Understand the tax reform report to be voted on in the Chamber

After almost four months of discussions and debates, the rapporteur for the tax reform in the Chamber, deputy Aguinaldo Ribeiro (PP-PB), presented this Thursday (22) the report on the proposed amendment to the Constitution (PEC) that will initiate the tax reform. Expected to be voted on in the first week of July, the proposal will simplify and unify taxes on consumption and represents only the first stage of the reform.

The proposal unifies two PECs that have passed through Congress in recent years, one in the House and the other in the Senate. This is a preliminary version of the text, which may be amended by the Chamber during pre-voting negotiations.

The main change foreseen in the report will be the extinction of five taxes: three federal; the Tax on the Circulation of Goods and Services (ICMS), administered by the states; and the Tax on Services (ISS), collected by municipalities. In exchange, a dual Value Added Tax (VAT) will be created, divided into two parts. The Tax on Goods and Services (IBS) will unify ICMS and ISS. The Contribution on Goods and Services (CBS) will be collected by the Union.

In exchange for changes that will bring an end to the tax war between states, the government will create a Regional Development Fund to finance development projects in poorer states. Initially budgeted at R$ 40 billion from 2033, the fund is the main point of controversy in the tax reform. Several governors ask for an increase in the value to R$ 75 billion and may mobilize state benches to increase the value.

The proposal provides for reduced rates for some sectors of the economy and makes room for the creation of a system of cashback (return of part of the tax paid), which will be regulated by a supplementary law. The text also provides for changes in taxation on property, with tax on luxury means of transport and inheritance.

Understand the tax reform changes

Extinction of taxes

• Add the following federal taxes: Tax on Industrialized Products (IPI), Social Integration Program (PIS) and Contribution for Social Security Financing (Cofins);

• Extinction of ICMS (state) and ISS (municipal).

Dual Value Added Tax (VAT)

In place of these taxes, two taxes will be created

• Contribution on Goods and Services (CBS): will unify the Tax on Industrialized Products (IPI), the Social Integration Program (PIS) and the Contribution for the Financing of Social Security (Cofins);

• Tax on Goods and Services (IBS): will unify the Tax on the Circulation of Goods and Services (ICMS) and the Tax on Services (IBS);

• In the dual model, the Union defines the CBS rate; and the states and municipalities, from IBS. Regarding local taxes, the difference will be that state governments and city halls will have to agree on a single rate, instead of each public entity reducing taxes to encourage the fiscal war;

• Fully non-cumulative: CBS and IBS will not cascade in any phase of the production chain. Today, the Brazilian model is one of partial cumulativeness. Some sectors of the economy continue to pay in cascades. Others pay for added value at each stage of the chain (they pay on the added value over the previous price), but have exemptions along the stages that result in higher taxation at the end of the chain;

• Billing at destination: goods and services will be taxed at the point of consumption, instead of at the point of origin, as is currently the case. Change ends tax war;

• Exemption on exports and investments.

selective tax

• Surcharge on production, sale or importation of goods and services harmful to health or the environment;

• It will focus on cigarettes and alcoholic beverages, with the possibility of being extended to foods and beverages rich in sugar;

• Originally, it would replace the IPI, but it will be a separate tax;

• Part of the proceeds will be used to maintain the Manaus Free Trade Zone.

Rates

• Single standard rate: will apply as a general rule;

• Rate reduced by 50% for the following groups, with a short production chain and who would be harmed by non-cumulative VAT:

– Urban, semi-urban or metropolitan public transport services;

– Part of the drugs (IBS aliquot);

– Medical devices;

– Health services;

– Education services;

– Agricultural, fishing, forestry and vegetable extractive products in natura (to benefit the basic food basket);

– Agricultural inputs, food intended for human consumption and personal hygiene products (to benefit the basic food basket);

– National artistic and cultural activities.

• If changes in consumption taxation increase general collection, provision in the text provides for the reduction of IBS and CBS rates.

Zero rate of CBS:

– Medicines;

– Higher education education services: Prouni;

Zero rate of IBS and CBS

• Individuals who carry out agricultural, fishing, forestry and plant extraction activities in natura;

• In the case of individual rural producers, exemption from IBS and CBS applies to those with annual revenues of up to R$ 2 million. Producers who receive less than this amount per year may transfer presumed credit (type of tax compensation) to buyers of their products.

Books

• Books will continue with tax immunity.

Cashback

• Possibility of broad return of part of IBS and CBS to individuals;

• The initial idea was to include a refund mechanism for low-income families in the PEC, similar to what exists in some states, but the system will be defined in a supplementary law.

Favored tax regimes

• Maintenance of the Manaus Free Trade Zone and Simples Nacional, a special regime for micro and small companies.

Specific tax regimes

• Fuels and lubricants: single-phase billing (in a single stage of the chain), uniform rates and the possibility of granting credit to taxpayers;

• Financial services, insurance, operations with real estate, cooperatives, health care plans and betting: specific rates, differentiated treatment in crediting rules (use of tax credits) and in the calculation base; and taxation based on revenue or turnover (instead of value added in the chain);

• Government purchases: exemption from IBS and CBS, if the maintenance of tax credits from previous operations is allowed; full transfer of the collection of IBS and CBS collected to the contracting public entity (Union, State or municipality).

National Regional Development Fund (FDR)

• Created to reduce regional and social inequalities;

• Contributions made by the Union;

• Union contributes BRL 8 billion in 2029 and BRL 40 billion per year from 2033;

• Application of resources: studies, projects and infrastructure works; promotion of activities with a high potential for generating employment and income, with the possibility of granting subsidies; actions for scientific and technological development and innovation.

Tax Benefit Compensation Fund

• Fund with Union resources will guarantee tax benefits already granted by the states until 2032;

• In 2028, the fund would reach its maximum point, with R$32 billion. Subsequently, resources fall.

Transition

• Transition from old taxes to new ones starts in 2026 and will take eight years;

• 2026: 1% rate, offset against PIS/Cofins;

• 2027: beginning of CBS, extinction of PIS/Cofins and reduction of IPI to zero (except for products from the Manaus Free Trade Zone);

• 2029 to 2032: gradual entry of IBS and gradual extinction of ICMS and ISS;

• 2029 to 2078: gradual change over 50 years from charging at origin (place of production) to destination (place of consumption);

• 2033: full effectiveness of the new system and extinction of old taxes and legislation.

Payroll exemption

• Any increase in revenue obtained with payroll exemptions for some sectors of the economy should be used to reduce taxation on the consumption of goods and services and relieve the payroll of other sectors that do not benefit from the measure.

IPVA

• Collection of Motor Vehicle Ownership Tax (IPVA) on water and air vehicles, such as jets, helicopters, yachts and jet skis;

• Possibility of the tax being progressive according to the environmental impact of the vehicle. Who pollutes more, pays more.

inheritance and donation

• Progressivity of the Causa Mortis Transfer and Donation Tax (ITCMD);

• Rate will increase according to the value of the transmission; transfer the jurisdiction of the tax on movable property, titles and credits to the State where he is domiciled;

• Collection on inheritances abroad

IPTU

• Possibility for city halls to update the basis for calculating the Urban Property and Territorial Tax (IPTU) by decree;

ׇ• The decree will comply with general criteria provided for in municipal law;

• Measure responds to the request of city halls.

Second stage of the reform

• Deadline of up to 180 days after the enactment of the reform of taxes on consumption for the submission of the second stage of the tax reform, which deals with the reform of taxes on income.