Tax reform: what changes for states and municipalities – 7/5/2023 – Market

The tax reform modifies the distribution of revenue between states and municipalities. Find out about the proposed changes.

Change in the destination of the collection

The new taxes on consumption will be allocated to the region where the consumer of the product or service is located, following the principle of destination. Currently, the money stays where the company’s headquarters are located (principle of origin).

What taxes will be affected

The change applies to state ICMS and municipal ISS. These two taxes will be extinguished and replaced by a single tax on goods and services, the IBS.

Who wins

Almost 85% of Brazilian municipalities, including 11 capitals, and also 17 states will increase their share of the cake with this change, according to a study carried out by Ipea (Institute for Applied Economic Research) on the redistributive impacts of the reform in the Federation.

who loses

Other entities lose participation in the cake, even so, they will have an increase in collection with the reform in absolute terms. Ipea estimates that only 16 municipalities will actually lose revenue.

With the positive effects of the economic growth generated by the reform, all states and 98% of municipalities increased their collection (including all capitals), according to the institute.

How is the inequality between the entities of the Federation

According to Ipea, the redistributive effect has the potential to reduce the difference between the highest and lowest per capita revenue of ICMS (state tax) and ISS (municipal tax) from 200 times (R$ 14,621 and R$ 74) to 15 times ( R$ 6,426 and R$ 497), reducing the overall degree of inequality in municipal revenues.

Currently, 60% of Brazilian cities cannot collect ISS tax or R$ 100 per inhabitant per year. The 61 richest municipalities in ISS concentrate 43% of all tax revenue, although they have only 12% of the population and no more than 27% of GDP from services.

Who supports and who is against the change

The FNP (National Front of Mayors), which represents municipalities with more than 80,000 inhabitants, wants to maintain the ISS and the rule for charging the tax at the source (where the company is headquartered) and not at the destination (where the consumer is). .

The CNM (National Confederation of Municipalities), an entity that represents more than 5,000 municipalities, defends the change that will redistribute the collection and benefit smaller cities.

São Paulo, Goiás and Mato Grosso do Sul are among the states that are against the current text of the reform.

How will the tax be collected?

The proposal is to create a public body that manages the tax on goods and services for states and municipalities, the Federative Council of IBS, but some states are against the idea.

Under the current proposal, the council will have powers that go beyond collecting the new tax, making compensations and distributing the result to states and municipalities. The institution will be able to edit infralegal norms, of obligatory observance by all the entities that integrate it, and standardize the interpretation and application of tax legislation, in addition to taking care of administrative litigation with taxpayers.

What would be the power of each region in the council

A technical note from the CCIF (Centro de Cidadania Fiscal) suggests a board with nine members and a third of them changing each year. To be elected, they need to surpass 25% of the votes, a percentage that would not be achieved by the states of any region of the country alone.