Tax reform: Union can afford more than expected – 06/23/2023 – Market

The Union may have to cover a bill greater than the R$ 160 billion already provided for in the PEC (proposed amendment to the Constitution) of the tax reform to offset the tax benefits granted by states and which are guaranteed maintenance until 2032.

A device inserted in the text foresees that “the Union must complement the resources” in case of insufficiency of the so-called Tax or Financial-Tax Benefit Compensation Fund.

The fund will receive gradual contributions from the federal government over eight years. The sum will reach R$ 160 billion.

The amount will be used to reimburse companies covered by incentives that are negatively affected by the reduction in ICMS rates in the transition that will take place between 2029 and 2032. The measure is necessary because the benefits will not be transferred to the new IVA (Value Added Tax), and the losses could be challenged in court by the companies.

The federal government today has a notion of the magnitude of the incentives to be compensated, but the exact figure is still unknown, since each state has its own criteria for calculating the numbers.

For this reason, there are technicians who see the device as a kind of “blank check”, forcing the Union to pay a bill much higher than that indicated in the PEC.

The federal government’s view, however, is that this is a “calculated risk”, since the cost should not be much higher than the amount proposed by the Union for the tax benefit validation fund (R$ 160 billion). The size of this risk, however, is kept confidential due to the sensitivity of the issue for the negotiations.

Some protection locks were inserted in the text in an attempt to shield the National Treasury coffers against an unwanted surprise in the conduct of this process.

Only tax benefits granted for a certain period and subject to conditions (compensation, such as making an investment) will be offset. The reimbursement also only applies to incentives given until May 31, 2023.

In addition, in practice, the fund financed by the federal government will have to pay for benefits enjoyed for only four years, from 2029 to 2032, a period in which ICMS rates will be gradually reduced.

In this interval, non-industrial incentives will already be in the reduction phase, as determined in Complementary Law 160, approved in 2017 and which ensured the validation.

The PEC also provides that a complementary law may establish criteria and limits for determining the level of benefits, in addition to procedures for the Union to analyze compliance with the requirements by companies that claim compensation.

According to interlocutors, the device that determines the supplementation of resources was agreed between the rapporteur, deputy Aguinaldo Ribeiro (PP-PB), and the Ministry of Finance, which is interested in enabling a faster transition from ICMS to the new tax system.

Without the benefits compensation fund, the technicians’ assessment is that it would be very difficult to start the migration before 2033, when the incentives achieved by the validation law would be extinguished.

The biggest fear of the federal government is to overextend the transition for states and municipalities, opening space for lobbies that seek the extension of these benefits, disrupting the attempt to simplify the system.

Some governors tried to put pressure in this direction during the negotiations. The rapporteur for the PEC, however, included a kind of vaccine and expressly predicted in the text that “it is forbidden to extend the deadlines” for validation provided for in Complementary Law 160.

The need to maintain the validation of tax benefits until 2032 entered the federal government’s radar in the face of internal warnings about a “not small legal risk” of any negative impact of VAT on incentives being questioned in court.

The risk exists because, by gradually reducing the ICMS rates to increase the new VAT rate, the benefited companies will have a lower credit than the signaled when they made their business decisions and planned to carry out investments (under the expectation of a certain return ).

From a legal point of view, this would be considered a kind of breach of contract, leaving the door open for a flood of lawsuits.

As shown to Sheettotal ICMS waivers should reach the mark of R$ 227.9 billion this year, according to an estimate by Febrafite (Brazilian Federation of State Tax Inspector Associations) based on data from the LDO (Budget Guidelines Law) projects of State executives.

Not all of this value, however, is achieved by the law of convalidation of tax benefits, nor is it directly linked to the so-called “tax war”, in which states grant presumed credits in an attempt to attract companies to their territories, allowing them to collect less tributes.

There are a series of state incentives of indefinite duration, which, with the reform, will lose effectiveness with no obligation for compensation by the Union.

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TAX BENEFITS INVOICE

Union will make annual contributions to the ICMS Tax or Financial-Tax Benefits Compensation Fund:

2025 – BRL 8 billion

2026 – BRL 16 billion

2027 – BRL 24 billion

2028 – BRL 32 billion

2029 – BRL 32 billion

2030 – BRL 24 billion

2031 – BRL 16 billion

2032 – BRL 8 billion

Total: BRL 160 billion