VAT rate can reach 27%, says Fazenda

A government study, prepared at the request of parliamentarians and released this Tuesday (8), concludes that the standard rate of new taxes on consumption that will be created with the tax reform should be between 25.45% and 27%.

A level within this range is necessary to maintain the current average tax burden, considering the exceptions that will be applied to certain sectors, according to the document, produced by the Extraordinary Secretariat for Tax Reform (Sert) of the Ministry of Finance.

The projected taxation is the sum of the rates of the Tax on Goods and Services (IBS, which should replace ICMS and ISS), and the Contribution on Goods and Services (CBS, resulting from the merger of PIS and Cofins). Together, the new taxes will compose a dual Value Added Tax (VAT).

Technicians point out that the projections are not accurate because they still depend on characteristics of the new tax system that will only be defined from its regulation, through complementary bills.

They can influence the standard rate, up or down, the list of goods and services that will have a reduced rate and the scope of the so-called selective tax – a tax of an extra-fiscal nature, also foreseen in the reform, to discourage the consumption of products that are harmful to the health or the environment.

The version of the proposed amendment to the Constitution (PEC) of the tax reform approved in the Chamber provides for a reduced rate of 60% for sectors such as health, education, medical devices, public transport, agricultural products, food, personal hygiene products, in addition to productions artistic, cultural, journalistic and audiovisual activities. The precise definition of the list of exceptions, however, will be made by infraconstitutional legislation.

According to the study, the most difficult variable to calculate accurately is the so-called compliance gap, the result of the difference between potential and effective collection, considering the effect of factors related to non-compliance with tax obligations (evasion, avoidance, default and litigation).

Sert considers a scenario with a compliance gap of 10% as feasible, in which the standard VAT rate would be 25.45%. In the most conservative scenario, where the compliance gap would reach 15%, the total standard rate would be 27%.

As a reference, the compliance gap in Hungary, a member country of the Organization for Economic Cooperation and Development (OECD) where the standard VAT rate is the highest, was 10% between 2018 and 2019 – the last years for which there is data available before the pandemic.

The authors of the study themselves point out that a standard total rate of 25.45% to 27% is high by international standards, but point out that the interval reveals the fact that taxation on consumption in Brazil, as a proportion of the Domestic Product Gross (GDP), is one of the largest in the world.

“It is worth remembering that the tax reform provided for in PEC 45 maintains the current tax burden on the consumption of goods and services, but does so in a transparent manner and with few and clear exceptions, contrary to what currently occurs”, they write.

The authors also record that the estimated rates are lower than the current standard rate levied on goods and services subject to the standard ICMS rate and the normal PIS/Cofins regime, which reaches 34.4%. “This reduction is made possible by eliminating a series of special regimes, tax benefits and favored treatments provided for in current legislation, as well as reducing the compliance gap”, says the text.

In July, a study by João Maria Oliveira, from the Institute of Applied Economic Research (Ipea), based on the proposal approved by the Chamber of Deputies, estimated that the effective rate of the new tax on the consumption of goods and services could reach 28 .4%.

The projection was contested by the Minister of Finance, Fernando Haddad. “That is a study that does not take into account a series of factors. There is no impact analysis, for example, on [combate à] evasion, evasion, cut of tax expenses [eliminação de incentivos fiscais]”, said the minister.