The point that disagrees and contaminates the tax reform report – 06/20/2023 – Market

The report with the guidelines for the PEC of the tax reform approved last week by the Working Group in the Chamber of Deputies is, for the most part, aligned with the principles of transparency, simplification, tax justice and combating tax evasion, which have permeated the entire debate on reform in Brazil.

There is, however, one point that differs from this alignment. There is one piece that evidently does not match the rest of the set and that needs to be changed in the final version of the PEC, at the risk of contaminating it: the guarantee of broad credit not conditioned to the effective proof of payment of the tax.

By allowing the crediting to be done without actually paying the tax, the report leaves an anachronistic door open for the perpetuation of mechanisms that favor tax evasion and negatively affect society as a whole. Good entrepreneurs, who manage their businesses with a focus on competitiveness and results, will have to face an unfair competitive environment, permeable to distortions that favor bad taxpayers.

This open door to tax evasion also affects citizens, since it will take a collective effort to pay for the inevitable increases in tax rates, necessary to support the gap in public revenue caused by tax evaders.

Crediting without effective payment of the tax also threatens the very institutional design of the new tax system. How is the IBS Federative Council going to transfer revenue to the federative entities at the end of the chain if, in the middle of it, the tax was not collected? The way to avoid the collapse of the system would be to raise the rate for setting up a default fund. A less efficient and much more expensive alternative than crediting upon proof of payment of the tax.

There is also another problem resulting from this guideline, which appears in the working group’s report: it perpetuates the very high rates of tax litigation in Brazil, since credits account for a large part of the judicialization of tax issues in the country.

The members of the Tax Reform Working Group themselves point to the importance of the effective payment of the tax for its credit when they state that the measure is indicated “as an alternative to be implemented in the near future, under the terms of the complementary law, where it is already foreseen, for example, the split payment”. We don’t need to leave this for later. We cannot leave this for later.

It is essential to point out that the tax reform that is under debate was designed to guarantee a simple, quick, broad and secure credit for the tax paid on purchases. These characteristics are desirable because they are suitable for the existence of a good business environment for the whole country, encouraging free enterprise, fair competition, the creation of new businesses, the growth of companies, jobs and income generation.

However, for this to be viable, there must be, from the beginning, a fundamental and insurmountable rule: only purchases whose tax has been paid, in the sense of effectively collected, generate the right to credit for the purchaser.

If we are proposing a reform of our tax system, we must not bring instruments to the new model that cause precisely the distortions we want to avoid. We cannot waste the chance to put an end to subterfuges that penalize good taxpayers and citizens.