Understand the proposals and differences of PEC 45 and PEC 110

Special report from Valor Econômico showed some of the main differences between the tax reform proposals that are currently being processed in the National Congress. Dr. Eduardo Maneira was interviewed to talk about the topic.

Understand the proposals and differences of PEC 45 and PEC 110

The main idea of the reform is to simplify the tax system

By Adriana Aguiar — From São Paulo

03/21/2023

Two Constitutional Amendment Proposals (PEC) that deal with tax reform are on the Congress agenda: PEC 45, considered more technical, and PEC 110, considered more political. The two intend to replace PIS, Cofins, ICMS, ISS and IPI with a single or dual Value Added Tax (VAT), which imposes taxation only on consumption. VAT is currently adopted in more than 170 countries. This consumption tax would be called Tax on Goods and Services (IBS) and would be around 25% of the value of the product or service provided and must be directed to the city and state where the product was consumed or the service was provided, in addition to the Union. It does not apply to investments and exports.

The two proposals also create a Selective Tax (IS) to discourage the consumption of products that are harmful to health or the environment. And both proposals allow a tax refund program for low-income families, when they consume (it would be a type of cashback). The two projects also maintain Simples for small businesses.

The main idea of the reform is to simplify the tax system. As a result, companies will have to spend less on tax obligations. This is because, since the 1988 Constitution, more than 460 thousand tax rules have been published in Brazil, according to data from the Brazilian Institute of Planning and Taxation (IBPT), which creates difficulties for companies in following all obligations. With the reform, people will also know how much they actually pay in taxes and where that money goes.

Procedure in Congress

The most advanced process is PEC 45, proposed by deputy Baleia Rossi (MDB/SP). It was prepared at the request of Rodrigo Maia, at the time president of the Chamber, by the Fiscal Citizenship Center (CCiF), an independent think tank that aims to contribute to the simplification of the tax system. The project has been in progress since 2019, has already passed through the Chamber's Constitution, Justice and Citizenship Committee (CCJ) and is ready to be voted on in the plenary.

PEC 110, also from 2019, had a replacement text presented by the rapporteur, the then senator Roberto Rocha (PTB-MA), in March 2022, and is ready for the agenda of the CCJ of the Federal Senate. The PEC has already received more than 250 amendments.

Differences between PEC 45 and 110

Despite the similarities, the PECs have some differences that could be decisive in their approval. In general, PEC 45 ends up being more technical and PEC 110 makes more concessions to the sectors involved.

The first is that in PEC 45 there is a proposal to create just one IBS, which would be divided between the Union, States and municipalities, according to the location where the product is consumed or service is provided. In PEC 110, the creation of two taxes was established, an IBS under state and municipal jurisdiction, and another IBS under federal jurisdiction. The proposal would have been a request from the Federal Revenue.

Another big difference is that PEC 45 provides for the adoption of the same rate for all sectors, without exception. PEC 110 makes reservations for regimes favored by the Constitution.

PEC 45 also does not allow the granting of tax benefits, whereas PEC 110 provides exceptions provided for in the Constitution for favored regimes.

PEC 110 allows favored regimes through exemption or adoption of reduced rates; total or partial refund of tax to purchasers of goods and services and changes in crediting rules. And although he does not mention who the beneficiaries are, the rapporteur in the explanatory memorandum mentions the agricultural and agroindustry sector, products that are part of the basic food basket, the education sector, health and public transport, charitable activities, among others.

It is not yet known how the process will progress, but the Minister of Finance, Fernando Haddad, has shown himself committed to approving the tax reform and has worked together to achieve this. Furthermore, economist Bernard Appy, appointed as special secretary for Tax Reform, was part of the CCiF team, the entity that prepared the original text of PEC 45, until the end of 2022.

Expert opinion

According to the director of CCiF and professor at FGV Direito SP, where he is also coordinator of the Fiscal Studies Center (NEF), Eurico Santi, PEC 45 and PEC 110 have many more similarities than dissimilarities. But PEC 110 ended up becoming more politicized, having already received more than 250 amendments, and ended up opening concessions to sectors regarding exemptions, lower rates and different treatments. “Our idea with PEC 45 was not to favor any sector, everyone pays equally on all products and there is no exemption, but those on low incomes can have amounts refunded”, he says.

In the opinion of the postgraduate professor in tax law at the São Paulo Law School (GVlaw), Carlos Eduardo Navarro, partner at Galvão Villani, Navarro, Zangiácomo e Bardella Advogados, the PECs have relevant differences such as the division of money between the tax authorities, since PEC 110 provides for a tax only directed to States and municipalities and another to the Union, which can facilitate processing. “What we hear is that the Federal Revenue wants a tax of its own”, he says.

For Navarro, PEC 110 brings greater harmonization of different interests, by providing tax benefits and different rates for some sectors, which could facilitate its approval. Furthermore, it maintains the benefits for the Manaus Free Trade Zone, which, if denied, could create difficulties. "From a technical point of view, I think PEC 45 is more appropriate as it does not allow any type of tax incentive. When everyone pays, everyone pays less. But there are sectors that are very strong and that are working in Congress politically", he says.

The biggest losers, however, with the reform, in any of the projects, according to Navarro, could be service providers for individuals. This is because in the case of service providers for legal entities, companies will later be able to take credit for these 25% of IBS paid. But in the case of those who provide services to individuals, the person has nothing to do with this credit. In the case of small companies, they will be able to remain in Simples and not have their taxes increased. "Those who provide services to individuals must actually tend to increase prices, they may suffer inflationary pressure. But the majority are on Simples", he says.

Associate professor of tax law at UFRJ Eduardo Maneira, partner at Maneira Advogados, believes that PEC 45, which is being processed more quickly, is the one that should move forward and receive some suggestions from PEC 110. “The government will do its best to approve it. Even more so with Bernard Appy, appointed as special secretary for Tax Reform”, he says. For him, however, it should only be approved if it makes some concessions, such as tax benefits or lower rates for some sectors. In addition to the two taxes, one for the Union and another for States and municipalities.

https://valor.globo.com/brasil/noticia/2023/03/21/entenda-as-propostas-e-diferencas-das-pec-45-e-pec-110.ghtml