Tax reform: see the main points – 06/06/2023 – Market

In an attempt to launch the tax reform negotiations, the rapporteur in the Chamber of Deputies, Aguinaldo Ribeiro (PP-PB), presented this Tuesday (6) the general lines of the proposal and stated that migration to the new system may have a greater transition to accommodate tax benefits already granted by states and municipalities and which were validated by the National Congress until 2032.

The issue is one of the main impasses that may hinder the progress of reform in the National Congress. Information about the negotiation of a major transition was anticipated by Sheet.

The document with the guidelines was symbolically approved by the deputies and brings general principles that are consensus among parliamentarians. But the materialization of the text of the PEC (proposed amendment to the Constitution) still depends on new conversations with the benches.

According to Ribeiro, the mayor, Arthur Lira (PP-AL), said that the substitute will be appreciated in plenary in the first week of July. To be approved, the PEC needs at least 308 favorable votes, in two rounds.

When starting to read the report, Ribeiro defended the importance of approving the tax reform after decades of failed attempts. “This is not a government reform. It is not an ideological reform. It is not a right-wing reform, it is not a left-wing reform, it is a structural reform of the Brazilian State,” he said.

He also praised Minister Fernando Haddad (Finance), who since the transition has listed the proposal as one of his priorities in conducting economic policy. “I want to praise Minister Haddad, who has a real dimension of the importance of a tax reform for the country,” he said.

The Extraordinary Secretary for Tax Reform of the Treasury, Bernard Appy, accompanied the presentation of the report.

At a time of difficulties in articulating the management of Luiz Inácio Lula da Silva (PT), the leader of the government in the Chamber, José Guimarães (PT-CE), said that there will be a strong effort in favor of the approval of the reform. “We are going to mobilize our base, mobilize the leaders, mobilize the government to give political legitimacy and get votes for you to crown this extraordinary work,” he said.

One of the pillars of the WG report is the merger of PIS, Cofins and IPI (federal taxes), ICMS (state) and ISS (municipal) into one IVA (Value Added Tax), which will be called IBS (Imposto sobre Goods and Services). The system will be dual: it means that a portion of the rate will be administered by the federal government, and the other by states and municipalities.

A selective tax will also be created, which does not have a collection purpose and is applied to goods and services whose consumption the government intends to discourage (such as cigarettes and alcoholic beverages). Some parliamentarians also advocate applying it to curb polluting activities.

The report does not indicate what the rates of each of the new taxes would be, which will still depend on calculations carried out jointly with the Ministry of Finance.

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 unification of taxes, however, cannot serve as a pretext to end tax benefits granted by states and municipalities and which have already been validated by Congress until 2032. The Legislative assessment is that it is necessary to provide legal certainty to the companies contemplated. Therefore, the report indicates that they will be maintained, but without detailing how this will be done.

Interlocutors heard by Sheet stated that a longer transition period for ICMS and ISS is under discussion to reconcile the implementation of the new system and the need to provide legal certainty to these incentives.

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. Now, the discussion is to extend the second phase to eight years, totaling a transition of one decade, until 2034 (when the incentives will already have ended).

The larger transition helps dilute the validation bill, which would need to be funded by the Union in the 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.

According to Ribeiro, most of the benefits were granted via ICMS, although there are also incentives from the Union and municipalities. “Of course, the transition also serves to calibrate the amount of resources [para arcar com a convalidação]. As I anticipate the extinction of the tax, it is clear that I increase the cost”, confirmed the rapporteur. “Either it is a contribution, or it is a transition”, he added, admitting that the period of migration to states and municipalities may be longer.

Regarding the design of the IBS, the working group plans to set a standard rate and reduced rates for specific sectors, such as health, education, public transport and rural production. The working group also included the possibility of contemplating regional aviation.

There will also be specific treatment for segments such as fuels and lubricants, real estate, financial services, insurance and cooperatives.

Parliamentarians also want to avoid an increase in taxation on basic basket products, which are currently exempt or with a lower burden.

The report suggests measures to mitigate the so-called regressive taxation on consumption, which proportionally burdens lower income families. The government defends the so-called “cashback”, a term in English that represents the return of the tribute paid in cash to the consumer, an idea accepted by the WG report. The document does not detail the model to be adopted.

