vote leaves behind three other proposals

The Chamber of Deputies is due to vote this Thursday (6) on the Proposed Amendment to the Constitution (PEC) 45/2019, which changes the country’s consumption tax system. Considered a priority by the government of Luiz Inácio Lula da Silva (PT), the version that will go to the vote ended up overlapping other tax reform alternatives under discussion in Congress.

The central axis of PEC 45 is the creation of a single tax on consumption, in the Value Added Tax (VAT) model, based on the unification of five taxes: IPI, PIS and Cofins, currently under federal jurisdiction; ICMS, administered by the states; and ISS, which are the responsibility of the municipalities.

The Brazilian VAT would be called the Tax on Goods and Services (IBS) and would have single rules, but two distinct administrations, one at the federal level and the other shared between states and municipalities – hence the name “dual VAT”. In addition, the creation of a selective tax is proposed, which would be levied on goods and services considered harmful to health and the environment, as a way of discouraging their consumption.

To offset losses with the end of tax benefits and reduce the economic imbalance between the federal units with the reform, a Regional Development Fund (FDR) is also foreseen, which would also have a counterpart from the Union.

The main lines of the proposal rescue ideas from a report by Senator Roberto Rocha (PTB-MA) to PEC 110/2019, which also provided for a dual VAT system with selective tax and FDR. Presented in October 2021, however, the opinion has not advanced further in the Senate since then.

The text that will be voted on is a replacement by federal deputy Aguinaldo Ribeiro (PP-PB) for PEC 45, authored by Senator Baleia Rossi (MDB-SP), based on a proposal by economist Bernard Appy, current special secretary for the Reform Taxation of the Ministry of Finance.

PEC 7/2020 provides for only three taxes in the country

If approved, the text leaves behind other alternatives for reforming the tax system that are being discussed in Congress. One of them is PEC 7/2020, presented by federal deputy Luiz Philippe de Orleans e Bragança (PL-SP), which had a favorable opinion approved by a special committee of the Chamber in December 2022, being ready for consideration in plenary.

The text proposes to base the collection of the Brazilian State on only three taxes: on income, consumption and property. On each of the bases, a tax would be levied at rates defined at the federal, state and municipal levels.

To this end, a total of 15 taxes and contributions would be abolished, practically all of which are levied today on property and consumption at the three levels of government:

• Tax on Circulation of Goods and Services (ICMS);
• Tax on Industrialized Products (IPI);
• Contribution to the Social Integration Program (PIS);
• Contribution to the Civil Servant Asset Formation Program (Pasep);
• Social Security Financing Contribution (Cofins);
• Service Tax (ISS);
• Motor Vehicle Ownership Tax (IPVA);
• Tax on Transmission Cause Mortis and Donations (ITCMD)
• Rural Territorial Property Tax (ITR);
• Urban Land and Property Tax (IPTU);
• Social Contribution on Net Income (CSLL);
• Export Tax (IE);
• Social security contributions on payroll;
• Contributions for Intervention in the Economic Domain (Cide); It is
• Salary-Education.

By means of agreements, the competence for collection, inspection and collection would belong to the Union for Income Tax (IR); from the states to the excise tax on goods and services; and municipalities for the property tax.

With the extinction of social contributions, social security would be financed by a portion of the collection of taxes on consumption and income, in addition to budgetary resources. The minimum percentage of taxes to be allocated to the area would be defined in a complementary law, according to the text.

Also according to the proposal, a minimum share of 18% of the Union’s revenue and 25% of the revenue of states and municipalities would be allocated to education. Supplementary food and health care programs would be financed with resources from income and consumption taxes of the respective federative entities.

States and municipalities would have the prerogative to institute taxes on income and assets in the form of an additional fee similar to that charged by the Union, delegating the collection to the Federal Revenue Service. With this, the transfers made by the federal government through the participation funds of the states (FPE) and municipalities (FPM) would be ended.

PEC 46/2022 would replace thousands of ICMS and ISS legislations in just two laws

Another alternative proposal for tax reform was filed by Senator Oriovisto Guimarães (Podemos-PR) in December 2022. Unlike other initiatives, the text does not propose to unify or extinguish any of the current taxes. The central idea is to simplify taxation on consumption through the unification of the laws of the states and the Federal District that regulate the ICMS and of the municipalities on the ISS.

In justifying the article, the parliamentarian states that the amendment would reduce “a lot the ancillary obligations of companies, reducing costs and making the impact of these taxes on the prices of goods more transparent”.

Under the proposal, the 27 state and DF laws dealing with ICMS and the more than 5,000 municipal laws on ISS would be replaced by just two (one for each tax), with nationwide coverage. The general norms would be established at the federal level, by the Union, through two complementary laws.

In order to maintain the autonomy of subnational entities established by the federal pact, the PEC, unlike other reform proposals, does not provide for the unification of rates. The percentages would continue to be determined and adjusted through state and municipal laws, according to the collection needs of local governments.

There would also be no change in the tax burden or generation of new expenses for the National Treasury, which would not participate in the management of the change in ICMS and ISS, since the entire unification process would be up to the group of states and municipalities.

In addition to the unification of legislation, another major change, also provided for in PEC 45 and supported by the federal government, would be the collection of ICMS and ISS at the place of destination of consumption – today the collection takes place at the origin, which motivates the so-called “tax war”. ”.

Since the enactment of the 1988 Constitution, there have been proposals for tax reform in practically all governments, but the resistance of sectors of the economy and the conflict of interests between the Union and federal entities have prevented the advancement of any of them.

According to the Chamber of Deputies, only three of them were approved by a special committee of the House, but none was voted in plenary: PEC 175/1995, in the government of Fernando Henrique Cardoso (PSDB); PEC 233/2008, in the second Lula administration (PT); and PEC 293/2004, during the Michel Temer (MDB) government.