Volume 6, Number 9, Page 3
Tax Reform Proposed by the Brazilian Treasury
By Mauro Ernesto Moreira Luz
I – Alteration of the original proposal
The original proposal for tax reform presented by the Ministry of the Treasury considered the creation of a federal value-added tax, a state tax on retail sales of merchandise, and a municipal tax on the retail sale of services. The referred proposal , moreover, considered eliminating the IPI (Tax on Industrialized Goods), the ICMS (Tax on Interstate and Intermunicipal Transportation and Communication) , the ISS (Service Tax), the CSL (a Social Contribution on Net Corporate Profits), which would be incorporated in the IRPJ, (Corporate Income Tax), the CONFINS (Social Security tax), and the PIS (Program of Social Integration).
In order to test the revenue collection capability of the proposed model, technical studies were commissioned from the Foundation for the Institute of Economic Research (FIPE) and the Department of Economics of the Catholic University of Rio de Janeiro. Additionally, the Internal Revenue Service prepared simulations. These studies were given technical support from the World Bank, the Interamerican Development Bank and the International Monetary Fund. All studies indicated that, with the tax rates set within reasonable bands, collections from the proposed taxes could equal the collections from the taxes that would be replaced.
After several discussions with the commission tasked with evaluating the tax reform proposal directed by the executive branch, the Ministry of the Treasury thought it fitting to alter the original proposal, considering the negative reactions of the state governments. This negative response was based on the possibility that the proposed model would run counter to the federative system and concentrate collections on income and consumption in the Union, possibly even diminishing state collections.
In this context, and taking in to account the result of the above-mentioned simulations, the Ministry of the Treasury adapted the original proposal, thereby presenting the project of constitutional tax reform in a final form. Thus, let us examine the principal characteristics of the proposal for tax reform presented by the executive branch (a project for a constitutional amendment), whose principal objective is obtaining greater rationality and efficiency in the taxation of consumption in the Brazilian economy.
II – Project of Tax Reform
In general terms, the proposal eliminates some taxes and contributions, and creates other, to wit:
TAXES ELIMINATED
Federal
Tax on Industrialized Products – IPI
Social Contribution on Profit – CSL
Program of Social Integration – PIS
Social Security – COFINS
Provisional Contribution on Financial Transactions – CPMF
Education Salary
State
ICMS – Distribution of merchandise and on interstate and intermunicipal transport, communications and electric energy
Municipal
Tax on Services – ISS (in the current format)
Note: The tax system instituted by this Constitutional Amendment will only enter into effect on the first day of the year following that in which the laws which regulate the new ICMS and the selective tax are published.
III – Principal Characteristics of the New Taxes Federation Tax on the Circulation of Goods, Merchandise and Services(new ICMS)
Currently Brazil has only Union, State, Federal District and Municipal Taxes. The new ICMS will be a Federation tax; The new ICMS will be levied on the distribution of any goods, merchandise and services. Currently, the ICMS (state) is levied only on the provision of services of interstate and intermunicipal transport and of communication, while the ISS (municipal) is levied on the provision of services specified in Complementary Law No. 56/87. With the “federal” tax, all services will be taxed by the new ICMS, as, for example, legal services, construction, financial services. Nevertheless, there may be concurrent taxation with the ISS;
Currently, services provided by professional companies which provide only one type of service (e.g. law firms) are subject to the ISS annually. The tax is charged as a fixed quantity per professional (e.g. R$ 150.00/year per attorney)and is not charged on the value of the services provided;
The Union has exclusive power to make laws about the tax. It is prohibited to grant exemptions, reductions in the tax basis or any fiscal incentive related to the new ICMS. The intention of the executive branch is to eliminate the fiscal war currently taking place (granting of fiscal incentives to new companies) between the states and the Federal District. Article 14 of the Constitutional Amendment holds that mechanisms for compensating the beneficiaries of fiscal incentives granted for a certain time span in relation to modified or eliminated taxes may be established by means of the publication of a specific law;
The states and the Federal District have the power to collect, supervise and render administrative-fiscal judgments. As such, State and Federal District administrative bodies may be maintained (e.g. Tax Court of the State of São Paulo-TIT/SP);
With the exception of the new ICMS, the Import Tax, the Export Tax and the Selective Tax, no other tax may be levied on operations related to electric energy, communication services, petroleum derivatives, combustibles, lubricants and minerals in Brazil;
The tax will be uniform for all goods, merchandise and services. A complementary law may set different rates, keeping in mind the essential characteristics of the products or services;
