The project to overhaul the Brazilian tax system is continuing to move forward in the political sphere. On September 4 2003, the House of Representatives approved the tax Bill, which will still be subject to further amendments and to the Brazilian senate's review before its final sanction.
Although characterized as a tax reform, the latest project resembles more a pure re-allocation and distribution of fiscal revenues among the different layers of the Brazilian government, rather than a simplification of the current system, a reduction of the astronomical tax burden or an incentive to increase the economical efficiency, productivity and investments in the country.
The main amendments of the proposed Bill can be summarized as follows:
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Reform of the state value-added tax on sales and services (ICMS) system - each Brazilian state is currently levying ICMS at different rates ranging from 7% to 25% on sales and transfers of goods as well as services related to freight and transportation, communications and electric energy transmission. It is proposed to substitute the current 27 ICMS legislations with one federal legislation. The applicable 44 ICMS rates will be reduced to only five rates imposed at a maximum rate of 25%. For inter-state transactions, the ICMS will be charged by the state of origin of the merchandise or service. Such rule will however be subject to a transitional period.
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Reform of the temporary contribution on financial activities (CPMF) system - CPMF is charged on every debit (for example, withdrawal and transfer) made to a bank account. The CPMF is currently imposed at a rate of 0.38% and was expected to be reduced to 0.08% for the year 2004. As for the approved project, the temporary contribution will be extended until 2007 and will continue to apply at a rate of 0.38%.
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Collection of social contributions on importation of goods and services - for many years local industries have criticized the fact that while the local production of merchandise and rendition of services are subject to social contributions (the social integration programme tax (PIS) and tax for social security financing (COFINS)), imports of merchandise and services are exempt. As per the approved project, importation of goods and services will also be subject to PIS and COFINS. Based on the status of the project, discussions in relation to the applicable rates have not started yet.
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Import and export taxes on services - the proposed Bill is also intending to impose an import tax on importation of services into the country and an export tax on exportation of services from Brazil. Such taxes remain subject to further regulations.
It is important to note that the above-mentioned amendments are proposed to be made at the constitutional level and will thereafter be subject to further regulations by the federal, state and municipal authorities.
Nélio B Weiss (nelio.weiss@br.pwc.com) and Philippe Jeffrey (philippe.jeffrey@br.pwc.com), São Paulo
