You Won’t Believe How the Tax Reform Merged 5 Dual VAT Taxes and 3 Rates! Speaker’s Outrageous Opinion Revealed!

The rapporteur of the Constitutional Reform Proposal that deals with the Tax Reform of consumption taxes (PEC 45/2019), the deputy Aguinaldo Ribeiro (PP-PB), presented, this Thursday (22), a preliminary opinion on the matter that will be discussed in plenary session of the Chamber of Deputies.

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The text, as previously indicated by the rapporteur, provides for the replacement of five taxes by a dual Value Added Tax (VAT). The taxes that would cease to exist are the IPI (Tax on Industrialized Products), the contribution to the PIS/Pasep (Social Integration Programs and Asset Training for Public Servants) and the Cofins (Contribution for the Financing of Social Security), at the federal level.

At the subnational level, the state ICMS (Tax on the Circulation of Goods and Services) and the municipal Services Tax (ISS) would be replaced. The two new taxes, the federal VAT and the subnational VAT, would be similar, but administered separately, to guarantee greater federative autonomy.

The new model provides for a broad tax base, not fully cumulative, with incidence “outside” the chain. This means that the so-called “snowball effect” in tax collection would cease to exist, in which a tax collected enters the tax base in the next stage of the productive chain.

The design is possible thanks to a credit system in which the tax is effectively paid only by the final consumer and at the destination, and not at the origin, as in many cases. In addition, the model promises a total and effective relief of exports and investments, which should increase the competitiveness of Brazilian products in the market.

The project under discussion by the deputies also provides for the creation of a Selective Tax (IS), which may tax the production, sale or import of goods and services harmful to health or the environment, which will be regulated by a complementary law.

As announced by the speaker Aguinaldo Ribeiro at a press conference, the protocol ruling provides for only three tariffs for products and services: a standard one, a differentiated one (with a 50% reduction in relation to the first) and a third zero.

Most of the goods and services included in the second group had already been provided for in the document with guidelines for the tax reform, prepared by the Working Group that dealt with the issue in the Chamber of Deputies. Are they:

1) education services;

2) health services;

3) medical devices;

4) medications;

5) urban, semi-urban or metropolitan public transport services;

6) agricultural, fishery, forestry and natural plant extraction products;

7) agricultural inputs, food for human consumption and personal hygiene products defined by legislation (which would be the products of the basic basket);

8) national artistic and cultural activities.

Already in the range of exemption would be some medicines (such as those intended for the treatment of diseases such as cancer) and higher education services – the case of Prouni (Universidade Para Todos Program).

Hypotheses are also framed in which natural persons who carry out agricultural, fishing, forestry and extractive activities in natural plants are not subject to the Contribution in Goods and Services (CBS).

In this case, there is an annual income limit of R$ 2 million, which allows a presumed credit to be transferred to the buyers of its products. According to the rapporteur, the measure would cover more than 98% of all rural producers in Brazil.

In the design presented by the rapporteur Aguinaldo Ribeiro, therefore, the products of the basic basket would no longer be exempt from the tax, but would have a different rate. And agribusiness, one of the main critics of the burden on this category of goods, would also be included in the special tax regime.

The substitute presented also establishes the so-called “cashback” of taxes, with the possibility of returning the IBS and CBS collected by individuals in a broad way. The criteria, however, must be defined later by complementary law. “It is an issue that we will still have to continue discussing,” said the rapporteur.

The idea suggested by the members of the WG is that the mechanism be used to make the Brazilian tax system more progressive, allowing the less favored groups of society to pay less taxes and not granting undesirable benefits to higher income sectors (such as currently occurs with the linear exemption of basic basket products).

The opinion presented this Thursday (22) also maintained two favored tax regimes established in the Federal Constitution. They are: Manaus Free Zone (ZFM) and Simples Nacional.

