteur of the proposal in the Chamber also removed from the final text some activities that would benefit from exemption from IBS and CBS, such as the acquisition of medicines and medical devices by non-profit social assistance entities and purchases by the public administration.

The creation of the so-called extended basic basket, which would have a 60% tax rate discount, was also removed from the PEC. Only the provision of a more restricted basic basket was maintained, which will have tax exemption.

Among the sectors that would have specific taxation regimes, the following were excluded:

• sanitation and highway concession services;
• air transport services;
• operations that improve the availability of the shared structure of telecommunications services;
• goods and services that promote the circular economy;
• operations with microgeneration and distributed minigeneration of electrical energy.

Ribeiro also removed from the proposal the need for a hearing and approval by the Senate of the president of the future IBS Management Committee, a body formed by representatives of subnational entities to manage the new tax. External control of the body by the courts of accounts was also left out, returning competence to the assemblies and legislative chambers.

The extension of the incentive for automotive manufacturers in the North, Northeast and Central-West regions, which had been excluded from the text by deputies and was reinserted by the Senate, was maintained by the rapporteur in the Chamber. The device, however, will be analyzed in the spotlight and may still be rejected.

On Wednesday, Lira met with the President of the Republic, Luiz Inácio Lula da Silva (PT), who would have accepted the overturn of a series of vetoes in exchange for the approval, later this year, of the tax reform and provisional measure (MP) 1,185 /2023. Both agendas are of interest to the Ministry of Finance.

Approved earlier, MP 1,185 deals with the incidence of federal taxes on state subsidies and changes in Interest on Equity (JCP).

What changes with tax reform

With a major change in the current model of taxation on the consumption of goods and services, the PEC is the first reform in the current Brazilian tax system since the 1988 Constitution.

Although they are managed at different levels of the federation IBS and CBS will have the same generating factors and calculation bases. Furthermore, they will comply with the principles of non-cumulative nature (billing in a single stage of the production chain) and collection at destination, in order to put an end to the “fiscal war” promoted by states to attract investment.

The IBS legislation will be unique for all of Brazil, putting an end to the thousands of laws that govern current taxes on goods and services in each municipality and each federative unit in the country.

Each tax will have a different transition period, with the full validity of the new model for taxpayers and consumers reached in 2033.

The transition from current taxes to national (CBS) and subnational (IBS) VAT will begin at the same time, in 2026, with rates of 0.9% in the case of federal tax and 0.1% in the case of subnational tax.

CBS should fully replace federal indirect taxes in 2027, when PIS and Cofins become extinct. IBS remains at a test rate of 0.1% until 2028. From 2029 and 2032, subnational VAT will replace ICMS and ISS at a rate of 1/10 more per year. From 2033 onwards, indirect taxes from states and municipalities will be fully replaced by the new tax.

The rules for the distribution of IBS between states and municipalities, in turn, will have a longer transition period, which will total 50 years, according to the approved text.

Brazilian VAT rate will be the highest in the world

The original idea of ​​the reform was to simplify consumption taxation, extinguishing or reducing as much as possible the number of tax exemptions or benefits granted to certain areas of the economy.

Pressure from representatives of different sectors, however, generated a list of exceptions, which should cause the standard IBS and CBS rate to increase, directly affecting sectors that were not on the list of beneficiaries.

The Minister of Finance himself, Fernando Haddad, calculated, based on the version of the PEC approved in the Senate, that, combined, the reference rates of the two taxes should reach 27.5%, which would already place the Brazilian VAT as the highest highest in the world, surpassing that of Hungary, which is 27%, and at least 70% above the world average and the most internationally adopted rate.

In the projections of independent analysts, however, the tax could be even higher. Warren Rena’s chief economist and former São Paulo Finance Secretary, Felipe Salto, for example, calculates that the level could reach 33.5%.

The percentage that will be charged in each of the taxes will still be defined through a complementary law that will regulate CBS and IBS.

Selective tax, cashback and funds for states

The text also provides for the creation of a Selective Tax (IS), of a regulatory and extra-fiscal nature, aimed at discouraging the consumption of certain products or services considered harmful to health or the environment. The list of products that must be surcharged, however, must still be defined by complementary law.

The PEC also opens up the possibility of refunding part of the tax paid to individuals with the aim of reducing income inequalities. The mechanism should be similar to what already occurs with ICMS in some states, where, by informing the CPF at the time of issuing the invoice, the taxpayer may be entitled to a credit for a discount on the payment of another state tax or even for transfer in current account.

The text provides more specifically for cashback options for low-income citizens on electricity consumption, the reversal of which can be made on the electricity bill itself, and on the purchase of cooking gas cylinders.

The reform will also create two financial funds aimed at supporting state governments, whose contributions will total R$790 billion over the next twenty years. The first will be a compensation fund for ICMS tax and financial-fiscal benefits, with the aim of replacing the current state incentives that today cause tax wars.

The second will be the National Regional Development Fund (FNDR), which will aim to reduce regional and social inequalities by delivering resources from the Union to the federative units.

IPVA, IPTU and ITCMD also change

Although the approved PEC focuses on the reform of consumption taxes, the text provides for some provisions that change taxation on wealth. One of the changes, for example, allows states to charge progressive IPVA rates due to the environmental impact of vehicles.

Another device includes water and air vehicles among the vehicles on which IPVA will be levied, which means that owners of boats and aircraft will start collecting the tax in the same way as car owners. However, agricultural aircraft and vessels used for water transport or industrial, artisanal, scientific or subsistence fishing are exempt from the tax.

In relation to IPTU, charged by municipalities, the text provides that the updating of the calculation base may be carried out by means of a decree, based on general criteria provided for in municipal law. Today, adjustments must necessarily pass through the Legislature to enter into force.

The reform also provides for changes in the Death and Donation Transmission Tax (ITCMD), which is the responsibility of the states. Today, each federative unit can establish its own rate, with a limit of 8%, and the possibility of tax exemption. The PEC provides for the tax to be progressive according to the value of the inheritance or donation transmitted, as is already the case in some states.

There is an expectation that, with the mandatory progressive system, the tax will increase in states where it is currently charged a fixed percentage.