Brazil has a tax reform in discussion in the Congress, as I write. Let us be objective about it and let me convey to you all the changes proposed. They will certainly simplify the system, which is quite complex, but at the same time will have some important side effects that must be considered. Let`s check the basis, and then I will comment on what I see as really important:
1 – Present VAT System (State and Federal)
Present VAT system comprises 3 Federal taxes, one which is a classical VAT taxe and two that may or may not be VAT (alternatively, a Tax on Sales):
FEDERAL:
- IPI – Excise Tax or Tax on Industrialized Products
- PIS and Cofins (basically the same legislation)
These will be substituted by the CBS – Contribution on Goods and Services (Contribuição sobre Bens e Serviços)
STATE/COUNTY:
- ICMS – State VAT, a “full VAT” tax
- ISS – Not a VAT, but a “Tax on Services” levied, in fact, at County Level
These will be substituted by the IBS – Tax on Goods and Services (Imposto sobre Bens e Serviços)
One important change is that the VAT will, from now on, be collected at the ORIGIN of the product, and not at the DESTINATION. This will certainly ensue a series of guerrillas among states. The largest ones, like São Paulo, always complained that produced the largest portion of goods and services, which were then collected at the non-producing states (usually the poorer states). With over 30% of the Brazilian population, São Paulo has always felt strongly against it.
EXCISE TAX – Selective CBS:
Goods and Services that are considered hazardous to the environment or to the health of population will suffer additional taxation, added to CBS rates (tobacco, alcohol, etc).
RATES and LEVELS:
All taxes, CBS plus IBS, will have one joint rate, and will be classified under 3 basic levels:
Standard Rate – Which is still not determined and will be established by the Senate.
Reduced Rate – Predefined as being 50% of the Standard Rate, and therefore depending on the Senate, also. Some products and services defined preliminarily as reduced are:
- Education
- Health services
- Medicine and medical devices
- Public transportation
- Fishing, agriculture, forestry, and plant based products extraction
- Food basket – the contents of it are still to be defined and may vary by region of the country
- National artistic and cultural activities.
Exempted – Zero rate applied for some products and services such as:
- Public Transportation
- Some Medicines and Treatments
- PRO UNI – The national program “University for Everyone”
- Social Programs, such as food coupons, etc.
- Individual Rural Producer whose annual gross revenues are up to R$ 3.6 million
2 – Other Federal Taxes
Tax on Property – IPTU
IPTU will have changes in the collection method and will be defined by federal decree.
Tax on Automotive Vehicles – IPVA
IPVA – will be reintroduced with a progressive character related to the pollution generated by each vehicle. IPVA will apply to jets and boats.
Tax on Wealth transmission, donations and inheritance – ITCMD
A new ITCMD with have progressive rates will be levied at the State where the donor is domiciled. Currently, it is based on where the Asset is located. This is an important change.
3 – Manaus Free Trade Zone
Brazil has only one Free Trade Zone – the “Zona Franca de Manaus” (ZFM). Manaus is in the middle of the Amazon Basin Area. The rationale for ZFM is that of creating ordere3d and sustained employment in a region that would otherwise be a void in northern Brazil. Therefore, despite the clamor for the extinction of ZFM, it will remain with its present role, which has been quite a success for the region, in the last decades.
4 – National Simplified Taxation System – SIMPLES
Micro and Small size companies will be able to maintain the reduced and simplified taxation method, as is today, including the exemption of formal bookkeeping records, which frankly is a disservice to these businesses.
Notwithstanding, Micro and Small sized companies will be able to opt to remain in the regime or leave it, to another taxation method (today, Presumed or Real Profit methods of taxation).
Other Aspects
We will not delve into specific aspects such as transition periods (8 to 50 years of transition period, depending on the taxation) nor in the specific methods of compensation for loss of collection among States and the Union. This is where things can go south in all the negotiations, with Governors of smaller states claiming for more compensation, and 5.570+ Mayors in different sides of the win-lose spectrum of this battle.
More to come!