Despite these specific regimes, the report suggests “isonomic” taxation, which includes goods and services provided through digital platforms. “The taxation will reach even those headquartered abroad”, says the document.

Regional Development Fund

In an attempt to reduce resistance from states and municipalities, the report lists as a guideline the creation of the FDR (Regional Development Fund) to ensure the existence of instruments to encourage economic activity.

The report suggests that the FDR be funded “primarily” by Union resources. There are claims for the federal government to pay alone an invoice in the range of R$ 50 billion to R$ 60 billion a year. Governors and mayors of the South and Sugeste regions also want to access these funds, since the North, Northeast and Midwest already have other instruments for regional development, such as constitutional funds.

The document also recommends that this annual transfer be classified as a mandatory expense and remain outside the expenditure limit to be established by the new fiscal framework.

Appy confirmed that the Union will pay for part of the fund, but did not detail values. He also rejected the risk of an unlimited bill, as the expense will fall outside the new ceiling.

“First point, it is not an unlimited amount. The Union intends to support the Regional Development Fund, but it is not an unlimited amount. responsible,” said the secretary.

Favored tax regimes

The members of the working group decided to maintain the tax benefits of the Manaus Free Trade Zone, one of the points that was blocking the negotiations.

The Simples Nacional, a simplified tax collection regime for micro and small companies, will also be maintained, but the report suggests that companies have greater flexibility to adhere or not to the new VAT system —which can be advantageous for those who supply goods or services for other companies, since they could obtain credits from the inputs and deduct them from the tax to be collected.

Taxation of income and wealth

Although the main focus of the tax reform PEC is on consumption taxes, the report suggests the inclusion of some changes in the collection of state and municipal taxes on income and wealth, in order to make them more progressive and more flexible.

One of the recommendations is to extend the IPVA (Tax on Motor Vehicle Ownership) to water vehicles (such as yachts and speedboats) and air vehicles (such as private jets). The current interpretation of the STF (Federal Supreme Court) is that the tax is only levied on land motor vehicles.

For the ITCMD (Transmission Tax Cause Mortis and Donation), the group’s recommendation is to determine that the charge is progressive due to the value of the inheritance or donation, allowing a greater burden on those of high value.

The rapporteur also pointed out that the group will respond to a request by the CNM (National Confederation of Municipalities) and authorize the municipal Executives to update the calculation base of the IPTU (Tax on Urban Land and Property) by means of a decree, from of criteria previously established in municipal law.

THE TAX REFORM GUIDELINES

• PIS, Cofins and IPI (federal taxes), ICMS (state) and ISS (municipal) will be replaced by a IVA (Value Added Tax) and will be called IBS (Tax on Goods and Services)
• Dual system: a portion of the IBS under the competence of the Union and another shared between states and municipalities
• Adoption of a standard rate, with the possibility of reduced rates for health, education, urban, semi-urban or metropolitan public transport and regional aviation, as well as rural production
• Specific treatment for operations with real estate, financial services, insurance, cooperatives, fuels and lubricants
• There will be a Selective Tax, with the aim of discouraging the consumption of goods and services considered harmful to health and the environment
• Collection of the tax at the destination, where consumption takes place (destination), replacing the current model of incidence at the place of production (origin)
• Non-cumulative tax
• Taxation of goods and services offered on digital platforms, including those based abroad
• System of cashbackwith the return of part of consumption taxes to the most vulnerable portion of consumers
• Maintenance of the Manaus Free Trade Zone and Simples Nacional
• Creation of a Regional Development Fund to allow the granting of new incentives to economic activity in certain regions, supplied with resources financed “primarily” by the Union
• IPVA collection forecast on speedboats, yachts and private jets
• Authorization for mayors to update the market value of properties (for IPTU calculation purposes) by means of a decree, based on criteria established by municipal law. Today, city halls depend on the approval of the local Legislature to carry out this update

WHAT ARE THE NEXT STEPS?

The rapporteur for the tax reform, Deputy Aguinaldo Ribeiro (PP-PB), should hold conversations with the parliamentary benches in the Chamber and work on the substitute text for the PEC (proposed amendment to the Constitution) that will be voted on in plenary.

The mayor, Arthur Lira (PP-AL), signaled that the proposal should be considered in the first week of July. The PEC needs to be approved by 308 deputies, in two rounds of voting. After that, the text goes to the Senate, where it will have to be approved by 49 senators, also in two shifts.