Tax reform: see the 8 main obstacles – 7/5/2023 – Market

The approval of the PEC (Proposed Amendment to the Constitution) of the tax reform depends on negotiations around political and economic issues. See some points that still cause disagreement.

1. Benefit for basic basket and rural producers

The proposal provides for a 50% reduction in the tax on agricultural products and inputs, which would keep the tax burden on the basic food basket unchanged. The sector wants a higher exemption (80%) and the inclusion of more products on the list.

The agribusiness bench also calls for an increase in the income limit for individual producers exempt from the new tax (from up to R$ 2 million to up to R$ 4.8 million per year).

2. Lower rate for some services

Service entities want the entire sector to be covered by a reduced rate, but the text provides for a 50% lower rate only for some segments, such as education and health.

The government says that 90% of companies will not be affected by the reform because they are in Simples, several sectors already have a lower rate and that service providers to companies will have a load reduction.

3. Federative Council with governors and mayors

One of the main challenges of the tax reform is to gather support from governors resistant to the federal council to be created by the reform to centralize the collection of the IBS (Tax on Goods and Services), which will replace the state ICMS and the municipal ISS.

The state of São Paulo, for example, defends a clearinghouse so that the states remain responsible for the collection, but now claims to agree with the council if states in the South and Southeast have greater decision-making power.

4. Divided Mayors

The National Front of Mayors, which represents large and medium-sized municipalities, positioned itself against the end of the ISS and asks that the tribute be left out of the reform.

The CNM (National Confederation of Municipalities), which represents the majority of mayors in the country, supports the reform and only asks for adjustments to the text, such as greater participation in the Federative Council, full reciprocal immunity in public purchases.

5. Development Fund

Another request is an FDR (Regional Development Fund) of R$ 75 billion per year, greater than the R$ 40 billion proposed by the Ministry of Finance and included in the current text. Resources will be used to grant regional incentives, in place of current tax benefits.

The states also differ on the criteria for distributing the fund – the South and Southeast want a rule that grants them a larger slice of the pie.

6. Entry into force of the new tax

The states also propose that the IBS enter into force in 2029 with a test rate of 1%, with the extinction of the ICMS in 2033, when the current tax benefits end. The proposal provides for a gradual transition (20% per year) between IBS and ICMS from 2029 to 2033.

7. Federal tax collection transition

The PEC provides for 50 years of federal transition, a period in which there will be a gradual redistribution of revenue between states and municipalities to avoid sudden drops in revenue.

The finance secretaries defend an interval of 45 years divided into two periods: In the first 26 years, the distribution criterion would follow the initial participation of states and municipalities in ICMS or ISS, decreasing year by year. Over the next 19 years, 95% of the resources would be distributed according to the place of consumption (destination), and another 5% would pay for the so-called “insurance” against revenue losses. In the PEC, insurance is equivalent to 3% of IBS revenues.

8. Manaus Free Zone

The PEC provides for special treatment for the region, to maintain the benefits until 2073, but Amazonas asks for the creation of an exclusive compensation fund for the region.