Proposed Constitutional Amendment (PEC) 45/2019, which aims to reform the Brazilian tax system, was approved by the Chamber of Deputies on July 7. However, for the tax reform to be effectively implemented after approval in both Houses of the National Congress, it will be necessary to regulate the other aspects through infra-constitutional rules.
The bill that will be submitted to the Federal Senate creates a dual Value Added Tax (VAT), with a federal Contribution on Goods and Services (CBS) and a subnational Tax on Goods and Services (IBS). In addition, a Selective Tax will be instituted, which will be levied on the production, sale or import of goods and services that are harmful to health or the environment.
The objective is to replace five taxes: the contribution to PIS, Cofins, IPI, ICMS and ISS.
Marina Thiago, co-founder of the Pra Ser Justo movement, believes that the text approved by the Chamber was correct. “A small number of tax rates, full non-cumulativeness, the principle of destination, the issue of the federative council. In terms of a good VAT structure, all these points were preserved and we see this in a very positive light.”
Now, it will be necessary to draft and approve rules that detail and regulate the specific aspects of the new legislation. According to the expert, the new rules will mainly be responsible for defining issues regarding the CBS, IBS, differentiated regimes and cashback.
The proposal did not specify the rates of the new taxes, for example. The number that is expected is that of the favored regimes: 40% of the standard rate. Among the beneficiaries are the sectors of education, health, devices for people with disabilities, basic menstrual health care products, public transportation, agricultural products and inputs, and artistic and journalistic productions.
A supplementary law will need to specify the standard tax rate and who will be entitled to the regime. “This ends up being a major point of discussion that we will have in the future, to specify a little more, so as not to open up too many possibilities for interpretation,” stated Marina Thiago.
On Tuesday of last week (11/7), the rapporteur of the tax reform in the Senate, Eduardo Braga (MDB-AM), told the newspaper Folha de S.Paulo that he is considering setting minimum and maximum limits for the IBS and CBS rates in the constitutional text. The senator stressed that the idea is in its initial phase and that he still plans to talk to parliamentarians about the possibility.
The complementary law will also detail the scenarios for refunding taxes, with the aim of reducing income inequality. The complementary law will also discuss how the cashback will be implemented, who the beneficiaries will be and, eventually, what the value criteria will be.
For lawyer Maria Andréia Santos, partner in the tax litigation area at Machado Associados, as the rules applied to CBS and IBS will be essentially the same, everything indicates that this issue will in fact be addressed
only by law.
In addition to the rates and differentiated regimes, the tax expert sees the definition of the credit taking system as a central point. The text foresees that a complementary law will provide for the compensation regime, and may establish hypotheses in which the use of the credit will be subject to verification of the effective collection of the tax levied on the transaction.
“Will the credit have to be appropriated when you have proof of payment from the previous stage? So, will we have joint liability for the purchaser? Does the person who purchased the product have to pay the contribution from the previous stage to ensure payment? Or will it be in the form of payment at the time of financial settlement?” he asked.
Henrique Lopes, a partner in Tax Law at KLA Advogados, emphasized a possible consequence of centralized tax administration: the impact on state and municipal administrative courts. In São Paulo, for example, there is the State Tax and Fees Court (TIT) and the Municipal Tax Council (CMT) in the capital.
“Since you will have a centralized management committee to work on regulatory issues and collection issues, when a doubt arises about compliance with obligations, about the correctness or incorrectness of collection, who will decide that?” he pondered.
Lopes noted that the TIT has a history of rulings on ICMS and the CMT on ISS. Both may have concurrent jurisdiction to hear cases or it may depend on whether the issue is local or state-level. Another alternative would be to nationalize the litigation and install a new administrative body.
Main points to be defined in the tax reform
- CBS and IBS rates;
- Details of specific regimes;
- Cashback mechanics;
- Credit taking system;
- Basic basket products.
- Criteria for defining the target entity of the operation;
- Targets of the Selective Tax;
- Tax administrative process.