Likewise, as indicated in the document prepared by the Tax Reform GT, the substitute provides for specific tax regimes for three categories:

1) Fuels and lubricants: single-phase, with uniform rates and the possibility of granting credit to the taxpayer;

2) Financial services, real estate operations, health plans and forecast contests: rate changes, accreditation rules and calculation bases; and taxation based on income or turnover.

“They are those systems in which, due to the nature of these activities, it is impossible for VAT to be applied directly to the debit and credit system, as it works. That is why we list these specific tax regimes”, explained the speaker.

3) Government purchases: no incidence of IBS and CBS, allowing the maintenance of credits related to previous operations; and the full allocation of the product of the collection of IBS and CBS collected to the contracting federal entity, through the reduction to zero of the rates of the other entities and the increase of the rate of the contracting entity in the same amount.

One of the most sensitive points in the debate on tax reform, the creation of a National Fund for Regional Development aimed at reducing territorial and social inequalities, is also provided for in the text presented, with contributions exclusively from the Union, a requirement accepted by the economic team of the government of President Luiz Inácio Lula da Silva (PT).

During his presentation, the rapporteur himself praised that this has been one of the main obstacles to the advancement of tax reform in the past. “We want it to be a very relevant fact that we have the concrete demonstration, in which we are including in the Constitution the contribution of resources from the Union to support the National Fund for Regional Development,” he said.

But the parliamentarian recognized that there are still edges to cut from the federative point of view for the construction of a design that meets the demands of the majority of governors and mayors. During the presentation of the substitute, he said that, during the next few weeks, he will maintain a dialogue with the main actors involved.

According to the text, the delivery of funds to the States and the Federal District is foreseen to carry out studies, projects and infrastructure works, in the promotion of productive activities with high potential for generating employment and income (including the granting economic subsidies and financing) and the promotion of actions aimed at scientific and technological development and innovation.

Earlier, before presenting the substitution, the rapporteur was, accompanied by the president of the Chamber of Deputies, Arthur Lira (PP-AL), in a meeting with state governors and finance secretaries to seek an understanding on this and other points that are discussed in the tax reform.

The substitute foresees that the resources will correspond to the values, updated, from 2023 to the year prior to delivery, due to the accumulated variation due to inflation measured by the Expanded Consumer Price Index (IPCA), as follows:

1) R$ 8 billion in 2029;

2) BRL 16 billion in 2030;

3) BRL 24 billion in 2031;

4) BRL 32 billion in 2032;

5) BRL 40 billion in 2033.

The text also establishes a loss compensation fund (called the Tax or Financial-Tax Benefits Compensation Fund), to compensate the losses of subnational entities with the change of regime and the end of the possibility of tax benefits for specific sectors of the economy. ., ensuring compliance with validated incentives.

By substitution, from 2025 to 2032, the Union will contribute to the Fund resources that will correspond to the following values ​​(also updated by the variation accumulated by the IPCA):

1) R$ 8 billion in 2025;

2) BRL 16 billion in 2026;

3) BRL 24 billion in 2027;

4) BRL 32 billion in 2028;

5) BRL 32 billion in 2029;

6) BRL 24 billion in 2030;

7) BRL 16 billion in 2031;

8) R$ 8 billion in 2032.

Many of the exposed points were anticipated by the deputy Reginaldo Lopes (PT-MG), who coordinated the Tax Reform GT in the Chamber, in an exclusive interview granted to InfoMoney two weeks ago. Watch the full video below:

Procedure

The idea is that the text is voted on, with possible adjustments, in the first week of July (before the parliamentary recess), according to the calendar presented by the president of the legislative house, the deputy Arthur Lira (PP-AL).

As it is a PEC, the text depends on the support of 3/5 of the deputies (that is, at least 308 of the 513) in two rounds to prosper. Afterwards, it must still go through the Federal Senate with the requirement of the same proportional quorum (which means a minimum support of 49 of the 81 members of that chamber).

More information at a time

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