what changes with tax reform

Approved on Friday (15) after 30 years of discussion, the tax reform will simplify taxation on consumption and bring about changes in the lives of Brazilians when purchasing products and services.

Basic food baskets, medicines, fuel, streaming internet services, the products are diverse. With a long list of exceptions and special rates, the new tax system will have varying impacts depending on the sector of the economy. At the same time, for the first time in history, there will be measures that guarantee progressiveness in the taxation of some types of assets, such as vehicles, and the transmission of inheritances.

Over the next year, Congress will have to vote on complementary laws to regulate tax reform. According to the Minister of Finance, Fernando Haddad, the projects will be sent in the first weeks of 2024.

Also next year, the government may begin reforming Income Tax, with changes such as the taxation of dividends (portion of companies’ profits distributed to shareholders). In this case, however, the changes will occur through a bill, with a lower voting quorum.

Check out how tax reform will change consumers’ daily lives:

Basic basket

One of the items that generated the most controversy in the reform was the taxation of the basic food basket. The Senate had created two lists of products. The first with the national basic food basket, intended to combat hunger. This basket will have a zero rate and may have items regionalized by complementary law.

The senators had created a second list, called the extended basic basket, with a rate reduced to 40% of the standard rate and a cashback mechanism (partial refund of taxes) for low-income families. The rapporteur of the reform in the Chamber, deputy Aguinaldo Ribeiro (PP-PB), however, removed this list, on the grounds that a large part of the food benefits from the reduced rate for agricultural inputs.

The final impact on prices, however, is still unknown. At the end of June, the Brazilian Association of Supermarkets (Abras) presented a report according to which the basic food basket could increase by 59.83% on average with the previous wording of the tax reform, which reduced the Value Added Tax rate by half ( VAT) dual.

The study, however, was contested by economists, parliamentarians and members of the government itself. At the time, the extraordinary secretary for Tax Reform at the Ministry of Finance, Bernard Appy, said that the new system would make the basic food basket cheaper. The rapporteur of the reform in the Chamber, deputy Aguinaldo Ribeiro (PP-PB), presented a study by the World Bank, according to which the tax burden on the basic food basket would fall by 1.7%, on average, with the dual VAT rate reduced by 50%.

The disparity in estimates occurs because currently many products in the basic basket are taxed in cascade, with taxes affecting the price in the previous stage of the chain, before reaching supermarkets. The current exemption from federal taxes on products in the basket makes the products cheaper on the one hand, but on the other hand it prevents the use of tax credits and refunds of taxes paid in previous stages of the production chain.

In the dual VAT system, the return of tax credits, according to the government, would offset the tax collection. The dual VAT rate will only be defined after the tax reform. The Abras report used a VAT rate of 12.5%, just less than half of the likely full rate of 27.5% estimated by economists, to justify a possible increase in the price of the basic food basket.

The new 60% reduction and the future zero rate should make basic food products cheaper, but the calculation of the final impact can only be made when the tax reform comes into force. More industrialized items, with a longer production chain, should see greater price reductions. Fresh or lightly processed foods should have a slight reduction or even a slight increase because they will have few tax credits.

Medicines

The approved text provides for a 60% reduced rate for medicines and basic menstrual health care products. The Senate included enteral and parenteral nutrition products on the reduced rate list, which prevent or treat complications of malnutrition.

According to experts, the reform should not have major impacts on the price of medicines. This occurs for two reasons. Firstly, generic medicines are subject to specific legislation. Furthermore, Law 10,047, of 2000, establishes a special tax regime for medicines listed by the Ministry of Health.

The Senate also included the purchase of medicines and medical devices by public administration and non-profit social assistance entities in the VAT exemption. The Chamber of Deputies had zeroed the rate for medicines used to treat serious illnesses, such as cancer.

Fuels

The tax reform establishes a different treatment regime for fuels and lubricants. Dual VAT, with a single rate throughout the national territory and varying according to the type of product, will be charged only once in the production chain, in refining or imports. The change follows a reform proposed in 1992.

During the Senate process, however, the possibility of charging the Selective Tax was included, a tax on products that cause damage to health and the environment, on fuels and oil (for the extraction of oil and minerals, there would be a rate of 1 %). During the vote in the Chamber this Friday, PSOL tried to increase this rate, but the deputies overturned the highlight.

According to the Brazilian Infrastructure Center (CBIE), the selective tax should generate R$9 billion in revenue, considering only oil exploration, without other minerals.

According to the Brazilian Oil and Gas Institute (IBP), the differentiated regime will lead to a strong increase in the final price for consumers. Experts, however, state that the impact is uncertain because many points of the differentiated fuel regime will be defined by complementary law and the reform provides for the possibility of granting tax credits. Furthermore, the impact will only be known after the full dual VAT rate has been defined.

Vehicles

The collection of Motor Vehicle Ownership Tax (IPVA) will now apply to water and air vehicles, such as jets, helicopters, yachts and jet skis. The reform also establishes that the tax will be progressive depending on the environmental impact of the vehicle. Vehicles powered by fossil fuels pay more. Vehicles powered by ethanol, biodiesel and biogas and electric cars will pay less IPVA.

The Senate accepted an amendment by Senator Mara Gabrilli (PSD-SP) and included the purchase of cars by taxi drivers and people with disabilities and autism among the items with zero tax rate. The benefit currently exists and would be extinguished with tax reform.

In July, during the first vote in the Chamber, deputies created an exception list to avoid charging vehicles used for agriculture and services. The list covers the following types of vehicles: agricultural aircraft and those certified to provide air services to third parties; vessels owned by legal entities with water transport services granted; vessels owned by individuals or legal entities that practice industrial, artisanal, scientific or subsistence fishing; platforms that move in water without trailers (such as drillships or platform ships); and tractors and agricultural machinery.

In the Senate, the extension, until 2032, of an incentive for automakers in the North, Northeast and Central-West regions increased tensions. In the first vote, in July, the Chamber had overturned the extension of this incentive. In the first version of the report in the Senate, the incentive was extended only to the production of electric cars, but the House’s Constitution and Justice Committee (CCJ) extended the benefit to manufacturers of vehicles powered by biodiesel and hybrid vehicles powered by biodiesel and gasoline.

This generated uneasiness among the governors of the South and Southeast, who alleged unequal conditions with the automakers installed in the two regions. On Friday, rapporteur Aguinaldo Ribeiro agreed to maintain the benefit in the base text, but highlight this point. Unlike the first vote in the Chamber, where the incentive received 307 votes, one less than the 308 necessary, the deputies maintained the benefit with 341 votes in favor, 153 against and four abstentions.

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