Title: The Need For a Simpler and More Inclusive Brazilian Tax Reform
The Brazilian Ministry of Finance has been working on a tax reform that replaces five complex taxes with two Value Added Taxes (VATs), one federal and another subnational, with centralized and shared collection to promote a more efficient tax system. However, there are issues of political support, conflicting design objectives, and transition schedules, as detailed during the 3rd Forum of the National Chamber Supply Chain of the Brazilian Association of Supermarkets by the extraordinary secretary for tax reform, Bernard Appy. Despite these challenges, Appy highlights the importance of achieving simplicity and inclusivity, making the proposed tax reform a national project, not just a government initiative.
The Proposal For A Simpler Tax System
The Brazilian government’s goal with this tax reform is to replace five complex taxes consisting of multiple exemptions with two easy to manage and understand Value Added Taxes (VATs), with centralized and shared collection. The secretary stressed that VAT should be taxed on consumption, not on production, making it necessary to focus on the destination. The proposed stripped-down model would reduce the complexity of the present system, which would be more beneficial in the long term.
The Need For a More Inclusive Tax Reform
The proposed tax system would be more inclusive, leading to a significant reduction in the number of tributes, which would have positive effects on the economy. The government aims to introduce simple mechanisms that will offer refunds of money through cashback, a complementary mechanism in the new tax system. However, it is essential to limit the access to this system to avoid fraud, but a well-maintained system could overlook the already invisible population.
A Number of Challenges
The Brazilian government needs political support to pass this proposal through Congress, as it is a national project and not just a government initiative. Furthermore, several objectives of the tax reform have conflicting effects in the design, making it challenging to anticipate the transition from the current consumption taxes to new ones. There are also the issues of defining cashback and determining transition schedules.
The Proposed Fiscal Transition Schedule
The timetable for the transition from the current consumption taxes to the new ones has not been determined yet. However, the secretary noted that there would be a faster and earlier transition from the PIS and Cofins to the CBS if the complementary law will have passed the middle of next year. As such, the transition of ICMS and ISS to IBS would start by 2027 and take place over the next few years.
The Challenges Facing The Agricultural Industry
João Galassi, President of Abras, raised concerns regarding the taxation of agricultural products. However, the report presented by the tax reform working group in the Chamber suggests a lower tax rate on agricultural products and the basic basket, according to Secretary Appy.
The Way Forward
The Brazilian government believes that for the country to progress economically, it has to implement a more straightforward tax system that doesn’t depend on political support, reduce the complexities, and focus on the destination while ensuring that it is inclusive and equitable.
Additional Piece:
Why A Simpler Tax System Will Stimulate The Brazilian Economy
Brazil’s tax system has been a thorny issue for governments due to numerous tributes and complicated exemption criteria that deter investors and traders’ interests. The tax structure offers opportunities for bureaucratic corruption and untaxed sectors of the economy. The current tax system may hinder essential goals of government policies on job creation, reducing poverty, and enhancing education, infrastructure, and healthcare, thereby stifling economic growth.
The proposed simpler tax system would encourage investments to flow into the country, reducing bureaucracy and the associated incentives for corruption. This would lead to more participation in the formal economy, promote job creation, and ensure social justice. The VAT model will increase revenue because it is more comprehensive, indicating that more items will be taxed. The VAT model would also bring in new taxpayers as individuals and small businesses would get reduced tax rates and exemptions.
Customization of exemptions can stimulate investments in specific regions, incentivize onshore production, and support small businesses and low-income households. The proposed tax reform will also ensure that Brazil meets international tax best practices, making the country more attractive to investors.
Furthermore, the current tax structure hurts small enterprises the most, as they do not have the resources or means to navigate the complexity of the present system. This situation impedes entrepreneurship, innovation, and job creation, hindering growth. By implementing a simpler, more inclusive, and efficient tax system, the Brazilian government can enable small businesses to thrive.
The new tax structure will also make Brazil more competitive with other similar economies such as Mexico and Chile that have already introduced significant tax reform. These economies offer low-cost tax systems that attract foreign investors, thereby increasing their economic growth. A more straightforward and inclusive tax system will boost economic growth, reduce poverty rates, and increase government revenue in Brazil.
