A new chapter in Brazil’s tax reform

The Brazilian tax system is highly complex — composed of several taxes and taxing entities (a federal government, 27 states and 5,000 plus municipalities) — and imposes a high tax burden and excessive cost for taxpayers, which must comply with countless ancillary tax obligations.

As mentioned in our previous article, a broad tax reform is necessary and claimed by the Brazilian society because the current system leads to uncertainty, risks and many conflicts.

In this context, congressman Luiz Carlos Hauly drafted Proposal to Amend the Brazilian Federal Constitution 293/2004, which intends to:

• Substitute the federal excise tax (IPI), federal tax on financial transactions (IOF), federal social contributions on revenues (PIS and COFINS), federal contribution for funding basic education, federal contribution on fuels (CIDE-fuels), state VAT (ICMS), and municipal service tax (ISS) with one single federal VAT – the goods and services tax (Imposto Único sobre Bens e Serviços; IBS);

• Create a federal selective tax for goods whose consumption must be regulated by means of higher or lower taxation;

• Incorporate the social contribution on net profits (CSLL) into the corporate income tax (IRPJ);

• Transfer the state donation and inheritance tax (ITCMD) to the federal government; and

• Strengthen the automotive vehicles property tax (IPVA), which would be also levied on the property of vessels and airplanes.

Such proposal was being broadly debated, but congressman Hauly was not re-elected in 2018. This has not prevented him from continuing to defend his project and assisting the Brazilian Congress in the discussions about the matter.

In April 2019, congressman Baleia Rossi presented Proposal to Amend the Brazilian Federal Constitution 45/2019, which was more restricted and focused on taxes on consumption. Such proposal was drafted by Centro de Cidadania Fiscal (“Fiscal Citizenship Centre” – CCiF), which is an independent institution established to think about improvements to the Brazilian tax system based on the principles of simplicity, neutrality, fairness and transparency.

Congressman Rossi’s project intends to substitute the taxes IPI, PIS, COFINS, ICMS and ISS by the IBS. Under the model proposed, the IBS will be levied on (a) domestic transactions with goods, services, intangibles, assignment and licensing of rights, and lease of goods; and (b) imports of (tangible and intangible) goods, services, and rights. The IBS will be a non-cumulative tax, not levied on exports, and not subject to tax incentives that, directly or indirectly, reduce its tax burden.

As the IBS substitutes federal, state and municipal taxes, it would be a national tax, governed by one single national law. If implemented, it will be collected and overseen by a tax agency composed of representatives of the federal, state and municipal governments, and its revenues will be shared between them. The sharing of tax revenues has always been and may continue to be a ‘deal breaker’ in Brazilian tax reform.

The IBS will be subject to a global tax rate (the same for every good and service), which is composed of the sum of the rates established by the federal, state and municipal governments. Therefore, the IBS rates will vary depending on the location where the transaction is carried out.

On inter-state and inter-municipal transactions, the IBS will be calculated considering the rates established by the state and municipality of destination - an improvement in the tax system -, and such destination will be entitled to receive its share of the tax revenue.

The project also intends to create a federal selective tax, which will be a one-time-charge “sin tax”, to discourage the consumption of certain goods and services.

The proposal also establishes a 10-year transition period, under which the IBS will be gradually increased, and the taxes which will be substituted will be proportionally decreased, until their extinction. This means that the current and new taxes will coexist for ten years, which seems to be quite complicated for taxpayers.

It is intended that the current level of tax burden be maintained, especially because the federal, state and municipal governments cannot afford to lose their revenues.

The tax reform and the social security reform (also under discussion at the National Congress) are of the utmost importance for Brazil’s development. They are expected to increase productivity, GDP and the inflow of investments, and to improve the country’s business environment.

This article was written by Ricardo Marletti Debatin da Silveira (rms@machadoassociados.com.br) and Gabriel Caldiron Rezende (gcr@machadoassociados.com.br) of Machado Associados.