Estimates were made by Finance Ministry’s team and presented to Senate’s tax reform rapporteur
08/08/2023
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Fernando Haddad — Foto: Rafa Neddermeyer/Agência Brasil
Point of greatest doubt in the debates on the tax overhaul, the combined standard rates of the Contribution on Goods and Services (CBS) and the Tax on Goods and Services (IBS), to be created, should reach 25.45% to 27% — according to estimates prepared by the Finance Ministry and delivered on Tuesday to the rapporteur of the proposal in the Senate, Eduardo Braga. The same study shows that the preferential tax treatments approved by the Chamber of Deputies added 4.72 to 4.98 percentage points to the standard rate.
After meeting with Mr. Braga, Finance Minister Fernando Haddad said the study was the first to describe the tax overhaul in number. Others may be prepared, he added. He also said the “scenarios are very well designed” and present “very solid” estimates of tax rates.
Mr. Haddad said his team will act as the Senate’s “backstage” during the discussions. To win the 60 to 65 votes needed for approval, “you have to show what you’re doing,” he said.
Besides the minister, Mr. Braga said that the study will be the basis for discussing the benefits of the changes that will be proposed in the Senate. “The Ministry of Finance is delivering the study promptly,” he said. He also informed that it is expected to complete the work of analysis of the proposal in the Constitution and Justice Committee (CCJ) in October.
The rates indicated in the study are not exact, nor are they definitive, government officials say. They were estimated in different scenarios, always considering that the level of collection will be maintained after the reform.
Thus, the sum of the revenues of the CBS, the IBS, and the excise tax will have to be at the same level observed in the five taxes that will be replaced: social taxes PIS and Cofins, the tax on industrialized products (IPI), the sales tax ICMS and the tax on services ISS. The target level is equivalent to 12.45% of the GDP.
However, the result of the overhaul will be positive, a source say. “We’re going to a better place,” this person added. In the worst-case scenario, the standard rate for the sum of IBS and CBS would be 27%. It would be lower than the current tax level, of up to 34.4%.
The official said that although the ICMS rate is 18%, in most cases this rate is charged on the price of the product – which includes other taxes. If it were calculated on the price of the products without taxes, as is the case with the IBS, the rate would be 24.2%. The same happens with PIS/Cofins: 9.25% compared to 10.2%. The sum of the taxes would be 27.25% now, compared to 34.4% before.
The study has two rates because it works with two scenarios that differ because of the “compliance gap.” The term describes revenue losses due to evasion, avoidance (using loopholes in the law to pay less), non-payment, and litigation.
In the scenario they call “feasible,” they estimate the gap at 10%. This is the level observed in Hungary, where the standard consumption tax rate is 27%, the highest one among Organization for Economic Cooperation and Development (OECD) countries. In the “conservative” scenario, the gap is 15%.
How much the gap will decrease after the overhaul is one of the uncertainties that prevent a more precise calculation of the standard rate. There is a certainty in the Finance Ministry that the reduction will come due to the simplification of the system and the reduction of special regimes. The number of disputes is also expected to decrease. Today, the Administrative Council of Tax Appeals (Carf) is discussing a backlog of R$1.5 trillion.
The second point of uncertainty is the collection of the excise tax. It is not defined which products and services will pay this new tax. The international standard is to levy it on tobacco and alcoholic beverages, but in the case of Brazil, this will only be defined in law to be discussed after the approval of the constitutional amendment proposal PEC 45. The study assumes that only smoking and alcohol will be taxed and that current taxation will be maintained.
A third issue is the specific tax regimes that will be applied to fuels, banks, and real estate, among others. The simulations assume that the collection of the current model will be maintained, but the performance may be different.
Finally, the VAT rate will change according to the exceptions created to the general rule. The more products and services have a preferential tax treatment with lower taxation, the higher the standard rate to be applied in general.
If the original proposal of the government officials was maintained, in which the taxation on consumption would have no exceptions but the Simples Nacional (a simplified tax regime for small businesses) and the Free Zone (a duty-free area in Manaus, in the Amazon), the standard rate would be between 20.73% and 22.02%. The rate of 25.45% to 27% considers all the exemptions passed by the Chamber of Deputies, ranging from private schools to amusement parks. The text can be changed in the Senate.
The officials calculated the weight of the exceptions to the general rule. The most expensive is the reduced rate of 50% for agriculture and food basket, which adds from 1.67 to 1.79 percentage points to the standard rate. A 50% reduction for health services adds 0.62 to 0.63 percentage points to the standard rate. In the case of private education, the increase is 0.32 percentage points in both scenarios.
*Por Lu Aiko Otta, Estevão Taiar — Brasília
Source: Valor International