Tax reform report has dual VAT and impasses – 06/05/2023 – Market

Promise of different administrations that governed Brazil in the last decades, the tax reform enters a decisive period of negotiations in the Chamber of Deputies with the presentation, this Tuesday (6), of the report of the GT (working group) with the guidelines of the proposal.

The document prepared by the rapporteur, Deputy Aguinaldo Ribeiro (PP-PB), will indicate the general lines and points that could be the target of consensus after months of discussions. But the text of the PEC (proposed amendment to the Constitution) for voting in plenary still depends on new conversations to materialize.

One of the main points of impasse is the validation of tax benefits already granted by states and municipalities and which are guaranteed until 2032.

In the midst of the fiscal war of recent years, many governors and mayors granted substantial incentives via ICMS and ISS, which would lose effect in a unified taxation system as intended with the reform.

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 in a complementary law of 2021.

Incentives, however, are not necessarily symmetrical between states and municipalities. Some gave more and others less.

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.

Within the federal government, the assessment is that the issue “will have to be resolved”, but it is still far from an outcome.

According to different interlocutors, this is an issue that will be decided in the political negotiations in the coming weeks. One of the possibilities is to use resources from the FDR (Regional Development Fund), to be created in the reform, to pay for the validated benefits. In Congress, there is an assessment that the Union will need to inject resources to overcome this obstacle.

The final text must still be subject to negotiations in the coming weeks. The mayor, Arthur Lira (PP-AL), has signaled his intention to put it to a vote before the parliamentary recess, which begins on July 18. But he himself has already adopted a kind of vaccine and said he has no way of guaranteeing its approval.

Aguinaldo Ribeiro has said that the WG’s report will not be a representation of personal or government convictions, but rather an attempt to reconcile different views and increase its chances of approval.

The tendency is for the document to indicate the unification of the different taxes on consumption charged by the Union, states and municipalities in a dual IVA (Value Added Tax). 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 tax will be collected where consumption takes place (destination), replacing the current model of incidence at the place of production (origin). There will be a transition period until there is a complete migration to the new model.

The Ministry of Finance had a preference for a national VAT, in order to achieve greater simplification of the system, but it always left the door open for the negotiation of a dual VAT if this represented greater political support for the proposal —which is precisely the case. Governors and mayors are vehement in their defense of maintaining their autonomy in tax management.

After decades of failed attempts at reform and living with a system seen as “failed”, the economic team’s assessment is that the best tax reform is the one that is possible. The report with the reform guidelines must be the product of these political compositions.

In another arrangement to try to attract greater support for the proposal, the working group’s report should indicate the setting of a standard rate and reduced rates for specific sectors, such as health, education and public transport. There are also negotiations to contemplate sectors of agriculture and some foodstuffs.

“We are discussing. They are cutting-edge sectors, products, activities such as health, education, which agro or food products. These are the questions that we are going to debate”, said on Wednesday (31) the coordinator of the WG, deputy Reginaldo Lopes ( PT-MG).

The group has not yet hit the hammer on the number of rates, but one of the possibilities is that there are three: the standard rate, a reduced rate and zero rate. The values ​​would still depend on regulation by complementary law.

The discussion around the number of rates is related to a disagreement between congressmen and the Treasury on how to avoid an increase in taxation on products in the basic basket, which are currently exempt or with a lower burden.

The government defends the so-called “cashback”, a term in English that represents the return of the tribute paid in cash to the consumer. The extraordinary secretary for tax reform, Bernard Appy, has already said that the transfer could be made through a discount on the next purchase or through credit on the social programs card.

Parliamentarians, however, have shown concern about the model, as they understand that its implementation is complex. In addition, there is criticism of the fact that, in order to obtain cashback, even the most vulnerable families would first need to pay the tribute.

“Brazil would be the only place where the poor will have to have working capital”, criticizes deputy Mauro Benevides Filho (PDT-CE), former Secretary of Finance of Ceará and one of the members of the working group.

The reform guidelines must also include a differentiated treatment for the financial and insurance sector. There is still demand for a specific regime for civil construction.

The transposition of these agreements into the constitutional text, however, is a delicate point. According to technicians, a mistaken expression can become fertile ground for judicialization in the future – everything you want to avoid with a new and simpler system. Therefore, careful work is already underway to analyze which terms can be used to provide legal certainty to sectors benefiting from some type of treatment or reduced rate.

Another point of the report will be the creation of a selective tax, which does not necessarily have a collection purpose and is applied to goods and services whose consumption the government intends to discourage (such as cigarettes and alcoholic beverages).

The Simples Nacional, a simplified tax collection regime for micro and small companies, will be maintained, but companies will have greater flexibility in whether or not to adhere to the new VAT system – which can be advantageous for those who provide goods or services to other companies.

In a VAT system, the collection of the tax is made on the price of the merchandise, less production costs. This means that, in the new model, a micro and small company that supplies inputs to other companies will generate credits that its client can use to deduct taxes.

In the current Simples Nacional system, this company does not generate tax credits for its customers, which can be seen as a competitive disadvantage. There is no difference only when the sale is made directly to the final consumer.

There is still an impasse, however, involving the Manaus Free Trade Zone. There is already a decision to maintain benefits for the region, whose economy is very dependent on the industrial center. The possibilities, however, are still under analysis.