The Tax Reform is one of the most debated topics today. There is a great expectation that the system will undergo significant simplification and standardization. There are also numerous claims that the tax reform would be able to increase the national GDP.
In fact, the national tax system is exceptionally complex, the compliance cost assumed by companies is disproportionate and the degree of litigation in the system is high. We have all the elements for investors and companies’ insecurity.
An example is the ICMS “tax on goods and services”, a tax included “in its own calculation basis”. Due to the calculation complexity, the population is unaware of the effective tax rate paid on products that are consumed, which undermines fiscal transparency.
The need to reform the current system ends up being a recurring agenda.
In this context, the international practice study is appropriate without compromising national needs.
As an example, we could mention some UK VAT system features. The tax is levied on a broad basis (goods and services). There is a standard rate (20%), a reduced rate (5%), a 0% rate, as well as VAT-exempt products. The system is also fully non-cumulative.
According to data collected, more than 170 countries currently adopt some form of VAT or IVA, with some particularities (such as tax rates, competencies assignment, and exemptions, among other aspects).
In addition to VAT or IVA, many countries also charge “Excise Tax”, an indirect tax levied on certain products (often considered harmful, such as alcohol and tobacco).
The aforementioned aspects are similar to what is being discussed about Brazilian tax reform. It is often mentioned that there should be few rates, the system should be simple, the tax basis should be broader (covering all goods and services), and the system should be non-cumulative.
The proposed PECs themselves, nos. 45 and 110/2019, have uniformity and simplification measures, in addition to contributing to the mitigation of serious problems in the current system, such as non-cumulativeness and tax war.
Since the need for simplification of the tax system is detected, the logical conclusion would be the technical debate and the system to be adopted delimitation, considering national particularities.
However, the system real simplification seems to be a difficult result to achieve, given the countless comprised interests.
In addition, there is enormous pressure arising from budgetary issues (in particular, the need to maintain states' and municipalities' revenues).
In this disturbing context, on 06/06/2023, the Working Group Tax Reform Report was released, which analyzed the current tax system and concluded that it needed to be urgently changed, which is not exactly a surprise. For this, it analyzed the proposed solutions proposed by PECs nos. 45 and 110 of 2019.
The conclusions will be used to prepare the PEC 45/2019 replacement text, which will be voted on. As such, the report is more a directive than a solution to the ongoing debates.
In summary, the work is focused on the taxation on consumption, with the elimination of taxes (ICMS, IPI, PIS, COFINS, and ISS) by a single tax - Tax on Goods and Services (IBS) and by a selective tax on goods considered harmful to health and the environment.
The IBS - at least in the initial project - will have a broad calculation basis, and it is charged on goods and services. One of the most remarkable IBS features is the full non-cumulativeness (so that the tax paid is effectively deducted from the tax payable).
The IBS must be changed at the destination. The system should provide for a prompt accumulated credits refund. IBS should also not be charged its own calculation basis.
In addition, a standard rate is expected (although it may include exceptions for health, education, transport, and rural production, among other hypotheses).
Regarding the excise tax, proposed in the report, it should work as a surcharge for the health or environment harmful products (with a possible comparison to the aforementioned “Excise Tax”).
However, after reading the published report, it became clear that there is an effective difficulty in adopting a simplified system, given the many interests to be reconciled, in order to approve the tax reform.
For the substitute text preparation, the Working Group presented a dual VAT model as a guideline (one from the Union and the other shared between the states and municipalities). The system must be identical, including the applicable rates and it should be fully non-cumulative.
There is also a proposal for the creation of a Federative Council, composed of subnational entities, for the uniformization of tax powers throughout the national territory. There is also the expectation for special tax regimes, such as the maintenance of the Manaus Free Trade Zone and Simples Nacional, as well as the creation of the Regional Development Fund, aiming for regional inequalities reduction, which should be more detailed in the presentation of the PEC 45/2019 substitute text.
Initially, the ICMS tax benefits, validated until 2032, should be respected.
There are also special regimes for real estate, financial services, insurance, fuel, and lubricants (which, in turn, also happens in other countries that adopt IVA/VAT).
The group also recommends the cashback adoption, consisting of a partial tax return for low-income families.
For the PEC approval, the text must be approved in both legislative houses, in two rounds, with a quorum of three-fifths. It is precisely in this legislative phase that the Project may undergo considerable changes, distancing the new system from the principles and objectives that gave rise to the complex reform movement.
If you have any questions, please do not hesitate to contact our tax team.