When does tax reform take effect? Understand the next steps

Considered historic, the approval of the Proposed Amendment to the Constitution (PEC) 45/2019 in two rounds by the Chamber of Deputies does not end discussions on tax reform, being only the first step towards changing the country’s tax system .

As of now, the text is still going to be appreciated by the Federal Senate, where it can be rejected, approved in full as it came from the Chamber or modified. For real, the PEC needs a favorable vote, also in two rounds, of at least three-fifths of each Legislative House, which means the support of at least 49 senators.

If it undergoes changes in the wording, the text returns to the Chamber, where it would need the approval of the deputies for the changes to be enacted.

In the Senate, the expectation is that the vote will take place only after the parliamentary recess, which runs from July 18 to 31. The president of the House, Rodrigo Pacheco (PSD-MG), has been favorable to the proposal.

“I salute the work done by the Chamber, due to the approval of the tax reform, in the person of President Arthur Lira (PP-AL) and the rapporteur, Deputy Aguinaldo Ribeiro (PP-PB). It is up to the Senate now to fulfill its role to deliver this important reform to the country”, said Pacheco after the result of the vote in the Chamber.

Despite this, Lira believes that senators should change the PEC, requiring a new analysis by deputies. “The Senate will have the opportunity to have a more leisurely discussion, with a more acute eye. And we will know how to respect and evaluate the text, which will certainly come back”, she said at a press conference held this Friday morning (7).

“Having modifications, which I believe they will, it will return to the Chamber. In the meantime, conversations are already being tuned, so that one House with the other House, with a common text, can start building a consensus for a faster vote”, he said.

Transition to new tax system runs until 2033

If the version approved by the Chamber of Deputies is maintained, the new rules will still take some time to come into effect. Components of the dual Value Added Tax (VAT) system, the Contribution on Goods and Services (CBS), under the competence of the Union, and the Tax on Goods and Services (IBS), which will be administered by states and municipalities, will begin to be implemented only in 2026 – with test rates of 0.9% and 0.1%, respectively.

“The objective of this stage is to know the taxable base, allowing the calculation of the CBS and IBS rates necessary to replace the current collection”, says the report by federal deputy Aguinaldo Ribeiro.

The amounts collected with the IBS will be used initially to fund the Federative Council, which will manage the state and municipal taxes, in addition to composing a fund to offset ICMS tax benefits.

CBS should fully replace federal indirect taxes as early as 2027, when IPI rates will be zeroed, with the exception of what is levied on products manufactured in the Manaus Free Trade Zone, in order to maintain its competitiveness.

IBS, on the other hand, remains at a test rate until 2028. Between 2029 and 2032, subnational VAT will replace ICMS and ISS in the proportion of 1/10 more per year. Only in 2033, the indirect taxes of states and municipalities will be fully replaced by the new tax.

Specific rules still depend on approval of complementary laws

After approval of the amendment to the Constitution, the National Congress will still need to reach an agreement on specific rules for the new consumption tax system. The rates of each tax, for example, will be defined only after the enactment of the text, by means of a complementary law.

The list of items considered harmful to health or the environment and which will be subject to excise tax surcharge will also be established by means of a complementary law, as well as the products that make up the basic food basket and which, therefore, will be exempt from VAT.

Other details that need to be regulated through infraconstitutional legislation include transfers from the Union to the Regional Development Fund, the rules for the annual review of rates to maintain the tax burden, and the operating model, limits and conditions for the VAT refund system. , the call cashback.

Consumption tax reform was only the first stage of tax reform

Furthermore, PEC 45 is just one of the stages of a “sliced” tax reform. The federal government still wants to make changes in the tax legislation that focus on income and assets.

In 2021, during the government of former President Jair Bolsonaro (PL), the Chamber of Deputies even passed a law (PL 2.337/2021) that made a series of changes to the Income Tax (IR), but the project stalled in Senate Economic Affairs Committee (CAE).

Since the campaign for the presidency of the Republic, Lula has promised that he will update the Income Tax rates for Individuals in order to exempt taxpayers who receive up to R$ 5,000 per month. In recent statements, he has also defended charging income tax again from those who receive profits and dividends.