Government spending pressures and revenue assurance efforts could still prompt rate adjustments

12/18/2024

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Brazilian Lower House’s rejection of 34 amendments made by the Senate to the tax reform regulation—which had contributed to raising the standard rate of the Value Added Tax (IVA)—is unlikely to ensure that the rate remains at 26.5%, experts interviewed by Valor suggest. Government spending pressures across various levels and the pursuit of revenue guarantees may also lead to future rate adjustments.

The changes to the tax reform bill made in the House, after its approval in the Senate, are in line with the executive branch’s proposal, said political scientist Rafael Cortez of Tendências Consultoria.

“Now we wait for the Presidency of the Republic to review the text, which may veto certain sections, and for the Finance Ministry to calculate the reference rate,” explained tax attorney Thais Shingai, partner at Mannrich and Vasconcelos Advogados. “Rapporteur Reginaldo Lopes [Workers’ Party, Minas Gerais] mentioned wanting to return to the 26.5% ceiling, but it’s important to remember that even in the House, the exceptions implied a higher rate.”

When the bill reached the Senate, the IVA projection was already at 27.97%, according to government calculations. With the Senate’s amendments, the rate was estimated to increase to 28.55%. Rapporteur Lopes removed 34 of the Senate’s proposals—a reduction sufficient to lower the IVA by 0.7 percentage points.

Among the key factors that elevated the IVA, Ms. Shingai pointed out the removal of the provision that equated basic sanitation services with healthcare services, which allowed the sector to benefit from a 60% IVA discount. Other expansions to the list of exceptions, such as the inclusion of cookies and mineral water, and the reduction of the tax rate for leasing medical equipment, were also vetoed, which she considers positive.

The elimination of the proposal that mandated tax substitution for transactions involving alcoholic beverages, soft drinks, and tobacco products was also seen as a positive move, she adds. “It would have created unnecessary complexity, which would have been very problematic, especially since there is already a ‘split payment’ system and destination-based taxation.”

Regarding changes to the Selective Tax, Ms. Shingai highlighted the exclusion of weapons from the list and the reinstatement of sugary beverages, which she views negatively. “This is a controversial issue. Some countries have implemented similar taxes without achieving the desired health outcomes. For example, Mexico saw a decrease in soft drink consumption but an increase in other beverages,” she explained.

Ana Cláudia Utumi, a tax attorney and partner at Utumi Advogados, noted that defining negative health externalities for the Selective Tax is complex. “The difference between medicine and poison is the quantity, and sugary beverages also include juices that are part of children’s lunchboxes.”

However, not all Senate changes to the Selective Tax were removed, Ms. Utumi pointed out. The Lower House retained the section stating that the tax should only apply to the extraction of mineral goods and no longer to their export. The original government proposal had mandated the tax regardless of the destination of the mineral goods, including exports.

With fewer benefits, Ms. Utumi said the standard rate should be lower, but questions whether the changes are sufficient.

“There’s another factor impacting the standard rate, which is government spending that continues to rise. The final rate will be determined in 2032. So, even with the changes made now and attempts to lock the rate in law, it’s impossible to guarantee a fixed rate with growing public expenditures and the notion that revenue won’t decrease. It’s not just the rising expenses themselves, but the fact that some states aren’t paying all their bills,” she explained.

Adjusting this, according to Ms. Utumi, should come from a review of expenditures. “But such reviews are usually modest, and we’re already seeing the chaos caused by the recent surge in the dollar.” She also suggested that adjustments could come from revising tax benefits. “However, over the years, we’ve seen how difficult it is to alter tax benefits. Revoking them involves a very complicated power struggle.” Therefore, the most likely path, she said, would be altering the tax rate.

Ms. Utumi explained that the maximum rates for the CBS (federal Contribution on Goods and Services) and the IBS (Tax on Goods and Services) will be set by Senate resolution. States and municipalities may implement IBS rates below the maximum but must apply the same tax level across all activities. She expects this rule to discourage state and municipal governments from reducing their IBS rates.

As for the Selective Tax rates, they will be defined by ordinary law. Federally, Ms. Utumi noted that Selective Tax and CBS revenues should be equivalent to the current collections of PIS (Social Integration Program), Cofins (Contribution for the Financing of Social Security), and IPI (Tax on Industrialized Products). These three taxes will be abolished under the new consumption tax reform.

*By Marcelo Osakabe, Marsílea Gombata e Marta Watanabe

Source: Valor International

https://valorinternational.globo.com/