Summary:
The Brazilian government is proposing a tax reform that replaces five taxes with two VATs, simplifying the tax system and making it more inclusive. The government intends for the tax reform to be a national project rather than a simple government initiative. The new tax system will focus on consumption, making it necessary to focus on the destination. The transition schedule from the current consumption taxes to the new ones has not yet been finalized. There are issues concerning the cashback and conflicting objectives in the tax system design. The secretary of tax reform says a lower tax rate for agricultural and basic basket products is under consideration. A simpler tax system will encourage foreign investors, enable small businesses to thrive, and boost economic growth.
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The extraordinary secretary for the tax reform of the Ministry of Finance, Bernard Appy, highlighted this Tuesday the 13th that the tax reform is a proposal not only of the Lula government, but also of the country and society as a whole. He also defended the simplicity that the new tax model should bring.
“It is not a federal government project, it is a country project. The government chose not to send new proposals to Parliament and is supporting Parliament in the construction of a tax reform based on the two PEC: 45 from the Chamber and 110 from the Senate”, said the secretary during the 3rd edition of the Forum of the National Chamber. Supply Chain of the Brazilian Association of Supermarkets (Abras).
Appy stressed that the government does not intend to bring the political litigation to debate in Congress. “Our work is more supportive and, to the extent possible, political support,” he said. “It is a job in the interest of the country, it is not in the interest of the government, it is not a situation of government versus opposition, it is a measure in the interest of the country as a whole,” she added.
The tax reform secretary recalled that the proposal replaces the five current taxes with two VATs, the Value Added Tax, a federal VAT and a subnational VAT, with shared and centralized collection. “We are talking about five extremely complex taxes full of exceptions. Each of these tributes has a bunch of exceptions. They will be two extremely simple tributes built on international bases. We are not going to have 27 laws, 5,570 laws, it will be legislation and centralized collection, ”he said.
Appy also assured that the new model will focus on the destination. “VAT is taxed at destination. Because? Because it is the consumption tax. When it is taxed at origin it is taxed on production, when it is taxed at destination it is taxed on consumption. VAT must be taxed on consumption ”, he defended.
fiscal transition schedule
The timetable for the transition from the current consumption taxes to the new ones provided by the tax reform is not yet defined, but it is very likely that there will be a faster and earlier transition from the PIS and Cofins to the CBS, Bernard Appy said. “If we pass the complementary law in the middle of next year, a year later, in the middle of 2025, there will be a transition from PIS/Cofins to CBS and probably most of the IPI,” he said.
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The transition from ICMS and ISS to IBS, according to Appy, should start in 2027 and take place over the next few years.
The secretary also stated that a number of issues, including validated benefits, make it difficult to anticipate this transition. “The problem is that there are objectives with conflicting effects in the design of the tax reform,” he amended.
‘Refund of money’
The secretary also pointed out that definitions of the cashback suggested in the proposal are still lacking and that the model must be a complementary mechanism in the new tax system, but he defended the adoption of the measure. “I know that there is this distrust, we are not going to enter this irresponsibly. I think it may be a complementary mechanism, which will have to be tested, to see if it works,” he said.
He affirmed that the government must create a “simple” system and that it is studying the experience of other Latin American countries that have adopted this model and that it is in dialogue with the Ministry of Social Development to work together on the proposal.
“It will not necessarily be the public of the Cadastro Único, it could be a broader public. Even that is being considered. There has to be a limit, obviously, to avoid fraud. Of course, there is a risk of fraud, but if it is done well, it can even include the invisible population”, said Appy.
Agricultural products
Questioned by the president of Abras, João Galassi, about the taxation of agricultural products, Appy pointed out that the report presented by the tax reform working group in the Chamber brought indications on the subject.
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“The report has already made it clear that there will be a lower rate for agricultural products and, quite possibly, for the basic basket. It’s put there, I’m not discussing what’s ideal, I’m talking about what’s put there,” Appy said.
Related
Reforma tributária não é projeto do governo federal, é um projeto do País, diz Appy
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