Tax Reform: Lira wants to regulate by the end of 2024 – 07/22/2023 – Market

After obtaining a historic approval of the Tax Reform, the President of the Chamber of Deputies, Arthur Lira (PP-AL), tries to maintain influence over the next steps of the proposal in the Senate and aims to guarantee time for congressmen to complete the regulation of the new system by the end of 2024 – still under his management at the head of the House.

The regulation can only be made after the enactment of the PEC (proposed amendment to the Constitution) and encompasses thorny issues, such as how to calculate the rates of new taxes and the detailing of rules applicable to sectors and activities that have gained specific treatment, such as financial services, or favored (with lower taxation), such as health, education, transportation, among others.

The sensitivity of the topic is precisely what inspires a certain skepticism in a wing of the National Congress regarding Lira’s ability to achieve her objective. In 2024, parliamentarians will already be focused on municipal elections, and dealing with such controversial topics can cause wear and tear.

There is doubt whether legislators will be willing to vote on issues that could wreak havoc on their constituencies.

The forecast for the second half of this year is that the Senate will make adjustments to the text of the PEC, which will need to return to the Chamber because of this. Lira, according to people familiar with the matter, seeks to control changes in the proposal during discussions in the neighboring House and wants to maintain the narrative of being the godfather of the Tax Reform.

Faced with Lira’s performance, senators involved in the debate on the proposal intend to “play along” with the mayor. The idea is to close the processing of the PEC in Congress later this year.

But, even before the PEC is voted in the Senate, the discussion of the future value of the rates already mobilizes different interest groups, which try to escape from a higher charge. Close to the elections, the clash could get even tougher.

From now on, calculations that simulate the level of taxation under the new system generate political discomfort. As shown to Sheeta technical note from Ipea (Institute for Economic and Applied Research) estimated that the effective rate of the new Brazilian tax to tax the consumption of goods and services would be 28.04% —the highest in the world for a IVA (Value Added Tax).

The Ministry of Finance released a note to say that the study disregarded some factors, such as the effect of reducing tax evasion. On Wednesday (19), Minister Simone Tebet (Planning and Budget) took the president of Ipea, Luciana Servo, to a meeting with Minister Fernando Haddad (Finance) to clarify the agency’s projection.

In conducting the vote on the Tax Reform in the Chamber, Lira placed himself as a kind of guarantor of the proposal, pledging his political capital to obtain significant support and ensure the approval of a matter that has been skating in the Legislature for years.

The mayor called meetings with governors to resolve impasses involving the FDR (Regional Development Fund), which will fund future incentives for companies to replace the current mechanism of tax benefits, and the Federative Council, the body that will centralize the collection and distribution of resources from the new IBS (Tax on Goods and Services) to states and municipalities.

Lira also negotiated the advancement of economic proposals directly with Haddad. In the name of fulfilling his promise to vote on the PEC in the first week of July, he reversed the agenda of the Chamber, leaving the government’s priority projects for later — including the conclusion of the assessment of the new fiscal framework.

For this reason, approving the regulations for the Tax Reform in 2024 would be, for Lira, the ideal outcome for her mandate, with the achievement of a kind of seal of quality for having led the House in approving the biggest change in the tax system in almost 60 years.

The topic, however, is by no means trivial. In addition to the political complications, the government faces a series of points to be negotiated and discussed —in the PEC itself, which is still pending in the Senate, and in the regulation that will come later.

Specialist Melina Rocha, international VAT consultant, sees four main issues that need to be addressed via complementary bills (which need the support of 257 deputies and 41 senators to be approved).

According to her, they can be sent separately or together to facilitate processing. “Some of these projects can be grouped together, nothing prevents it. There is no need to have separate laws”, she says.

Government interlocutors also see four main themes, but say the decision on whether or not to bring them together in a smaller number of projects is a political decision “that has not yet been made”.

The first theme of the regulation, according to Melina Rocha, is the effective creation of the IBS, of states and municipalities, and the CBS (Contribution on Goods and Services), of federal competence. The two taxes will replace the current PIS/Cofins and IPI (Tax on Industrialized Products), all federal, in addition to the state ICMS and the municipal ISS.

According to her, this first regulation will need to establish the general rules of the two taxes, with criteria such as taxable event, calculation basis and situations in which taxation is not made (such as exports). It will also be necessary to detail the rules applicable to goods and services that received specific treatment in the PEC, such as fuel and financial services, among others.

Another stage of the regulation will need to detail the operation of the Federative Council, whose voting rules are already in the PEC, but may undergo changes. “There should be more detail in relation to the operation of the General Assembly of the Council. It will probably have an executive board responsible for managing this entity. How will this more management function be chosen?”, asks Rocha.

The expert also lists the need to provide in this legislation how the fiscal administrative process of the new taxes will take place and what will be the role of the Council in coordinating the performance of the tax collection bodies in the inspection.

A third axis of the regulation must deal with the distribution criteria of the FDR — even if the Senate decides to include in the PEC itself the description of the apportionment of funds between states. According to Rocha, the law should provide for more specific issues, such as transfer times and criteria for measuring the objectives of the development fund.

The fourth item would be the prediction of rules for refunding tax credits accrued in ICMS. “There is already a guideline in the PEC, for the abatement to be made in 240 months, but obviously the detailing will be done by law”, says Rocha.

She still sees two other ordinary laws, whose approval requires a smaller quorum (simple majority, provided that 257 deputies or 41 senators are present in the session): refund of credits accumulated by companies in PIS/Cofins and the CBS cashback system —mechanism to return to low-income families part of the amount paid in taxes on consumption.

According to government interlocutors, there is still a bill that should deal with the Selective Tax, which will focus on activities considered harmful to health and the environment.