If current version is approved, creation of new tax and end of tax breaks will impact prices
Renata Emery — Foto: Divulgação
Basic sanitation services will be subject to the Goods and Services Tax (IBS), according to the known version of the tax overhaul passed by the Chamber of Deputies and currently being considered by the Senate. Today, the sector practically pays only federal taxes, according to experts. With the increase in the burden, representatives of the segment estimate that prices could rise.
The IBS, created by the overhaul, will merge and replace sales tax ICMS and services tax ISS.
The law that determines which services pay ISS (Supplementary Law No. 116 of 2003) does not include sanitation services. Shortly after the text was passed by the National Congress, President Luiz Lula Inácio da Silva (in his first term) vetoed the provisions that established the collection of the tax, claiming that it was not in the public interest to tax environmental sanitation and water purification services.
In 2019, a supplementary bill (No. 155) was presented, and it created the collection, but the text was never considered. Now, the latest version of the tax overhaul, to be analyzed by the Senate, does not provide a more favorable treatment to the sector.
Abcon, an association that represents private-sector concessionaires in the country’s basic sanitation sector, is hiring an independent consulting firm to evaluate the impact. The association’s executive director, Percy Soares Neto, believes that if the tax increase is confirmed, it will lead to a “flood” of requests for contractual rebalancing and a consequent increase in the cost of water and sanitation services.
Mr. Soares estimates that the projected increase could be reversed in the discussion phase in the Senate. “We have already started a very good dialogue with some lawmakers and with the government itself. I think the game of tax overhaul is not over yet,” he told Valor. In the government, talks are being held with the Ministry of Cities’ National Secretariat of Sanitation.
The Abcon executive said he intends to propose a way out to avoid increasing taxation for infrastructure sectors, such as a differentiated regime. In the specific case of sanitation, it is even considered the alternative of equivalence with the health sector.
“We are going to show the senators the impact of the end of the relief on both tariffs and the pace of investment,” said Mr. Soares. “We have to come up with a proposal that is reasonable both in terms of the reformist spirit and the need to bring sanitation to those who don’t have it,” he added.
If the discussion arises during the Senate debates, the government will evaluate it, said a source from the government. She noted that the issue was not raised during discussions on tax overhaul in the Chamber of Deputies.
In general, the government wants to avoid creating new special tax treatments to block additional burdens on the economy as a whole. The basic rate of the IBS and the Contribution on Goods and Services (CBS) will be set to maintain the current level of collection. The more exceptions, the higher the rate will have to be.
Government specialists emphasize that the debate on tax overhaul should take into account not only the taxation of the final consumer of goods and services but also the burden on the entire chain, including investments. There are efficiency gains that will affect the entire economy and reduce business costs, the government argues.
“The sector is going from zero to the maximum rate,” said André Carvalho, a partner at Veirano Advogados, a tax consulting firm.
In addition to the ISS relief, the Federal Supreme Court ruled in 2013 that the ICMS is not levied on the supply of treated water by a public service concessionaire (RE 607056). Some states have a relief, a zero rate, or ICMS credits, which means that concessionaires generally do not pay this full rate either, according to the lawyer.
“It goes from zero (ISS and ICMS today) to a rate that can be between 25% or 30%. And initially, there is no reduced rate for the sector. We see a big impact on IBS and maybe also on CBS,” said Mr. Carvalho. The lawyer said that some companies, if they obtain recognition of reciprocal immunity in court (one public entity cannot collect taxes from another), they will be able to pay PIS and Cofins in the cumulative regime, with the reduced rate of 3.65%, but without the right to credits, which would be even more advantageous.
In addition to taxes, there may be an impact from the end of tax benefits. Today, the sector benefits from Reidi (Special Incentive Regime for Infrastructure Development), which allows the acquisition of the structure that will be used in sanitation with exemption from PIS and Cofins.
The lawyer said that the idea of the overhaul is to have a regime without as many exceptions as today, but ponders that some sectors have achieved differentiation, such as construction and the financial sector.
“Maybe the only good news is that they are taking credits over everything. But we don’t know if, at the end of the day, the tax burden on sanitation will remains. I think it will be more burdensome,” said Leonardo Battilana, a partner in the tax department of the same firm. Mr. Battilana said that in PEC (constitutional amendment proposal) No. 110 there was a forecast of incentives for sanitation services. For this reason, he said, the expectation is that the sector will recover this forecast in the text in the Senate.
According to Renata Emery, a partner in the tax department of the law firm TozziniFreire Advogados, the sector may try to pass on the increase in taxation in the final cost, despite being a sector that suffers from default. For Ms. Emery, the taxation of the sector, as well as energy and infrastructure in general, increases the collection because they are services consumed by everyone. “They are the preferred candidates for collection,” he said.
For Claudio Frischtak, an economist and CEO of consultancy Inter B Consultoria Internacional de Negócios, the sector can pass on any increase in taxation and it is still possible to maintain a benefit for those in need, through a “social tariff”. “Reliefs must be avoided at all costs. “The greater the number of exemptions, the higher the base rate and you start to create distortions, although much smaller distortions than we have today,” he said. The economist also points out that a tax overhaul that brings simplification improves the situation of all sectors.
Currently, Brazil has a 50% deficit in the sewage collection service. The sector estimates that between 13 and 15 million Brazilians do not have access to treated water at home. Since the approval of the sanitation framework (Law No. 14.026/2020), governments have been trying to attract more private investment, which currently runs the service of 26% of the population.
*Por Beatriz Olivon, Rafael Bitencourt, Lu Aiko Otta — Brasília
Source: Valor International