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Initial discussions on tax reform in Brazil commence

15 November 2017

ITR Correspondent

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The first discussions relating to the most recent tax reform bill, which was submitted to the National Congress, have started in Brazil.

The need to change the Brazilian tax system is unquestionable: its enormous complexity, the numerous taxes existing in the country, the undesirable concentration of taxation on consumption and production and high administrative costs, both for taxpayers and for tax authorities, are the main drivers of the tax reform bill.

Indeed, the current Brazilian tax system excessively burdens production and consumption and, as a result, jeopardises the economic growth of Brazil in a time of crisis and low employment.

The bill of law indicates that the mere simplification of the system would be enough to guarantee a GDP growth of 1% per year during the next 10 years, which could lead Brazil to surpass some of the great economies of the developed countries.

Besides the desired simplification, the tax reform seeks to loosen the tax on consumption and production, being tax neutral, that is to say, by preserving the collection of tax while not increasing the tax burden.

In general terms, these are the premises and motivations indicated upon the presentation of the bill. However, there are some challenges that require an in-depth analysis of the bill.

The bill proposes to eliminate several taxes, specifically the tax on industrial products (IPI), the tax on financial transactions (IOF), the social contribution on net income (CSLL), the PIS contribution, the Pasep contribution, the COFINS contribution, the contribution to an education salary, and the CIDE contribution on fuels. All of these taxes are collected by the federal government, except for the tax on circulation of goods and services (ICMS) and the tax on services (ISS), which are collected by the states and cities, respectively.

Pursuant to the new bill, the federal government will collect the following taxes, some of which are already under its responsibility: tax on foreign trade (imports and exports), income tax (IR) for individuals and entities, rural property tax (ITR), tax on conveyance of property mortis causa and gifts (ITCMD) and, eventually, the new tax on great fortunes (IGF), as well as social security contributions by employers (collected on the payroll) and employees (collected on their salaries).

The federal government will also be responsible for the so-called selective tax (IS): a tax on consumption of specific products, such as cigarettes, beverages, electric power, telecommunications services, and fuels, which was created to allow the tax on goods and services (IBS), under the responsibility of the states, to have its rate adjusted to the average rate practiced in developed countries. In other words, taxes that are lower than the tax rate usually charged under the ICMS regime.

With respect to the states and the federal district, the main tax shall be the tax on goods and services (IBS), which should be governed by a single national law, with centralised collection and inspected at the state level. This tax will not be cumulative, so that all the financial credits may be considered, with an "external" calculation (avoiding the charge of tax on the tax amount itself) and the collection of which will be done by the federal government for subsequent distributions to the states. The acquisition of fixed assets and of products to be exported shall not be subject to this tax.

The states and the federal district would also be responsible for the taxation on ownership of vehicles, the IPVA tax, to which boats and aircrafts were added. The revenue obtained from such tax, however, shall be destined to the cities, following the premise that property tax must be for the benefit of the local taxation system.

A single rate, as suggested by the new tax bill, shall cause a significant increase on service taxes, which are subject to the cumulative system of taxation and, by its own nature, accumulate few credits. This is not very different to what happened when the non-cumulative system for PIS/COFINS contributions was implemented.

The revenue obtained from the collection of ITCMD and IPVA, which would be collected by the federal government and the states, respectively, will be allocated to municipalities, which would collect property taxes by means of the IPTU tax and the tax on conveyance of real property 'Inter Vivos’ (ITBI).

These are the main topics discussed in the tax reform bill submitted to the Congress, which will entail further countless discussions by tax authorities and taxpayers.

As said above, it is remarkable that we have this matter included in the agenda of priorities in Brazil. As tax practitioners and scholars, we welcome the opportunity to submit our opinions on the matter in order to collaborate, in a sense, with the rationalisation and simplification of the Brazilian tax system.

Some sceptics fear that, despite all discussions, we have no political conditions and time for the analysis of the tax reform bill and its vote by the end of 2018 when the current House of Representatives will end its term in office. And, we cannot deny that this is a strong possibility.

Despite the favourable political circumstances, which are essential for the approval of all and any change of this size, it is fundamental that the matters in the bill of law are exhaustively debated, including the legal and constitutional aspects.

In other words, we must be mature and address relevant matters raised by the tax reform, promote its debate and face head-on the issues in place for many years, so that, if and when the tax reform is approved by Congress, we have already discussed a good share of its aspects. 

This article was written by Glaucia Maria Lauletta Frascino, partner at Mattos Filho.

Glaucia Maria Lauletta Frascino_Mattos Filho_New Glaucia Maria Lauletta Frascino

International Correspondents