Document spans over 300 pages; Lower House speaker expects to pass new regulations before legislative recess
04/25/2024
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Fernando Haddad — Foto: Marcelo Camargo/Agência Brasil
Finance Minister Fernando Haddad presented the first supplementary bill to regulate the consumption tax reform to Lower House Speaker Arthur Lira and Senate President Rodrigo Pacheco on Wednesday. The Ministry of Finance estimates the average rate for the new taxes—to be set later—at 26.5%, potentially rising to 27.3%. Mr. Lira expects to pass the new rules by the start of the parliamentary recess on July 17.
Valor reviewed the 360-page, 499-article bill, which had not been officially filed in the Congress system as of Wednesday night. Among the most anticipated elements by tax experts and business sectors were the definition of a list of 15 staple foods with a zero tax rate, the six types of goods that will be subject to the new selective tax, and the rules about categories included in specific regimes.
The text follows the guidelines of the proposal to amend the Constitution (PEC) passed by Congress last year, which merges six taxes. They will be transformed into CBS (federal) and IBS (of the states and municipalities). These new taxes will have a single federal legislation, no compounding effect, and collection at the destination. Additionally, the bill provides differentiated taxation for products made outside the Manaus Free Trade Zone that compete with those manufactured in the region.
“The country has been waiting 40 years for a solution to the most tangled of Brazilian problems, which is our chaotic tax system, still unfortunately among the 10 worst in the world but will be among the 10 best in the world following the full implementation [of the reform],” Mr. Haddad said after delivering the bill to the legislators.
The regulatory proposal does not set the rates for the new system. Bernard Appy, the extraordinary secretary for tax reform at the Ministry of Finance, said that the estimates would be similar to those previously released by the ministry before the project’s submission.
“The estimate is very close to what was previously stated, with the design ranging from 25.7% to 27.3%, averaging 26.5%. The reference is the average, but the expectation is that it could be even lower,” Mr. Appy said. Regarding the selective tax, there is no information yet, and the rate will depend on future legislation.
The proposal details the rules for products and sectors taxed at a differentiated rate, a highly anticipated aspect of the regulation. The bill lists, for example, 15 items from the basic food basket, including butter, margarine, milk, rice, and soybean oil, specified according to the Mercosur Common Nomenclature—Harmonized System (MCN/HS).
Three other items also have a zero rate, located in another chapter in the text sent to Congress: horticultural products, fruits, and eggs. Thus, the foods for human consumption subjected to a zero rate would be 18.
According to the proposal, one of the guiding principles for selecting the foods to benefit from favored rates “was the prioritization of fresh or minimally processed foods and culinary ingredients, following the recommendations of healthy and nutritionally adequate eating from the Dietary Guidelines for the Brazilian Population, by the Ministry of Health.”
Another guiding principle, the text points out, “was the prioritization of foods primarily consumed by the poorest, aiming to ensure that as much of the tax benefit as possible is appropriated by low-income families.”
The text also sets 14 foods that will have their tax rates reduced by 60%. The list includes meats, fish, mate, natural honey, and pasta.
On another front, the project details the rules for the professional categories that will be subject to specific regimes, with a reduction in rates by 30%. According to the text, there will be 18 categories under this regime, including lawyers, administrators, accountants, and economists. These professionals must be “subject to oversight by a professional council,” according to the proposal.
Additionally, 27 healthcare services will have a 60% reduction in the charges of the new taxes. The list includes psychiatric, dental, physiotherapy, and laboratory services.
The rules for the new selective tax will also likely be a point of contention in the regulatory process, with sectors diverging on which areas should have the additional taxation, aimed at discouraging the consumption of goods considered “harmful to health and the environment.” According to the government’s proposal, this list will include vehicles; vessels and aircraft; tobacco products; alcoholic beverages; sugary drinks; and extracted mineral goods (iron, petroleum, and natural gas).
According to the text, the selective tax will be levied only once on the product, with no possibility of using tax credits from previous operations or generating credits for subsequent operations. The bill also says that the Federal Revenue Service will be responsible for administering and overseeing the new tax.
Another innovation of the PEC, the so-called “cashback reward,” is also detailed in the proposal. The system provides for the return of part of the taxes paid to individuals from low-income families. According to the text obtained by Valor, the tax returns will be directed to families with a per capita income of up to half a minimum wage, provided they are included in the Single Registry for Social Programs (CadÚnico)—a tool used by the Brazilian government to identify and categorize low-income families.
In the bill, the government proposes a general rule of returning 20% of the CBS and IBS for poor families. In the case of cooking gas, there will be a 100% return of the CBS and 20% of the IBS. For electricity, water, and sewage, it is 50% of the CBS and 20% of the IBS. The only products exempted are those subject to the selective tax, such as cigarettes and alcoholic beverages, which will have no reward.
The proposal also foresees the possibility of creating “fiscal citizenship incentive” programs, aimed at encouraging the final consumer to request the issuance of a tax receipt. This initiative already exists in several states and aims to reduce tax evasion—which could lower the general rate. The IBS managing committee and the Federal Revenue Service may use up to 0.05% of the tax revenue to fund these programs. The proposal does not define how these resources will be used—whether with direct returns to the taxpayer, lotteries, or even advertising campaigns.
Following the delivery of the proposal, the government and Congress must race against time to pass the regulation by the end of the year. Before receiving the text, Mr. Lira indicated that he would try to pass the regulation in the Lower House by the beginning of the legislative recess on July 17. “We’ll establish a backward calendar. If you don’t set a date, everything gets pushed to next week, and things keep dragging on,” he said. After the recess, the Lower House is expected to be virtually inactive due to the municipal elections.
The project delivered on Wednesday is the first of a total of three texts to regulate the PEC passed last year. Another supplementary bill is expected to be sent after the International Workers’ Day holiday to address the managing committee of the new taxes. There is also a need for a statute law to address the compensation fund for the states and companies.
Mr. Lira said that, if the government delivered the reform on Wednesday, he would gather the party leaders to decide whether to appoint two rapporteurs directly in the plenary or create two “small” working groups, with five or six legislators each. According to him, choosing a single rapporteur without forming a working group might be problematic because “many competent people want to participate.” He did not indicate who the possible names might be.
*Por Jéssica Sant’Ana, Raphael Di Cunto, Marcelo Ribeiro, Beatriz Olivon, Guilherme Pimenta, Estevão Taiar — Brasília
Source: Valor International