Tax Reform: see how each sector is burdened – 07/25/2023 – Market

The approval of the Tax Reform should ease the burden that currently falls on segments such as industry, accommodation and food, but should raise the rates charged on civil construction and a good part of services, shows a study by Itaú Unibanco obtained by Sheet.

The redistribution of burden between sectors is one of the most sensitive themes of the Reform. The fear of high rates led to a race for exceptions and specific treatments in the processing of the PEC (proposed amendment to the Constitution) in the Chamber of Deputies. The discussion tends to gain strength again in the Senate.

To measure the impact of the IVA (Value Added Tax) model on each sector of the Brazilian economy, Itaú analyzed the text approved by the Chamber and calculated the total rate of the new taxes on consumption. The report is signed by economists Claudia Bruschi and Pedro Schneider.

In bank accounts, the charge can reach 27.5%, already including the federal CBS (Contribution on Goods and Services) and the IBS (Tax on Goods and Services) of states and municipalities, in addition to other elements provided for in the Reform.

This would be the necessary rate to keep revenue constant as a proportion of GDP (Gross Domestic Product). Experts use data disaggregated by sector from official sources such as the Federal Revenue and IBGE (Brazilian Institute of Geography and Statistics) to make the estimates.

The calculations already consider possible cases of reduced rates, necessary corrections due to the participation in the Simples Nacional companies sector (whose load will remain the same), exports (which will be exempt from the new VAT) and the current degree of informality in the economy (a measure of those who do not collect taxes as they should).

“We emphasize that the rate may be lower, if there is an increase in the degree of compliance and formalization”, says the report.

Based on these assumptions, Itaú estimates that the sectors with the greatest increase in load will be civil construction, technical activities, water and sanitation, domestic services, administrative activities and extractive industry. Taxation on these activities tends to rise by 8 percentage points as a proportion of revenue. In some cases, this could mean triple the current charge.

Even activities benefiting from reduced rates, such as health, education and transport, would have some increase in burden, albeit to a lesser extent.

However, the bank makes two caveats that may lead to variations in the final result. “At the company level, it is possible that tax benefits, special regimes and structure (for example, a company can be in more than one sector) can generate substantially different results”, says the document.

Another important point is that companies also pay taxes on their profits, which can lead to load variations depending on the sector and revenue after the Reform.

The accommodation and food segment, currently with one of the biggest burdens on its revenues, would remain in the lead, despite an estimated relief of 8 percentage points. The sector is labor-intensive and has a short production chain — which makes it less able to take advantage of tax credits paid on the purchase of inputs.

Other activities should have a load reduction with the Reform, such as the transformation industry, electricity and gas and agribusiness. They should benefit from the greater possibility of deducting these credits or from tax relief on exports.

Economist Claudia Bruschi, one of the authors of the Itaú study, says that it is not a matter of pointing out “losers and winners” with the Reform, but measuring and pointing out the possible results of the approval of the PEC.

“We are not trying to close a number, saying that there will be a sectoral increase of so many percent. Here in Brazil, the mix of sectorial composition between Simples, real profit and [lucro] presumed [diferentes regimes tributários usados pelas empresas] it’s quite different. We just wanted to give a qualitative degree of which sectors could be more impacted or less impacted within the Reform”, she says.

In the bank’s estimates, the increase in load is more likely to occur on companies that earn up to R$78 million a year and currently pay a lower rate of PIS/Cofins (3.65%), but without the right to deduct credits obtained from the acquisition of inputs (called the cumulative regime). According to Itaú, declarations of this category to the Federal Revenue account for approximately 10% of companies, employment relationships and gross revenue.

This does not mean, however, that the final balance will be negative. “We looked at a lens in terms of the rate, but in terms of the indirect result, when talking about increased productivity and, consequently, GDP, economic growth, everyone, in the end, will have a positive economic impact”, adds Bruschi.

The government itself has argued that the approval of the PEC can boost economic growth, which would bring benefits to all segments. There is, however, no official disclosure by the Ministry of Finance that measures these impacts and the consequences on the tax burden of the sectors.

In recent weeks, another study on the impacts of Tax Reform caused controversy. As shown to Sheeta technical note from Ipea (Institute of 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 VAT.

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.

Bruschi, from Itaú, states that the rate may in fact be lower than the 27.5% estimated by the bank, but the study illustrates the effect of the Reform if the current level of informality is maintained.

“We see that there is a possibility, yes, of reducing both the [falta de] compliance with the level of informality. So, there could be some stimulus for you to increase this, and it would be a much more positive result for the economy”, he says.