Originally published in the April 17 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com )
Brazil’s President Luiz Inácio Lula da Silva is determined to implement a thorough tax reform, at least at the federal level, during his second term in office, even if the states and municipalities do not comply, according to a statement issued last week by Bernard Appy, the Ministry of Finance’s new secretary of economic policy.
He said the executive branch plans to send a constitutional amendment (tax reform) project to Congress in July or August, after negotiations with the state governments and some of the mayors.
Because of the potential gains to the economy as a whole, Brazil’s executive branch is calling for the creation of a true VAT that combines the state VAT (ICMS) and the municipal service tax (ISS). The new tax would be called VAT-E (with the “E” standing for estado, or state), Appy said.
However, if negotiations with the states and municipalities do not result in any concrete tax reform plans, the executive branch will propose a federal tax reform that will include the creation of a federal VAT (VAT-F) that would replace several existing federal taxes, including the P.I.S. (Program for Social Integration contribution), COFINS (Contribution for the Financing of Social Security), the federal excise tax (IPI), and the social contribution on fuel (CIDE-Fuel).
Appy said the executive branch is also studying a proposal to merge the corporate income tax with the 9 percent social contribution on net income (CSL).
Brazil’s Constitution requires the federal government to share revenues from taxes such as the corporate income tax and IPI must be with the states and municipalities. However, that sharing requirement does not apply to federal social contributions, such as P.I.S., COFINS, CSL, and CIDE. States and municipalities for years have claimed they should receive a share of those tax revenues as well. By merging several taxes into a VAT-F and a new corporate income tax, the federal government would be increasing the portion of federal taxes it must share with the states and municipalities.
However, the goal is not to increase states’ and municipalities’ share of federal tax revenues; the main purpose is to simplify the entire tax system, Appy said. Therefore, the percentages of states’ and municipalities’ share of the federal taxes likely would be reduced to balance the increase in their tax base, he said.
Appy said the complexity of Brazil’s tax system is causing the country to lose out on foreign investment, and harmful tax competition between the states is putting the brakes on domestic investment. He said the tax reform, and the VAT-E in particular, would shift the payment of the tax from the state of origin to the state of destination of the goods, would eliminate the states’ tax wars, and would give investors more security.
Only time will tell whether the executive branch’s new tax reform proposal will succeed or will meet the same fate as the 2003 tax reform, which is still stalled in Congress.
David Roberto R. Soares da Silva