Treasury says tax reform does not justify ICMS increase

The federal government released this Wednesday (22) a note in which it argues that the probable approval of the proposed amendment to the Constitution (PEC) 45, the tax reform, does not justify the increase in the current rates of the Tax on the Circulation of Goods and Services ( ICMS), announced by some states.

On Tuesday (21), the Finance Secretaries of Paraná, Rio Grande do Sul, Espírito Santo, Minas Gerais, Rio de Janeiro and São Paulo even released a joint letter in which they claim that the reform would constitute “a strong incentive” for that state governments increase revenue in the coming years in order to guarantee their tax revenues for the subsequent 50 years.

This is because the shares of the federative units in the total collected with the Tax on Goods and Services, provided for in the PEC, will be calculated based on the average revenue of each entity with ICMS between 2024 and 2028. “In this way, the greater the collection of a State with ICMS during this period, the greater the flow of IBS resources allocated to it until 2078”, justify the representatives of these six states in the South and Southeast.

Bahia, Ceará, Distrito Federal, Paraíba, Pernambuco and Rondônia have also announced that they must increase the state tax rate from 2024.

In the statement released by the Ministry of Finance, the Extraordinary Secretariat for Tax Reform, headed by economist Bernard Appy, states that states will maintain autonomy to set their IBS rate below or above the reference percentage.

“If any state deems that its collection in the period from 2024 to 2028 does not adequately reflect its historical participation in total ICMS collection, nothing prevents it from increasing its IBS rate”, says an excerpt from the text.

“For the state’s IBS collection, the same effect will be had if there is an increase in the ICMS between 2024 and 2028 or an increase in the IBS rate from 2029 onwards – and, above all, from 2033 onwards, when the ICMS will be extinguished and the IBS will come into full force. The tax reform does not, therefore, justify the short-term increase in the ICMS modal rate as a way of protecting future IBS collection.”

The note also suggests that the increase in modal tax rates would, in fact, be related to the losses that the states had in their revenues with the approval, in the last year of the government of Jair Bolsonaro (PL), of complementary laws 192 and 194, which forced a reduction in ICMS revenue on electricity, communications and fuels.

“This, in fact, was the reason given by 17 states that have already increased their ICMS modal rates since the end of 2022, before the publication of the PEC 45 report containing the reference to the period from 2024 to 2028”, highlights the ministry.

“In the same sense, the note signed by the Finance Secretaries of six of the seven states in the South and Southeast that point to tax reform as a reason for increasing the ICMS modal rate indicates that the loss of revenue resulting from the changes introduced in federal legislation in 2022 is also a reason to increase modal tax rates.”