Tax Reform: states and municipalities can define IBS – 07/17/2023 – Market

The Tax Reform authorizes states and municipalities to define their own rates in the IBS (Tax on Goods and Services), a new tax that will be created in place of the current ICMS (Tax on Circulation of Goods and Services) and ISS (Tax on Services).

The format has been used by critics of the Reform to reinforce the artillery against the proposal, on the grounds that it nullifies the effort to simplify the National Tax System.

The argument is rejected by defenders of the text, who see limited possibilities for varying rates from one place to another. They also claim that the device ensures the autonomy of states and municipalities, something so rightly claimed by critics of the proposal.

There is also a non-negligible political cost as a barrier to imposing a charge higher than that practiced in the rest of the country —which is seen as an advantage or a problem, depending on the wing that analyzes the issue.

From a positive perspective, the political burden would contain the impetus of rulers to increase taxation on their taxpayers. From a negative point of view, there would be pressure to set a reference rate as high as possible to serve all entities without individualizing wear.

The PEC (proposed amendment to the Constitution) approved in the Chamber of Deputies provides for the unification of five taxes on consumption into two new ones, the IBS (state and municipal competence) and the federal CBS (Contribution on Goods and Services). The transition would start in 2026, with full migration expected in 2033.

The federal government has been required to point out how much the new tax rates should be, but the numbers are still kept confidential. Preliminary estimates indicated a charge close to 25%, when IBS and CBS are added, but the final charge will also depend on the scope of sectoral exceptions, which were expanded in the final stretch of the procedure in the Chamber.

The text says that, after the enactment of the PEC, a resolution of the Federal Senate will set the tax reference rate for each federative sphere, “which will be applied unless otherwise provided in a specific law”.

The specific law in question must be approved by the local Legislature and may define the charging level in its territory, even if this means a different rate from that applied in other places. There is also the option for states and municipalities to automatically link their rates to the reference stipulated by the Senate.

Technicians accompanying the discussions explain that the passage is important to guarantee federative autonomy, a principle enshrined in the Constitution. Today, this freedom already exists: each state or municipality defines the rate to be charged from taxpayers.

The difference is that, after the Reform, the choice will be made within the framework of a much simpler system than the current one, in which governors and mayors set numerous rates, differentiated according to goods, services or sectors.

The PEC expressly provides that the charge defined by the entity “will be the same for all operations with goods or services”, with the exception of specific or favored regimes provided for in the constitutional text itself. That is, even if the entity wants to adopt a higher or lower rate, it will be the same for all goods and services provided by the IBS.

In addition, technicians note that the governor or mayor who wants to raise the IBS rate in their territory will need to “bear the political burden” of this decision.

If the desire is to reduce the charge, the text prevents the resulting loss of collection from being financed indirectly by other entities through the federative transition — a period in which states and municipalities will compensate each other to avoid sudden fluctuations in revenues during the implementation of the Reform.

Economist and researcher Sérgio Gobetti, specialist in the tax area and who today works at the Treasury Department of Rio Grande do Sul, points out that the political burden of setting a rate above the reference tends to be even greater after the PEC, since the proposal changes the billing location from origin (where the good or service is produced) to destination (where consumption occurs).

“Today, when the ruler increases the rate, he taxes the consumption elsewhere, he is invading the consumption of citizens from other locations. With the Reform, he will literally be taxing the consumption of his citizens. The bread, the light bill, gasoline… This makes the tribute’s relationship with society more transparent and republican”, says Gobetti.

According to him, it is not true that the permission to change the rates nullifies the objective of simplifying the system. In his assessment, the expansion of sectoral exceptions generates more complexity than the authorization for states and municipalities to set their own general rates.

“The demand for an increase in the rate should be low, because the transition helps to ensure collection”, says the economist. Gobetti also says that the changes will be subtle and tend to follow a pattern. In municipalities, where the charge today is between 2% and 5%, intermediate values ​​would be expected. “There would be no more than 5,000 tax rates. In practice, there will be a maximum of ten tax rates, which is already exaggerating.”

The president of Comsefaz (National Committee of State Finance Secretaries), Carlos Eduardo Xavier, says that the authorization for each entity to set its rate is important to accommodate different needs. “The country has continental dimensions and very unequal regions. This possibility is fundamental for the autonomy of states and municipalities”, he says.

A critic of the Reform, the partner and chief economist at Warren Rena, Felipe Salto, warns that the different needs will precisely act as an incentive to put pressure on who will subsidize the Senate with the calculations of the reference rate —a competence delegated to the TCU (Tribunal Union Accounts).

“In the first place, despite the fact that the TCU has very good servers, it makes no sense for the control body to make that estimate”, criticizes him, who was also São Paulo’s finance secretary. “In second place, [mesmo com a autonomia]no state or municipality will want to change its rate, because it will apply to all sectors.”

For him, the risk of losing revenue will lead the entities to put pressure on the TCU in an attempt to remove the local political cost. “If what I think will happen happens, the tendency is for the reference rate to stay as high as possible, to [os entes] not have the burden of having a higher rate than the reference rate”, he says.

Salto defends the setting of a band, with a minimum and maximum for the rates of the new taxes, to be recorded in a complementary law that will regulate the Reform. The norm —which he calls the “new Kandir Law”— could also establish the basic precepts of the new tax, based on which state and municipal executives could set their rules, replacing the Federal Council.

The idea of ​​a band for IBS rates was defended by the Senate Reform rapporteur, Eduardo Braga (MDB-AM), in an interview with Sheet. The difference is that the rapporteur understands that the command must be included in the PEC itself.

“Perhaps I think it prudent to have a constitutional command of minimums and maximums in IBS and for CBS. If not, it will leave it to a complementary law, which is an infraconstitutional matter, with a lower quorum”, Braga told the report on the day in which which was made official in the report.

Economist Manoel Pires, coordinator of FGV Ibre’s Fiscal Policy Observatory, considers that the rates cannot be thought of nationally, since each state and municipality currently has a certain tax burden. Fixing a lock could, according to him, take away autonomy from the entities.

“If the PEC expands the exceptions, but establishes a maximum of 25%, this could generate conflict”, he says.