Tax Reform is historic, but exceptions cause concern – 07/07/2023 – Market

The approval of the Tax Reform by the Chamber of Deputies in the early hours of this Friday (7) was a historic feat by the government of President Luiz Inácio Lula da Silva (PT), but the text needs to be improved, evaluate economists consulted by the Sheet.

Despite acknowledging advances in the unification of taxes and simplification of the system, and for seeing the government’s negotiation as positive —especially on the part of the Minister of Finance, Fernando Haddad, together with the parliamentarians—, they highlight a concern with the large number of exceptions created.

The fact that it is a historic approval does not mean that the text is good, ponders the chief economist at Warren Rena, Felipe Salto. Despite acknowledging Haddad’s victory, he considers that the text passed with “many and serious problems”, and that the Chamber of Deputies and its president, Arthur Lira (PP-AL), collaborated for this.

“There are several bad aspects: the Federal Council, estimated rates, poorly designed transition to the IBS (tax on goods and services), incentive compensation fund without clear limitation of Union contributions, numerous exceptions in relation to the reference rate, among others,” he says.

He adds that the Federative Council, which will manage the IBS and was the subject of controversy among the governors, is particularly worrying, not only because of the issue of autonomy, but also because of the “perverse” incentive generated in the return of credits to taxpayers.

“If it is going to be automatic and there is no guarantee of inspection, with a deadline and procedure, by the tax administrations, then a factory can be created to generate cold credits, derived from fraudulent banknotes. This needs to be understood in order to be corrected in the Senate”, he says.

For economist Zeina Latif, there may have been an exaggeration in the concessions and there was not an ideal design of a single VAT (Value Added Tax), with a single rate and total return via cashback, so that the benefits actually reach those who need it.

“The Council was not necessary and there was differentiated treatment for some sectors. But, despite all that, it was a very important step towards removing distortions that hinder our economic growth. Given the circumstances, the balance is quite positive and there is work to be done by the Senate to make the text more rounded, especially with regard to the return of tax credits.”

In the view of FGV (Getulio Vargas Foundation) economist Nelson Marconi, approval of the text is a very relevant step, especially in positive points, such as non-cumulativeness and collection at destination.

“But it is an incomplete reform. The fact that the government has left to carry out the reform related to taxation on income going forward takes away space to reduce taxation on services. If that other point had already been voted on, the rate on services could be smaller.”

He also assesses that the approval may result in an improvement in the economic scenario, by indicating a relief for the productive sector. “It helps, but it doesn’t solve it. The recovery depends on the drop in interest rates, on an expectation of increased demand.”

At the beginning of the week, a letter released by the trade union centrals emphasized the role that the tax system has in the country’s inequality and the importance of the country reforming in this sense.

This Friday, the CUT (Central Única dos Trabalhadores) released a note saying that “the next phase should cover topics such as large fortunes, profits and dividends and the progressivity of the IR table so that lower-income workers pay less tax”.

“I see it as a historic moment. The adoption of the VAT model, with a broad base, without full cumulativeness, few rates, incidence on destination and exemption on exports, has many positive effects for the country, reducing complexity and distortions. transparency and efficiency for our companies and economy”, says tax lawyer Breno Vasconcelos, also from FGV and Mannrich e Vasconcelos Advogados.

For the chief economist of MB Associados, Sérgio Vale, the approval of the text needs to be seen in a positive light, as it manages to reduce all the fiscal mess existing in the country. “But it is far from being perfect. Even though it has fewer rates, it has more exceptions than we would like, the cut has expanded and the number of segments has increased.”

Vale also considers that the creation of new loopholes in the future cannot be ruled out, which could further mischaracterize the project. “So many loopholes have already been placed that increasing exceptions in the future is not difficult. There is also the question of what the rate will be to accommodate all of them.”

One of the signatories of a manifesto released at the beginning of the week in defense of the tax reform, the former president of the Central Bank Arminio Fraga celebrated the approval. “It was a huge breakthrough,” he says. The manifesto already emphasized that there is no ideal reform, but that it was necessary to consider that it will have a very positive effect on the country’s productivity and growth.

In a note, the president of Fiesp (Federation of Industries of the State of São Paulo), Josué Gomes da Silva, said that the approval of the text is a victory for Brazil and defined the reform as one of the essential conditions to unlock progress and good -being social.

“It was a decades-long battle, which spanned several legislatures and governments. And finally it advanced to this superlative victory, expressing a unity of will in favor of Brazil of a robust majority of deputies, governors, mayors, congressional and Lula government technicians, with the decisive support of the productive sectors.”

“The proposal will certainly leverage the country’s growth and promote greater social equality”, highlights the president of the Cbic (Brazilian Chamber of the Construction Industry), Renato Correia. “We understand that the country needs to modernize, simplify and bring fairer taxation to the entire economy, allowing the country to have an environment conducive to development, with less bureaucracy and more efficiency.”