Tax reform may encourage “pejotization” in services; understand

A new concern arose among lawyers with the tax reform approved in the Chamber: the possibility that many employees with a formal contract are encouraged by employers to work as legal entities. The phenomenon of “pejotization”, to escape higher taxes, has already been a trend since the Social Security reform, in 2019, which raised charges on companies, and may now be accentuated, especially in the service sector, which employs the most in the country and which will be the most affected by the changes in PEC 45.

The current stage of tax reform, focused on consumption, turns four taxes into two. The federal PIS and Cofins, the state ICMS and the municipal ISS cease to exist, in order to create two: the Contribution on Goods and Services (CBS), intended for the Union, and the Tax on Goods and Services (IBS), which will supply the cash of states and municipalities. The federal IPI (Tax on Industrialized Products) also ends, but will be replaced by the Selective Tax.

The big change in the reform is that, both in the manufacture of a product and in the performance of a service, the inputs, materials and other services used by the company will be able to generate credits for CBS and IBS, since their suppliers have already paid the same taxes when selling them. This is the logic of the Value Added Tax (VAT), the model that inspired the reform, and which is present in around 170 countries.

One of the arguments defended by the industry is that it will be able to outsource many secondary activities, since it will guarantee the use of credits more safely. Today, there are a multitude of PIS/Cofins and ICMS rules that prevent this.

In the case of services, the ISS, charged by municipalities, does not generate credit. PIS/Cofins, even in the non-cumulative system (which generates credits), is practically not used in services, as these activities have negligible expenditure on credit-generating inputs.

In the new system, services will also be able to take advantage of credits from CBS and IBS, but despite the significant increase in the tax burden of the sector, their activities will not have many opportunities for effective calculation of credits, to offset the taxes paid today on their own billing. The biggest “input”, and the one that brings the greatest cost to these companies, comes with paying employees. And the payroll does not entitle to any credit.

Market projections are that CBS and IBS together will be 25%, an estimate based on studies by the formulator of the reform, Bernard Appy, current secretary of the Ministry of Finance. But this percentage does not take into account the tax incentives to be granted to various sectors: education, health, finance, among several others inserted at the last minute by the proposal’s rapporteur in the Chamber, Aguinaldo Ribeiro (PP-PB).

Therefore, it is likely that common services, which cater to the middle class, are taxed at higher rates, which may be close to 30%. It would be the highest VAT in the world, higher than that of Hungary, at 27%, according to a survey carried out by Bichara Advogados.

Legal entities

To deduct this rate, companies would tend to make employees into PJs, an acronym for legal entities. The CBS and IBS collected by these could be deducted from the tax owed by the company in providing the final service, reducing its price.

“I see two problems. First, we eliminate formal work and all guarantees linked to employment: maintenance of salary, compensation in case of dismissal without just cause, unemployment benefit, additional third during vacations. A contract between legal entities can be revoked at any time without compensation. For the worker, therefore, it can get worse”, says Murillo Estevam Allevato Neto, a partner at the firm.

The second problem, according to him, is that in recent years the Federal Revenue Service and the Labor Court have been tightening inspections on pejotization.

The understanding is that this constitutes fraud, in order to pay less taxes, when hiring the legal entity involves a relationship of subordination, as occurs between an employee and a boss, with fixed hours and meeting goals, without the autonomy that a company would have in providing a service to another. “It is illegal if there is a bond of subordination. But is there enough structure to supervise everyone? This is a practice that will have to be observed”, says the lawyer.

Maria Carolina Torres Sampaio, partner and head of the tax area at GVM Advogados, considers that the transformation of employees into legal entities will grow, especially for employees with higher positions and salaries. “Thus, they would be paid as suppliers and the company would be entitled to the credit they collected as legal entities”, she says.

The lawyer comments that, in many situations, the relationship is much more like providing services than subordinate work. The dividing line is thin. But, according to her, the Revenue today tends to disregard valid and regular service provision, under the allegation of tax planning and evasion of social security funds.

“With the likely increase in people offering their labor via PJ, given the greater interest of companies in this system, the tendency is for the Revenue to be even more aggressive in inspections, complicating some valid service provision relationships. On the other hand, effective workers, who will be induced to pejoização, will suffer on both ends – they will lose labor rights and will end up suffering assessments from the Federal Revenue”.

The reform will now pass through the Senate and the rapporteur, Eduardo Braga (MDB-AM), has already signaled to interlocutors that he intends to do a fine-tooth comb on the incentives approved for numerous sectors by the Chamber.