By 382 votes to 118, the Chamber approves the tax reform in the first round

By 382 votes to 118, the Chamber of Deputies approved this Thursday (6), in the first round, the Proposed Amendment to the Constitution (PEC) 45/2019, which deals with tax reform. The final version of the text was presented by federal deputy Aguinaldo Ribeiro (PP-PB) a few hours before the vote, which was adopted by the Lula government and by the President of the House, Arthur Lira (PP-AL). Earlier, federal deputies rejected a request from the PL, the party of former president Jair Bolsonaro, which asked for the postponement of the vote on the proposal.

The text unifies the five main taxes on the consumption of goods and services into a Dual Value Added Tax (VAT). In practice, two taxes. On the one hand, IPI, PIS and Cofins, from the Union, give rise to the Contribution on Goods and Services (CBS). On the other hand, ICMS (state) and ISS (municipal) form the Tax on Goods and Services (IBS).

The PEC leaves to a complementary law what the VAT rate will be, that is, the percentage of tax that will be levied on products and services consumed by Brazilians. It is estimated that the threshold is 25%.

According to the proposal, some specific goods and services will have the VAT rate reduced by 60%, as is the case of education, health, public transport and agricultural products. Target of controversy, the taxation of basic basket items – which in the original proposal would be half of the standard VAT – was zeroed by the rapporteur.

At the beginning of the month, the Brazilian Association of Supermarkets (Abras) presented a study that pointed out that the reform could cause an increase of almost 60% in taxes that fall on the basic basket.

Transition

The transition from the current to the new tax system will take seven years. It starts in 2026 and ends in 2032. In 2033, the new model of taxation on consumption starts to work in full.

Another transition that the text envisages is the one in which the incidence of the tax is changed from the origin of the product or service (as it currently works) to where people consume it. The shift will take 50 years, stretching from 2029 to 2078.

Cashback

The proposal provides for the creation of a cashback mechanism, in which part of the tax paid by consumers is returned. The details will also be left to a complementary law, but the tendency is for the novelty to be restricted to low-income families.

Federal Council

One of the points of greatest discussion in recent days, the composition of the Federative Council was defined by the rapporteur Aguinaldo Ribeiro. Governors fear losing autonomy with the body that will be responsible for collecting, managing and distributing the Tax on Goods and Services.

According to the PEC, the council will be formed by 54 representatives, one for each state and the Federal District. The municipalities will also have 27 representatives. The decisions of the collegiate will only be approved if they have an absolute majority of votes, in addition to having to represent more than 60% of the country’s population.

FDR

The text creates the National Fund for Regional Development (FDR), whose objective is to reduce inequalities between states, municipalities and the Federal District. The FDR will be funded by the federal government.

In the current model, as the tax collection remains with the state that produced the good or service and not with the one where consumption took place, the governors take the opportunity to reduce the tax burden in order to attract investments, a possibility that ends with the reform. The fund is a way to compensate subnational entities for the change in taxation from origin to destination, which will put an end to the so-called tax war.

Federation entities will be able to apply FDR resources in carrying out studies, projects and infrastructure works, promoting productive activities with high potential for generating jobs and income and promoting actions aimed at scientific and technological development and innovation.

The Union will have to contribute R$ 8 billion in 2029 and this amount will gradually grow until it reaches R$ 40 billion in 2032. The criteria for distributing the resources will be left to a complementary law, according to the PEC.

Tax Benefit Compensation Fund

This other fund brought by the proposal aims to ensure that the states do not lose money due to the tax benefits they granted to the productive sector as a way of attracting companies until 2032.

According to the PEC, the federal government will transfer around R$ 160 billion to subnational entities over eight years. Check the contributions year by year.

2025 – BRL 8 billion;
2026 – BRL 16 billion;
2027 – BRL 24 billion;
2028 – BRL 32 billion;
2029 – BRL 32 billion;
2030 – BRL 24 billion;
2031 – BRL 16 billion;
2032 – BRL 8 billion.

selective tax

Known as the “sin tax”, the Selective Tax (IS) will focus on goods and services considered harmful to health and the environment. This is another matter for a complementary law.

Procedure

The Chamber will still analyze the highlights that intend to change the approved text and, only then, vote on the proposal in the second round. After this discussion is over, the PEC goes to the Senate. To be approved definitively, it needs to pass through the sieve of 49 of the 81 senators, also in two rounds of voting.