Originally published in the November 23 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s executive branch is finalizing a tax reform bill as a part of the negotiations for the approval of the extension to 2011 of the 0.38 percent bank transactions tax (CPMF). The bill is expected to be submitted to Congress by November 30.
However, members of the executive branch do not expect the bill to contain all of the tax reform suggestions proposed earlier this year, including the mergers of several taxes into a single VAT, part of which would be collected by the federal government and the rest by the states. As originally conceived, the new VAT was to include the federal excise tax (IPI), the state VAT (ICMS), the municipal service tax (ISS), COFINS (the Contribution for the Financing of Social Security), P.I.S. (the Program for Social Integration contribution), and the fuel tax (CIDE-Fuel).
But for political reasons, the new tax reform project is likely to include neither IPI nor ISS in the new VAT. The core of the reform is expected to focus on replacing the ICMS with a new VAT regime under which the tax in interstate transactions will be attributed to the state of destination of the goods sold, and not to the state of origin as is currently the case with the ICMS. In other words, the most important aspect of the reform seems to be to try to put an end to harmful tax competition among the states as they seek to attract investment.
The government reasons that attributing ICMS to the state of destination in interstate transactions would not help states gain much in attracting new investment to their territories because the ICMS generated by those investments (in interstate transactions) would go to the states consuming the goods produced therein. Therefore, the new tax reform proposal should merge the ICMS, P.I.S., COFINS, and Cide-Fuel into the new VAT with effect from January 1, 2010.
However, the tax reform proposal may continue to undergo changes until November 30, because details are still being revised and are subject to debate.
Another measure that may be included in the tax reform bill is the merger of the 9 percent social contribution on net income (CSL) with the corporate income tax, for a total tax on corporate income of between 24 percent and 34 percent, depending on the amount of annual gross income. One of the reasons the government historically has kept CSL separate from corporate income tax is that CSL is a social contribution and the government does not have to share its revenue with the states and municipalities (as it does with the corporate income tax). However, the merger of the two taxes may be used to persuade governors to support the CPMF extension. (Governors usually have some influence over federal lawmakers and the senators of their home states.)
As for the exclusion of the IPI from the new VAT, the government decided that the moment is not right for that tax merger because many of the most important tax incentives for industrial taxpayers are concentrated in IPI exemptions and reductions. The government said it still plans to merge the IPI into the new VAT when the existing IPI incentives are no longer in place.
The executive branch decided to exclude the ISS from the new VAT because if the two taxes were merged, municipalities would lose taxing power over their most important tax. As an alternative, the government suggested creating a new municipal retail sales tax (IVV), but because of the diversity of the more than 5,000 municipalities in Brazil, it would be impossible to establish a uniform rate that would compensate for the loss of ISS revenues in all the municipalities.
Many observers are skeptical about the new tax reform proposal because after almost five years under President Luiz Inácio Lula da Silva’s administration, most of the 2003 tax reform has still not been put into place. Many argue that the government has not had time to thoroughly review the new tax reform proposal and is using the proposal solely to try to guarantee the extension of the CPMF to 2011. (The executive branch promised to submit a tax reform proposal to Congress by November 30 in exchange for the Senate Commission of Constitution and Justice’s approval of the CPMF extension. The commission approved the extension on November 13.)
David Roberto R. Soares da Silva