The tax will be non-cumulative. Currently, fixed assets engender a right to a credit for the ICMS, including those acquired by means of a leasing operation;
The tax will be levied on the importation of goods, merchandise and services from outside Brazil, independent of the legal status of the importer. With the alteration, the new ICMS tries to tax the importation of goods subject to leasing or whose importation is conducted by individuals. Precedent exists which excludes the referred operations from incidence of the current ICMS;
The tax will not be levied on exports, nor on gold when it is a financial asset. The non-incidence of the new ICMS on exports, including services, is thus assured;
The tax will be collected by means of a single total rate that will be the sum of a basic rate with those rates relating to the extra charges of this tax (social contribution); the amount collected by way of the ISS may be offset with the new ICMS;
The Courts of the states and the Federal District, which are invested with federal jurisdiction in all cases, are the competent courts for filing claims and judging cases regarding the new ICMS. Complementary Law may institute a special process for rendering the competence of the Supreme Court of Brazil or the STJ (depending on the case) uniform. The decision of this court will constitute binding precedent for the lower courts. In spite of the fact that the Federal Union makes laws about the new tax, the competence to file claims and judge cases with respect to the tax was expressly given to the State Courts. The fact that the decisions of the Superior Courts will serve as a binding precedent for the lower courts apparently runs contrary to the principle that insures free access to the judiciary and to the free persuasion of the Judge;
The Law will establish mechanisms for substituting the fiscal incentives for the Tax-Free Zone of Manaus which will end as a result of the elimination of the IPI and the modification of the ICMS;
Tax receipts will be divided among the Union, the States and the Federal District;
The portion of the total receipts belonging to the States and the Federal District will be distributed according to the location of the destination of the goods, merchandise or services;
Municipalities will receive 25percent of the amount collected by the states;
The Complementary Law will establish: situations in which the tax is not levied, the basic tax rates (one for the Union and another for the States and the Federal District), manner of participation in determining rates, contributors, tax-substitution, the non-cumulative nature of the tax, the location of the operation for purposes of tax collection.
Transition System:
The Complementary Law sets the transition system for a period of 12 years from the beginning of the collection of the tax;
In the first four years, the portion of the states and the federal district will be divided among them in accordance with the previously existing tax system;
In the eight subsequent years, a system will be adopted which progressively attributes the collected amount to the States and the Federal District where the destination of the merchandise or services is located.
Selective Tax
A Union tax will be levied only on some products and services, to wit: petroleum derivatives, combustibles, lubricants, electric energy, tobacco, alcohol, automobiles, boats, aircraft, luxury goods, merchandise specified in complementary law, and communication services;
The executive branch may alter the rates;
It will be selective and will be levied only once in the chain of production. The sole collection may generate conflicts, since in some situations (e.g. combustibles) innumerable circulation of inputs may occur before the final product is obtained.
Forty-seven percent of the amount collected will be given to:
(i) the Fund for the Participation of the States and the Federal District (21.5 percent);
(ii) Fund for the Participation of Municipalities (22.5 percent) and to
(iii) Programs for financing of the productive sector in the North, Northeast and Center-west regions;
Tax on Financial Transactions – movement or transfer of amounts and credits of a financial nature
A Union tax;
Definitively substitutes the CPMF;
Law will establish the conditions and limits so that the amount collected by way of the IMF may be offset with other taxes and federal contributions.
Social Contribution: Payroll, Extra Charges of the New ICMS, Income or Revenue
A Union tax, owed by the employer, company or similar entity, and levied on;
(i) payroll and other work earnings paid or credited, under any pretext, to the legal entity which provides services, even without an employment relationship;
(ii) operations related to the distribution of goods, merchandise and services: charged in addition to the new ICMS;
(iii) revenue or income: may only be instituted in relation to operations of any nature which are not subject to the new ICMS. This tax will be non-cumulative (currently contributions for PIS as well as for CONFINS are cumulative) and will not be levied on export of merchandise or services.
Tax on Services
Will continue to be a municipal tax;
Exports will be disencumbered. The amount collected by way of the ISS may be offset with the new ICMS.
Mauro Ernesto Moreira Luz is an attorney with Felsberg & Associates in Sao Paulo, Brazil.
