Originally published in the June 22 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s executive branch has decided to move forward on the country’s tax reform currently under review by the Chamber of Deputies
Finance Minister Guido Mantega will take the lead in negotiations with Congress in an attempt to approve the tax reform before year-end.
Mantega also will try to modify some items of the tax reform that have been subject to changes proposed by the Chamber of Deputies. Among them are taxation of basic food products, income taxation of banks and financial institutions, and state VAT (ICMS) benefits.
Deputies have proposed a complete constitutional ICMS exemption for basic food products sold to consumers. Mantega opposes the full exemption because he fears it could compromise state tax revenues, particularly in poorer states where food products represent a significant portion of consumers’ expenses and, accordingly, ICMS revenues.
He believes basic food products should be taxed at reduced ICMS rates to be established in future regulations rather than be subject to a full constitutional exemption. The rates would be uniform throughout Brazil; this could minimize the loss of tax revenues in poorer states and, consequently, prevent those states from voting against the tax reform.
Mantega also wants to regulate how the CONFAZ (a commission comprising all state treasury secretaries and the finance minister) will review, approve, and reject ICMS tax incentives granted by individual states. According to federal legislation, CONFAZ needs to approve tax incentives granted by individual states. But states have historically disregarded that legislation, resulting in the so-called tax war among states, with individual states granting harmful tax breaks and incentives without CONFAZ approval to attract investments from the private sector.
Finally, Mantega wants to negotiate a tax increase for banks and financial institutions. He wants to add to the final text of the reform a provision that would allow different tax rates according to business sector, thus enabling a tax increase for the financial sector.
Currently, banks and other financial institutions pay the same corporate income tax as any other company — 15 percent or 25 percent, depending on the amount of taxable income. The only difference in taxation of financial institutions is the social contribution on net income (CSL). Financial companies pay 15 percent, while nonfinancial companies pay CSL at 9 percent. Because the government wants to eliminate CSL from the tax reform, higher corporate tax rates for financial institutions would be the only way to avoid lowering taxes on financial institutions.
David Roberto R. Soares da Silva