Congress enacted in a solemn session this Wednesday (20/12) the tax reform, considered fundamental to simplify tax collection in the country. The reform provides for the unification of taxes to simplify the country’s tax model. Five taxes will be replaced by 2 Value Added Taxes (VATs), one federal and the other shared management between states and municipalities. The rates have not yet been defined, but they should be around 27.5%. One of the main points of the reform is to exempt basic food products consumed by most needy Brazilians from taxes. Thirteen sectors will have taxes reduced, such as education, health, and public transport. Positive outcomes have already been noticed, as S&P improved the country’s risk rating.
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CBS and IBS
According to the proposed amendment to the Constitution (PEC), five taxes will be replaced by two Value Added Taxes (VATs) — one managed by the Union, and the other with shared management between states and municipalities:
The Taxes over industrialized products (IPI), Social Integration Program (PIS), and Contribution to Social Security Financing (Cofins) will become the Contribution on Goods and Services (CBS), managed by federal authorities.
The Tax on Circulation of Goods and Services (ICMS) and the Tax on Services of Any Nature (ISS) will become the Tax on Goods and Services (IBS) with shared management by states and municipalities.
Estimates indicate that future taxes on consumption, to maintain the current tax burden – considered high – would amount to around 27% – and would be among the highest in the world.
The new rules establish the possibility of differentiated treatments, and sectors with reduced rates, such as education services, medicines, public passenger transport, and agricultural products.
The text also provides for a Selective Tax — nicknamed the “sin tax” — to discourage the consumption of products that are harmful to health and the environment and ensures tax exemption for basic food products.
Non-cumulative
With the implementation of VAT, taxes would become non-cumulative. This means that, throughout the production chain, taxes would be paid only once by all participants in the process. Currently, each stage of the chain pays taxes individually, and they accumulate until the final consumer.
Potential GDP Increase
The government believes that the reform will bring an increase in productivity and, consequently, a reduction in costs for consumers and producers, stimulating the economy.
Analysts estimate that the tax reform on consumption has the potential to increase Brazil’s potential GDP by at least 10% in the coming decades.
30 Years
The vote was considered historic, as the tax reform was discussed for 30 years by successive governments without ever being approved.
Risk Rating
For the first time in 12 years, the risk rating agency Standard & Poor’s (S&P) raised the rating of Brazilian sovereign debt. The country went from rating BB-, three levels below investment grade, to rating BB, two levels below. S&P granted a stable outlook, which does not indicate changes in the coming months.
In a note, S&P attributed the improvement in the Brazilian rating to the approval of the tax reform. According to the agency, the conclusion of discussions around the modernization of the Brazilian tax system expands the trajectory of implementation of pragmatic policies in the country over the last 7 years.
