Tax reform must end distortions, such as the ‘tour’ of goods across the country; understand

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As a result of the tax war between states, as a result of the current tax model, companies choose to ship the product to locations that have nothing to do with delivery. This stage of the reform seeks to simplify billing and cut waste. The tax reform, approved by the Senate, should put an end to some curious distortions in the country’s current tax collection system. This is the assessment of analysts and the government team responsible for the reform. Among the distortions that must be eliminated are: Unnecessary ‘touring’ of goods around the country Questions about which products generate credits for companies Payment of taxes already included in the calculation basis of other taxes Difference in taxation between goods and services The reform has not yet become law . As the text approved in the Senate had differences in relation to what passed in the Chamber, deputies now need to re-analyze the proposal. This stage of the reform seeks to simplify the collection of taxes on consumption. One of the points is the replacement of 5 taxes by a Value Added Tax (VAT), which will be dual: that is, a federal VAT and a state VAT. The expectation of the government and economic analysts is that the reform will make Brazil’s tax system, currently considered chaotic and causing financial waste, more efficient. Distortions that must end Understand below some of the distortions that make Brazil’s tax model inefficient and confusing. They should end when the reform becomes law: ‘Tour’ of goods or invoices across the country One of the most costly distortions for the economy is the “tour” of products across the country, a consequence of current tax rules. Today, ICMS, a state tax, is charged at origin. In other words, where the goods are produced. This creates the so-called “presumed credit” when a product leaves one state for another, reducing the value and being paid in ICMS. Through this model, some companies obtain tax benefits just because products pass through certain states, even if no deliveries are made there. The result is trucks circulating unnecessarily on the highways, wearing down the asphalt and polluting the environment, increasing the total cost of the Brazilian economy. An even bigger distortion is when companies just send invoices to obtain the tax benefit, without the products even circulating through the states that grant the benefits. “For some companies, the merchandise goes to that state and, from there, goes to the final destination. Or it doesn’t even go there, there is an exit invoice from that state and from that state to another. These are triangular operations, the product passes through a certain state to have some tax benefit, which is generally a presumed credit. That’s why it’s called a tour”, explained Melina Rocha, former consultant at the World Bank and specialist in VAT. Furthermore, each state can define its tax rate, which generates competition between them, the so-called tax war. With the tax reform, taxes will be charged at the final destination, where the good or service will be consumed, after a transition period, and no longer at the origin. This would help to combat the so-called tax war. Congress needs to approve Tax Reform later this year, says Gerson Camarotti With the end of the tax war, production tends to be closer to places of consumption over time. However, some goods will still continue to be made in more distant locations to maintain, for example, the Manaus Free Trade Zone (ZFM). The site concentrates the production, for example, of motorcycles, smartphones, TVs, air conditioners and notebooks. Discussion about which products generate credits According to analysts, this is one of the main points that generate legal discussions in the current Brazilian tax system: which items produced by companies can generate credits for them. The so-called tax credits in the Brazilian tax system are granted to companies as a form of incentive for the production of certain goods or services. The productive sector has gone to court in search of these reimbursements from the Union and states, resulting in many processes that can be avoided with the adoption of federal, state and municipal VAT. Melina Rocha recalls that there was, for example, a legal discussion about whether sandpaper, used in industrial processes, could obtain PIS and Cofins credits, reducing the amount of taxes paid by companies, as well as whether plastic bags could also benefit from tax credits. . With the adoption of VATs in the tax reform, this discussion will no longer exist. This is because, unlike what happens today, VATs will be non-cumulative (taxes will not be applied to tax amounts already paid throughout the production chain). Thus, companies will be able to have credits for all taxes that have already been applied to the acquisition of inputs and previous stages of production, which eliminates the need for credits granted today. Taxes included in the calculation basis of others In the current system, taxes are charged “inside” other taxes. For example, the state ICMS is levied on the ICMS itself and also on PIS/Cofins. This means that there are taxes embedded in prices that serve as a basis for charging other taxes, which increases the total value of goods and services and makes it difficult to calculate the tax being paid. The special secretary for tax reform at the Ministry of Finance, Bernard Appy, explained that only Brazil, together with Bolivia, charges tax on the price of products and services “inside”. With the tax reform, it was defined that there will no longer be the possibility of taxes being levied on taxes. The only exception will be the selective tax, levied on alcoholic beverages, cigarettes, weapons and the extraction of oil and minerals (so as not to create distortions in the market). Read also: Understand the main points of the tax reform, approved by the Senate Tax reform allows fuel to be taxed with a ‘sin tax’, but the government rejects the idea Will tax reform impact condominium fees? See what experts say Difference in taxation between goods and services Another distortion pointed out by analysts is the difference in taxation between goods and services, something that, if only the economies with the most representation in the world are considered, only happens in Brazil. Here, products are taxed with the state ICMS, greater than 15%. And services are taxed by the municipal ISS, at a rate of up to 5%. To these taxes are also added the federal PIS and Cofins, of 9.25%. According to specialist Melina Rocha, this differentiation in rates between goods and services generates legal disputes by companies seeking to pay less taxes. This is because some of them claim that they actually offer services, instead of products. With the tax reform, the National Congress defined that value-added taxes, both from the government and from states and municipalities, will apply to products and services – without differentiation. Impact of the end of distortions According to a 2020 technical note by economist Bráulio Borges for the Fiscal Citizenship Center (CCiF), as the tax reform corrects these distortions, it is expected that it will have a positive impact on productivity and growth in Brazil. The expectation is that the reform will boost GDP by up to 20.2% in 15 years due to increased productivity and investments. “In addition to the direct effects, the tax reform could also result in some indirect effects, resulting from the reduction of country risk and the long-term interest rate related to the reduction in the public debt/GDP ratio in a scenario of higher potential GDP growth” , says the study by economist Bráulio Borges. Study by the Insper Tax Research Center (InsperTax) released in July this year, coordinated by economist Vanessa Canado, says that in 2019, tax litigation (judicial disputes), distributed in the administrative and judicial spheres, was equivalent to 75% of Gross Domestic Product (GDP). “In global terms, it was concluded that around 95% of this litigation would be impacted by the reform of taxes on consumption, considering the general characteristics of CBS and IBS: broad base of incidence, full non-cumulative, rate that does not distinguish sectors or types of goods and services, restriction on the granting of tax incentives, unified and computerized charging”, concludes the study. Special Secretary Bernard Appy assessed the tax reform, in addition to reducing costs and stimulating foreign investment, it also closes many loopholes for tax evasion by correcting distortions and simplifying tax collection. “It closes many loopholes, [utilizadas na sonegação] doesn’t close them all. No tax system in the world closes all loopholes. There are countries with simple VAT, such as South Africa, which have a ‘compliance gap’ [lacunas que geram perda de arrecadação] very low. The more confusing the system, the greater the possibility of evasion”, said Appy. With the simplification that the tax reform will bring, explained Melina Rocha, VAT specialist, the number of additional obligations (declarations) that companies will have will also be reduced. to present. “If you look at VAT, as it is calculated in other countries, it is very simple. The VAT declaration is three, four lines in Canada. Today, with the additional obligations of IPI, PIS, Cofins, ICMS and ISS, there are already five [declarações]. Imagine if the company is registered in 27 states, let alone for the ISS [dos municípios]”, said consultant Melina Rocha. Next steps Although the economic team, led by minister Fernando Haddad, expects the text to be fully enacted by the end of this year, congressmen do not rule out “slicing up” the proposal. This means dividing sections of the reform and enacting first those on which there is consensus between the Chamber and Senate. After the reform has been enacted, some points still need to be regulated by the National Congress, such as, for example, analysis of the basic food basket, ‘cashback’ and the definition of which products and services may have reduced rates, or will be under different regimes.

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