Tax Reform: see where the holes are – 7/8/2023 – Market

The Tax Reform on consumption enters a new stage of debates after being approved by the Chamber of Deputies. Several sections of the PEC (Proposed Amendment to the Constitution) approved in a concentrated effort by the deputies, between Thursday and Friday (6th and 7th), will require attention during the course of the Senate.

Afterwards, the reform will still demand a new round of debates, when the time comes to elaborate the necessary complementary laws for the regulation of the changes.

This Friday, the rapporteur for the reform in the Chamber, Deputy Aguinaldo Ribeiro (PP-PB), said that he will support the senators in the new phase of appreciating the text. The President of the House, Arthur Lira (PP-AL), stated that he will be committed to approving the proposal when it returns to the deputies.

A Sheet highlights some topics considered sensitive.

‘LA GUARANTEE SOY YO’ FOR TAX CREDIT

With the reform, Brazil adopts the IVA (Value Added Tax), a type of non-cumulative tax. The company collects only the tax related to its product or service. All taxes paid on the acquisition of inputs, machinery and equipment for the business, as well as expenses with energy, telephony and transportation, are credited.

The taxpayer receives the credit corresponding to the tax paid in the previous step to deduct in the next step.

The text even predicted that the credit would be released within 60 days, but the final version does not define a deadline or system. The criteria will be defined in a supplementary law.

Some tax experts believe that credit recognition would be automatic. Others believe that the fund that will manage the resources of states and municipalities in the transition to VAT will be a guarantee for the recognition of credits in these entities. In the case of the Union, the future treatment is unknown.

Brazil has a long history of legal fights between companies and collection agencies because of the delay in releasing this type of credit or even the non-recognition of the right to receive it. In this environment, vagueness is considered a sensitive item by specialists.

“It’s a serious problem”, says lawyer Luiz Gustavo Bichara, who has been working in tax law for over 25 years and has been living with this problem.

“If there is no sanction expressly provided for by law, the normative provision will be useless. The same problem of non-return of credits, which already occurs today, may continue to occur.”

PUZZLE TO DEFINE DESTINATION

Another structural change that will take some work is to define the place where the consumption tax is collected, or, as the tax jargon says, where the “taxable event” for VAT taxation takes place.

The Brazilian model provides that the tax is for the entity of the federation where the headquarters of the company that provides the product or service is located. The reform transfers the collection to the destination, where the good or service is consumed.

In physical transactions there is no doubt about what destiny is. If a car is produced in São Paulo and sold in Sergipe, the tax is collected in the northeastern state. But in a world interconnected by the internet and with numerous virtual transactions, the discussion on the subject becomes more elaborate.

What is a destination for ticket tax purposes for a bus trip that starts in Salvador, Bahia, ends in Fortaleza, Ceará, but the passenger gets off in the city of Recife, Pernambuco?

How is the tribute of a chair bought over the internet in Brasilia by a person with a bank branch and credit card issue in São Paulo, but which will be delivered in Belo Horizonte, Minas Gerais?

The co-founder and director of the CCiF (Centro de Cidadania Fiscal), Eurico de Santi, says that the entity produced a technical note on the subject and hopes that it can help regulate the norm.

The work defends the deadline of up to 60 days for credit release and brings suggestions to define the collection location. The details can, for example, answer the questions above.

In the case of travel, he argues that it is better to consider the place of departure for charging the tax, since it is not possible to guarantee where the passenger will get off. With regard to the chair, the suggestion is to cover where the furniture was delivered.

LONG TRANSITION FOR STATES AND MUNICIPALITIES IS A RISK OF MORE SUBSIDIES

The consumption tax reform creates two VATs. At the federal level, the CBS (Contribution on Goods and Services) will be adopted, which will unify IPI, PIS and Cofins. The other entities will carry out shared management of the IBS (Tax on Goods and Services), which will replace the ICMS in the states and the ISS in the municipalities.

A transition period was established between 2026 and 2032, and, at the start, CBS will have a rate of 0.9%, and IBS, 0.1% for test purposes.

CBS goes into effect as early as 2027. IBS, however, will have a more gradual transition. ICMS and ISS will be reduced year by year, while the IBS will be increased. According to the schedule, the proportion will be 1/10 of IBS in relation to ICMS and ISS in 2029, evolving to 4/10 in 2032, before the extinction of the two taxes in 2033.

A compensation fund will ensure that states and municipalities maintain the same revenue recorded before the adoption of the changes. At the same time, a reduction in tax benefits linked to ICMS and ISS is expected. The tribute disappears, and the benefit disappears with it.

Experts, however, say that the deadline and systematics of the transition and the estimated values ​​for the fund make room for the permanence of tax benefits in states and municipalities, an old problem that fueled the fiscal war, and the reform should extinguish.

“They are promoting a slower reduction of the two taxes” says Felipe Salto, chief economist and partner at investment manager Warren Rena. ICMS, for example, he explains, will still have a rate of 60% of the current rate in 2032 and will only be extinguished in 2033.

“Does anyone believe that it will go from 60% to zero overnight? Why did they make this change? We can assume that, probably, to keep the ICMS as an instrument for granting presumed credit”, says Salto. “It would be chaos, as the compensation fund would exist to pay for the current incentives.”

In his report on the final text, Salto put the reform in a negative light.

EXCEPTION IS ALMOST RULE

Divergences are still large in the case of the list of sectors that will be the exception in the adoption of general VAT rates. There are those who are exempt, those who will have a zero or reduced rate, and even a group that will be able to opt for another type of taxation, which has not yet been defined — as is the case with the entire financial sector and civil construction.

Some exceptions were expected and make technical sense, explains tax specialist Vanessa Canado, coordinator of the Taxation Nucleus at the Center for Regulation and Democracy at Insper.

“Banks, for example, are usually left out because it is very complicated to apply VAT on the spread [diferença entre os juros pagos pelos bancos ao captar o dinheiro e a taxa que cobram para emprestar recursos]she says.

Experts point out that some exceptions also fall within the scope of social policies. The final text, for example, gives exemption or zero rate for urban rehabilitation of historic areas and urban reconversion. The creation of a national basic basket had already been framed in the same logic.

However, many exceptions are political in nature, to ensure support for the reform or to cater to lobbies from more organized sectors, which has led to excesses.

In the final stretch of the vote in the Chamber, the churches were able to extend benefits to their charitable and charitable organizations, such as day care centers, for example.

Health services, education, public transport and agricultural products and inputs received a greater discount, in the order of 40% in relation to the full rate, which has yet to be defined.

Tax experts fear that the greater volume of exceptions could raise the general rate of VATs, as an alternative to covering losses with so many benefits.