Tax Reform 2023: Understand the biggest challenges of the proposals under discussion

Valor Econômico is publishing special reports to debate tax reform. This Friday (24/3) the newspaper brought an analysis of the biggest challenges of the proposals currently being discussed. To address the topic, Valor interviewed Dr. Eduardo Maneira, partner at Maneira Advogados.

Tax Reform 2023: Understand the biggest challenges of the proposals under discussion

March 24, 2023

Debated for more than 25 years, Tax Reform is among the priorities of the National Congress and the federal government

By Adriana Aguiar — São Paulo

(Photo: Jefferson Rudy/Agência Senado)

At the opening of the Legislative year, in February, the President of the Republic, Luiz Inácio Lula da Silva, and the President of the Senate and Congress, Rodrigo Pacheco, called for tax reform in their messages. As well as the president of the Chamber, Arthur Lira, and other deputies and senators.

Today, two Constitutional Amendment Proposals (PEC) that deal with tax reform are on Congress's 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 will only tax 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. It does not affect 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 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.

However, there are some challenges ahead for this approval to actually happen. Valor heard Tax Law professors about what the biggest difficulties would be at the moment.

Resistance from municipalities

Associate professor of Tax Law at UFRJ, Eduardo Maneira, partner at Maneira Advogados, highlighted the resistance of municipalities, especially the larger ones, such as São Paulo and Rio de Janeiro, as the biggest challenge. According to him, of the approximately 5,500 municipalities in the country, 200 are against it. “The large municipality thinks it will lose revenue with the end of the ISS, while the small one is in favor because it believes it will gain more with the IBS [which adds ICMS, ISS, PIS Cofins and IPI].”

The services sector is also resistant to projects, according to Maneira. This is because ISS is currently charged on the provision of the service, at a general rate of 5%, depending on the municipality. With IBS, they would be taxed at 25%.

However, according to Maneira, service providers for companies will have 25% credits. But in the case of those who provide services to individuals, the person has nothing to do with this credit. "We also have to think that the provision of services around the world is expensive and that there may be an increase here too. But the implementation of this in itself will be a challenge", he says. In the case of small companies, however, they will be able to remain on Simples and not have an increase in taxation.

War of narratives

In the opinion of Carlos Eduardo Navarro, partner at Galvão Villani, Navarro, Zangiácomo e Bardella Advogados, postgraduate professor in Tax Law at the São Paulo School of Law (GVlaw), partner at Galvão Villani, Navarro, Zangiácomo e Bardella Advogados, the biggest challenge is communication to convey reality to people, which will in fact change. “There is a war of speeches and narratives and it is necessary to break down certain resistance so that the reform is actually approved”, he says.

As an example, he cites agribusiness, which has some resistance to the project, according to him, often due to lack of information. For Navarro, the situation could get better after the reform, if it is approved, for agribusiness exporters. This is because this sector has several taxes accumulated from the ISS paid to the broker, such as ICMS on the purchase of printers, IPI on the purchase of machinery that comes from abroad, such as payroll, which do not give credits. "With the reform, I would be able to recover these credits. Today any exporter has a lot of tax residue", he says.

There is also the challenge that it could lead to increased taxes on basic food products, but in his opinion, this could be offset by returning credits (called cashback) to the poorest. There is still the difficulty of what to do with the Manaus Free Trade Zone, which today has its own tax benefits.

In addition, Navarro highlights that there is still a risk that projects will be distorted when being processed in Congress. "We always know how the project comes in, but we don't know how the project comes out. If the entire sector lobbies, if everyone is covered, the reform could make the system worse, and it won't work as it could," he says.

According to the director of CCiF, who drafted PEC 45, and professor at FGV Direito SP, where he is also coordinator of the Fiscal Studies Center (NEF), Eurico Santi, as the tax reform greatly affects the powers and ends up being highly politicized in Congress, the biggest challenge would be mainly the resistance of sectors that have tax incentives and low tax burden, such as the Manaus Free Trade Zone, the agribusiness, which is heavily subsidized by the State, and the services sector, which is traditionally under-taxed in Brazil. In addition to large municipalities, which also show resistance.

https://valor.globo.com/reforma-tributaria/noticia/2023/03/24/reforma-tributaria-2023-entenda-os-maiores-desafios-das-propostas-em-discussao.ghtml