Tax reform became a number one priority for the new government’s economic team and leading parliamentarians of the National Congress at the beginning of the year. They hope to approve changes in tax collection in the country this semester.
According to experts consulted by the Brazil in fact, the task is very difficult. This is because the changes under discussion depend on the approval of a Proposed Amendment to the Constitution (PEC), which needs to be approved by two thirds of the House and Senate in two shifts.
Worse than that, even if approved, such a reform prioritized by politicians does little to solve the main problem of the national tax system, the so-called regressivity: the poor paying more taxes than the rich, proportionally.
This means that, despite the political effort it will require, the reform will not be enough to create fairer taxation, as promised by President Luiz Inácio Lula da Silva (PT) in guidelines presented to the Superior Electoral Court (TSE).
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What reform is this?
The tax reform that the government and Congress intend to approve is drafted in two PECs under discussion since 2019: 45/2019 and 110/2019. Both basically deal with the same topic. They propose a reform on taxes linked to consumption.
There are different types of taxes levied on consumption: PIS, Cofins, ISS and ICMS, among others. The two PECs want to unify these taxes and their legislation. All this to simplify the collection of taxes mainly for large companies.
For this to happen, however, at least one of these PECs must pass through Congress. The bylaws of the House and Senate provide for specific rules for voting on projects, as they propose a change in the Constitution, the highest law of the State.
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In this case, a larger number of votes is required than for the approval of a simple bill. Getting all those votes is difficult, all the more so as consensus on reform still doesn’t exist.
Business sectors, such as health plans, are against it. States and municipalities also have their objections, since the unification of tax rules would take away their autonomy to tax certain products.
“There will be a large flow of interest groups there in Congress (to discuss this reform). A very large profusion of interest groups,” said Federal Revenue auditor Mauro Silva, president of the National Association of Tax Auditors of the Federal Revenue Service of Brazil (National Unafisco). “Parliament will have to listen to these people. This will delay the pace of processing.”
Silva, by the way, is skeptical about the schedule idealized by the government and parliamentarians: he does not think that the reform under discussion ends this semester. He also points out that another reform, which would depend only on an ordinary bill of law, should be prioritized: the reform of the income tax, levied on wages and profits, for example.
For the auditor, in addition to being easier to approve, it attacks the regressiveness of taxation, which the reform on consumption does not do.
“They could deal first with the income tax reform. I would work on the other in parallel so that a vote on one would help the other,” he said.
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Marcelo Lettieiri, counselor at the Instituto Justiça Fiscal, also believes that the government and Congress make a mistake in focusing their efforts on reforming consumption taxes. Like Silva, he believes that the reform of the income tax is more important, as it does make the country’s taxation more in line with good international practices.
According to Lettieiri, around 35% of taxes collected in Brazil are on consumption. The average for Organization for Cooperation and Development (OECD) countries is 22%. The proposed reform in Congress does not change this, as it is mainly focused on simplifying charges.
The average income tax in the OECD is 33%. In Brazil, 22% of taxes collected are on income. That income tax reform may change.
For the expert, the government should even propose an agreement to first approve the reform on income and then on consumption, which could be improved.
“The government could actually make a great agreement with the market, which is very interested in this simplification. It approves the income legislation and maintains a commitment, in the second half, to approve the consumption legislation, reducing the tax burden”, he suggested, recalling that the Income taxation makes room for consumption exemption.
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Silva, from Unafisco, stated that reforming the income tax does not only mean correcting the Individual Income Tax table (IRPF) – which, by the way, is also Lula’s campaign promise. There is a need to review the exemptions granted to business owners.
“It is not simply increasing the rates in the table to up to 35% (today they are up to 27.5%) and saying that you are taxing the rich”, said Silva. “If you don’t fight ‘pejoização’ and tax dividends, you won’t charge 35% tax from anyone.”
It is also necessary, said Mauro, to review even the way in which taxes on corporate profits are collected. All this, considering that the competitiveness of Brazilian companies in the world cannot be compromised.
Vilson Antonio Romero, president of the National Association of Tax Auditors of the Federal Revenue (Anfip), said that the entity and other social movements have already presented an amendment to PEC 45/2019 so that it becomes broader, including taxes on income and even assets. .
Only 5% of national taxes are on property: on car or house ownership, for example. In the country, currently, there is also no tax on large fortunes.
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The creation of this tax is foreseen in the so-called Solidarity Tax Reform, which was summarized in the PEC amendment.
“Our project includes taxation on consumption, taxation on income, with taxation on dividends, etc”, summarized Romero.
Guilherme Mello (PT), Secretary of Economic Policy at the Ministry of Finance, defended solidarity reform several times in texts and interviews before entering the government. The new government, however, has not yet declared whether it will seek to approve this proposal.
Editing: Nicolau Soares
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