Tax reform may have greater transition – 06/06/2023 – Market

The tax reform may foresee a longer transition period to reconcile the implementation of the new system and the need to guarantee the maintenance of tax benefits granted by states and municipalities and which have already been validated by the National Congress until 2032.

In the mixed commission report presented in 2021, the forecast was that the migration to the new tax system would take place in six years – two years for the federal phase and another four years for the unification of state and municipal taxes.

According to interlocutors interviewed by the Sheetthere are discussions to extend this period to ten years, maintaining the two years for the unification of federal taxes and extending the second phase, which includes ICMS and ISS, to eight years.

Details are still under discussion, but the idea is that the guidelines of the report already indicate the guarantee of maintenance of tax benefits until 2032. The working group’s document will be released this Tuesday afternoon (6) in the Chamber of Deputies. The expectation is to vote on the PEC (proposed amendment to the Constitution) later this month.

The larger transition helps to dilute the validation bill, which would need to be shared or even funded by the Union in case of a faster unification of state and municipal taxes.

Preliminary calculations indicate that the account exceeds R$ 150 billion a year, the result of the unbridled granting of incentives by governors and mayors in the midst of the fiscal war. The definitive numbers, however, may be even higher, as there is little transparency about the granting of these benefits.

In Congress, there is an assessment that it is necessary to provide legal certainty to the contemplated companies, since contracts were signed in the expectation of obtaining these benefits. The Legislature itself ensured the extension of these incentives until 2032 in a complementary law of 2021.

The topic is considered extremely sensitive. Some governors even condition their support for the reform on a resolution of the problem of tax benefits. Others fear ending up with a bill for benefits granted by other states.

The solution under discussion among parliamentarians is to make a smooth transition of states and municipalities to the new system. Thus, they could maintain the current benefits without risking the account being left over to the other entities or to the Union.

The idea is that the migration of states and municipalities begins in 2027 and ends in 2034 (instead of ending in 2030, as predicted by the mixed commission). At the beginning, the pace of transition would be slow, accelerating towards the end of the period.

The extension of the transition of regional governments until 2034 would not be by chance. By then, the validated benefits will have ended, and it would be possible to accelerate migration in the final stretch (mainly in 2033 and 2034) without risking an invoice of tens of billions for the Union.

Details may still undergo changes, as the theme will be negotiated with the stands.

Although the solution represents a slower change in the tax system, the assessment of parliamentarians involved in the discussions is that the balance will still be positive, not only by making the approval of the reform feasible, but also by burying existing initiatives to extend these incentives for a while even bigger.

Without moving forward on this topic now, there is a risk that companies and sectors will implement an even greater extension, making any tax reform more difficult.

There is also care to avoid a very large bill for the Union, which will already have to inject resources into the FDR (Regional Development Fund). The fund will provide states and municipalities with instruments for granting new incentives from now on, given that the unification of rates in a IVA (Value Added Tax) makes the current model of exemptions unfeasible.

The amounts have not yet been finalized, but Congress is talking about a contribution of R$ 50 billion to R$ 60 billion. There are claims for the Union to fund this account alone.

The guidelines must also indicate the unification of the different taxes on consumption charged by the Union, states and municipalities in a dual VAT. The dual system means that a portion of the rate will be administered by the federal government, and the other by states and municipalities.

The working group should provide for a joint inter-federal agency to carry out tax compensation between states and municipalities, which will last for 40 years. It is a kind of invisible transition, in which there will be a redistribution of the collected resources to avoid sudden losses or gains over time.

As VAT will be dual, there will be a council for the Union and another for regional governments.

The members of the working group also decided to maintain the tax benefits of the Manaus Free Trade Zone, one of the points that was blocking the negotiations. The industrial hub provides for exemption or reduction of import tax and exemption or credit for IPI (Tax on Industrialized Products), among other incentives. The deadline was extended with the enactment of amendments and, now, the Free Zone is in force until 2073.

The aim is to preserve benefits for some products in the region, as well as encourage new economic activities.

Other special regimes will be preserved by the group, such as Super Simples. There will also be specific treatment for segments such as fuel, civil construction, banks and insurance companies.

Sectors such as education, health, public transport and agribusiness will have a reduced rate – called “balance” by WG interlocutors.

Agribusiness was one of the main poles of resistance to change, with the argument that an increase in the tax burden could generate food inflation and reduce the competitiveness of the sector in the international market. The leader of the ruralist group in the Chamber went so far as to say that the segment would not pay the tax reform bill.