The first part of the Brazilian government’s tax reform proposals, delivered on Tuesday by the economy minister Paulo Guedes to Congress, recommends uniting two social security levies into a single value-added tax (VAT). The bill focuses on federal taxes, so it avoids what would certainly be a lengthy debate with states and cities, and is aimed at simplifying the country’s complicated tax system.
The new VAT-like levy, to be known as CBS (an acronym in Portuguese for Contribution on Goods and Services), would replace federal consumption taxes PIS (Social Integration Program) and Cofins (Contribution to Social Security Financing), and be set at a rate of 12%.
During a presentation, the ministry said the new tax will be simpler, cheaper and more efficient for companies to implement, and be more transparent for consumers. But, the practical effect of the proposal would not be homogeneous.
According to Felipe Salto, executive director of the Independent Fiscal Institution (IFI) of the Brazilian Senate, the proposal goes in the right direction and is an important signal towards streamlining the tax system in Brazil. “But, of course, it could raise the tax burden in segments where deductions of the current levies are not frequently made, such as in the service industry”, he told LABS. “This effect could be softened, for example, with a gradual adoption of the new tax.”
Currently, PIS and Pasep are collected in two different regimes. The first is cumulative, with a lower rate (0.65% for PIS and 3% for Cofins) that is added up throughout the whole production chain. Firms subject to this system are generally smaller and declare their earnings in a simplified way. Bigger companies use a non-cumulative system, with higher rates of 1.65% and 7.6%, for each levy, and can deduct what was paid previously in the value chain. The new CBS tax would replace all that with a single non-cumulative 12% rate.
The proposal received was the target of two immediate criticisms: that is not bold enough and that it would prove burdensome to small and medium enterprises. Salto concedes that previous proposals that have been presented by both houses of Congress were broader in scope and ambition, but neither of those would be welcomed by the service sector.
“What was presented is timid, as it does not look at ICMS [a state-level goods and services tax], which is outdated and has 27 different regulations”, Salto reckons.
Indeed, calling it a “historic day,” Senate President Davi Alcolumbre said the administration proposal will be analyzed alongside the ones already underway in Congress, which also tackle state and city-level levies, to create a “unified” reform package.
The government will present other “phases” of its tax overhaul in coming months
The government signalled that this was only the reform’s “first phase” and more proposals, possibly three or four, could be expected in the coming months. The subject of a controversial digital payments tax was not raised, but it is not discarded in future proposals.
The expectation is that the government will present bills with changes in the Income Tax (IR) and the federal Tax on Industrialized Products (IPI), in addition to cuts in payroll taxes, substituted by the digital tax.
Brazil’s tax system is famously complicated. According to the Financial Times, a typical UK business spends just over 100 work hours to fulfil its tax obligations, a Brazilian company faces 2,000 hours.“Even some simplification would already spur tremendous gains. Today, entrepreneurs are afraid of making money because they are afraid of being taxed wrongly or not knowing how to pay the tax,” Gabriela Rosa Lopes, a tax consultant at BMJ Consultores Associados, told the British newspaper.
Guedes, the economy minister, said that simplifying the country’s system and reducing the overall tax burden are central in the government’s economic reform agenda, which also includes privatizations.
A tax overhaul was expected from Jair Bolsonaro‘s administration since last year, but it was delayed due to constant spats between the president and the Congress. Coming weeks will not present an easy path for the government as it has to gather support among legislators. A vote on the lower house may take place before the end of the year, but the reform will be probably approved in 2021.