How does Tax Reform affect the lives of small entrepreneurs?

Newspaper report O Globo addressed the impact of tax reform on small entrepreneurs. Dr. Eduardo Maneira, professor at UFRJ and partner at Maneira Advogados, was heard to speak on the subject.

Simple or MEI: how does the Tax Reform affect the lives of small entrepreneurs?

Special regimes were maintained in the text approved by the Chamber, but tax credits can change cost-benefit

By Ivan Martínez-Vargas — São Paulo

07/12/2023

Header Tax Reform – rates Art Editorial

Tax Reform approved by the Chamber of Deputies proposes maintaining taxation regimes for individual microentrepreneurs (MEIs) and also for Simples Nacional opters. Together, the categories form the majority of legal entities in Brazil. In the case of Simples, however, there are changes in the tax credits generated when a company in this tax regime provides goods or services to another that is not in Simples.

In general, the Tax Reform will replace five taxes from the current system (the federal PIS, Cofins and IPI, the state ICMS and the municipal ISS). Instead, two new taxes will be implemented: the federal Social Contribution on Goods and Services (CBS); and the Tax on Goods and Services (IBS), the collection of which will be paid by states and municipalities. Both make up the so-called dual VAT and are charged only at the destination of the goods and services.

In addition, they are designed to generate tax credits with the aim of zeroing out the tax in the production chains, that is, so that only the consumer pays the tax and the charges made in production and distribution are neutralized.

Simples is the tax regime aimed at legal entities with annual gross revenue of up to R$4.8 million. It brings together the payment of eight taxes (IRPJ, CSLL, PIS/Pasep, Cofins, IPI, ICMS, ISS and social security contribution) at a single rate and has six distinct bands, with rates ranging from 4.5% to 30%. Individual microentrepreneurs have annual revenue of up to R$81,000.

If the text of the Tax Reform is approved by the Senate as it stands, the most relevant change will take place in Simples. Companies in this modality will be able to continue paying the single and simplified rates, but will also have the option of paying the standard IBS and CBS rates, which have not been stipulated and will still be defined in a complementary law.

Companies that make this option will remove the two new taxes from the Simples basket. The difference between the two possibilities, according to the Ministry of Finance and experts, is the impact on tax credits.

What's it like today

Fernando Facury Scaff, professor at the Faculty of Law at USP, explains that today there is already the possibility of tax credits generated by Simples companies, especially at the federal level. Of the 10% single rate paid by a company under this regime, for example, 11.51% refers to Cofins and 2.49% to PIS.

— Those who do not join Simples today, but buy from those who are on Simples, can have full federal tax credits such as PIS and Cofins. In other words, the company that supplies it pays a lower rate, but generates full credit (for its customer). It is a distortion in the system that has the competitive purpose of not harming Simples companies — explains Scaff, adding that these credits can be used to reduce tax collection.

Option 1: continue with Simples and pay the simplified rate

According to the text of the reform, anyone who chooses to collect IBS under Simples, that is, at the single rate that already exists today, cannot receive credits and “transfers as credit only what is collected under Simples”, according to the Ministry of Finance. In this modality, therefore, the credit would no longer be full and would become proportional.

— After the reform, anyone who continues paying taxes within Simples will only transfer proportional credits to other companies, whereas today they transfer PIS and Cofins credits as if the payment were at the full rate. In our view, it will no longer be interesting to buy from micro and small companies under this regime — says Sandra Manata, economist at Fecomercio SP. The entity criticizes the text.

Option 2: continue with Simples and pay the standard IBS and CBS rate

The second option for Simples companies is to stop collecting IBS and CBS in the tax basket and pay these taxes at the standard rate, which has not yet been defined.

If you choose to collect IBS outside of Simples, the company normally credits itself and also transfers the IBS collected as credit, according to the Ministry of Finance.

“The situation of companies included in Simples will improve, as they will be able to choose to collect IBS under the normal regime, maintaining Simples for other taxes. In this case, they will be able to transfer credits in the amount charged as IBS and CBS” says the ministry, in a note to GLOBO.

For tax expert Eurico de Santi, professor at FGV Law and member of the think thank Center for Fiscal Citizenship, this option can be advantageous for many taxpayers.

— Assessment must be on a case-by-case basis. A company opting for Simples that chooses to pay the IBS outwardly will be able to deduct credits for everything it purchases in terms of inputs, for example — he explains.

De Santi participated in the group of technicians that prepared the first version of PEC 45, which gave rise to the Tax Reform text approved by the Chamber.

— It may be that, in some cases, it is interesting for a certain company opting for Simples to pay IBS at the full rate because its client wants to have tax credits, for example. It will be a market issue — says Eduardo Maneira, tax specialist and professor at UFRJ.

For Sandra Manata, this option of collecting IBS and CBS outside of Simples will mean “collecting more tax than today and having more additional obligations”.

How will IBS work

Due to the design of the tax, the new tax will be non-cumulative, that is, taxpayers will deduct the amounts already paid throughout the chain and will only collect the tax related to the added value at their stage of the process, explains de Santi. Tax governance will be carried out by the Federative Council, with the participation of states and municipalities.

— The final taxpayer is the one who pays the tax burden, anyone who carries out economic activity and is registered with IBS does not pay the tax — says Eurico de Santi, adding that the stages of the production chain collect the tax and generate credit.

In a simulation of the production chain for the sale of a pair of shoes, for example, the tax would work as follows, considering a standard rate of 25% (figure sold by the government's economic area):

• Step 1: A supplier sells inputs to an industry. If the value of the service is R$100, the tax to be collected must be R$25 and the price, therefore, R$125.
• Step 2: The industry resells the product to a distributor. The value of the pair is R$200, the tax to be collected must be R$50. As R$25 was already collected in the previous stage, in this stage there will be an additional payment of R$25. The total value is R$250.
• Step 3: the distributor sells the product to a retail chain. For a price of R$400, the tax to be collected must be R$100. As R$50 has already been collected in the previous stages, there will be an additional payment of R$50 in this one. The total value is R$500.
• Step 4: the store sells the product. For a price of R$800, the tax to be paid is R$200. As R$100 was collected in the previous stages, an additional R$100 will be collected in this one. The final price is R$1,000.
• End of the cycle: The consumer paid R$1,000 for a pair of shoes, including R$200 in taxes. This amount corresponds to the sum of taxes collected in the previous stages. In this hypothetical case: R$25 + R$25 + R$50 + 100.

https://oglobo.globo.com/economia/noticia/2023/07/12/simples-ou-mei-como-a-reforma-tributaria-mexe-com-a-vida-dos-pequenos-empreendedores.ghtml