Negotiations underway to establish measures for limiting standard VAT rate to 26.5%
07/12/2024
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Rodrigo Pacheco — Foto: Jefferson Rudy/Agência Senado
Members of the Ministry of Finance and the Senate are already negotiating ways to ensure the effectiveness of the provision included in the consumer tax reform regulations to limit the standard rate to 26.5%. Under discussion is the creation of a program that establishes a hierarchy of measures that can be adopted to reduce the tax rate if it exceeds the maximum limit. Valor has learned the idea is to include this detail in the text of the bill as it goes through the Senate.
Supplementary Bill (PLP) 68, the main proposal for regulating consumer tax reform, was passed on Wednesday night in the Lower House. The lawmakers included in the bill text a measure to limit the standard rate to 26.5%, the sum of the Contribution on Goods and Services (CBS) and the Tax on Goods and Services (IBS).
The initiative came in the face of an increase in exceptions, intending to prevent them from raising the standard rate of the new Value Added Tax (VAT). However, parliamentarians, members of the government, and experts pondered that it was not clear enough how this measure would work in practice.
As a result, people close to the economic team have already contacted senators to establish a program that sets out responsibilities and a timetable for action. The first mechanism would be a command for the government to reduce the number of exceptions to general taxation. This would be followed by other measures such as linearly cutting exceptionalities and raising taxes on income to compensate for the consumption tax. Or a combination of these measures. The details are still being worked out.
In an initial survey, the idea was presented to the Senate leadership, whose president is Senator Rodrigo Pacheco. According to sources, the idea was well received. Negotiators have argued that the tax rate cap needs to be backed up by a set of measures that allow it to be complied with. It’s a logic similar to that of the fiscal framework, in which the fiscal target is supported by a “ladder” of restrictions on spending in the event of non-compliance.
In the suggestion put forward by the government, exceeding the 26.5% limit could itself be a trigger to set off the reviews of the tax reform’s exceptionalities, which will otherwise be carried out every five years.
This way, the measures to ensure the VAT rate does not exceed the stipulated level would be triggered automatically. The version approved in the Lower House only stipulates that, in the event of the cap being exceeded, the government will send a supplementary bill to revise the list of exceptions. However, it does not impose any kind of penalty if the bill is not approved, which makes it possible for the rule not to be complied with in practice.
This mechanism was not initially on the radar of the government and Congress, but it was a political solution to include proteins in the tax-exempt basic food basket. The exemption of meat had been facing resistance because, in theory, it would cause an increase of 0.53 percentage points in the standard rate, estimated at 26.5% without considering this exception.
The increase would happen because the reform is based on maintaining current tax collection. Therefore, reducing taxes on products such as animal protein, cheese and medicines, as the Lower House has done, would increase the standard rate charged on other products.
According to coalition parliamentarians who defended the inclusion of proteins in the basic food basket, the contradiction between increasing the list of exceptions and capping the tax rate could be mitigated by efficiency gains in the fight against tax evasion, delinquency, and litigation in tax collection. This gain could occur, said a source in the technical area, but it will depend on how the collection of IBS and CBS is structured.
The government’s ambition is to have a system that is at the cutting edge of technology, like the banking services in Brazil today. This would make tax collection more efficient and the country’s consumption tax system the most modern in the world.
These changes will be discussed at the same time as the Finance Ministry is working on the next stage: income tax. The issue has been studied by the technical area since last year, but the proposal will begin to be formatted in August. The plan is to send it to Congress at the end of this year, after the elections, in order to discuss it in the first half of 2025.
As soon as he was officially confirmed as the rapporteur for the regulation project, Senator Eduardo Braga told journalists that he would maintain the objective of guaranteeing the neutrality of the tax burden in this case. He was also the rapporteur for the constitutional amendment proposal that established the tax reform.
The bill is expected to pass through the Constitution and Justice Committee (CCJ) before going to the floor vote. As the supplementary bill is expected to be altered by Mr. Braga and receive possible amendments from other senators, the tendency is for the proposal to still go back to the Lower House this year.
The government intends to finish the approval of this part of the consumer tax reform regulations by December. At the same time, the Lower House is still debating the project for the management committee of the new IBS.
*Por Fernando Exman, Julia Lindner, Caetano Tonet, Lu Aiko Otta — Brasília
Source:Valor International