Brazilian Tax Reform: Domestic Law and Foreign Trade Challenges
by: Roberto Codorniz
Facing an economic crisis that started by the end of 2014 and, so far, without any evidence of a solid and consistent economic reaction, Brazil is going through a unique moment of its History by placing structural reforms at the top of its legislative agenda. After labor law reform passed in 2017 and considering that the pension law reform is now at its last stages of approval at the Federal Senate, now it is time for the tax law reform.
There are several projects of tax law reform over the table. The most prominent one at the legislative agenda is based on the project developed by Tax Citizenship Center (‘Centro de Cidadania Fiscal – C.CiF’), endorsed by Congressmen (Baleia Rossi and others) and embodied in the Constitutional Amendment Proposal n. 45/2019. C.CiF Project has four main aspects that can raise concerns.
Firstly, the project intends to replace five existing taxes on consumption – ICMS,
ISS, PIS, COFINS, and IPI – by just one: Goods and Services Tax (GST). The GST is inspired by the European Value Added Tax (VAT). It is non-cumulative, and it targets the value added by each of the participants of the market through a tax credit calculated according to the amount of tax paid by the last step of the economic chain. In this context, the main challenge faced by the GST is to solve the residual cumulativeness of the existing system due to the lack of efficient mechanisms capable to provide a fully non-cumulative VAT.
The GST will target a broad taxable base comprising consumption of goods (both tangibles and intangibles), services, rights and leasing of goods. The choice of taxable basis for the GST is in line with the recent case law from the Brazilian Supreme Court which conceives the concept of goods and services according to a more liberal perspective. It is also better designed to face the challenges brought by the digital economy.
Secondly, the GST collected will be shared by all federative entities (i.e., Federal Union, States, Municipalities and the Federal District) according to its participation in the rate applicable. After collected, taxes will be shared by a national committee, whose components will be representatives from all the federative entities, also in charge to create a common tax statute and common rules for tax assessment.
From the perspective of Brazilian Federation, such a national committee gives rise to concerns related to the adequate balance of political interests in distributing tax revenues and the autonomy of States and Municipalities concerning the source of its tax revenues. Depending on the prevailing political interests, some entities can have its due share on overall tax revenues jeopardized.
Moreover, the Brazilian Constitution has a very rigid delineation of tax competences – some scholars see then as a ‘stone clause’ – within the Federation. Therefore, its doubtful whether those tax competences can be changed by a Constitutional Amendment. If the project is approved, the final word on this issue will be given by the Brazilian Supreme Court creating, for now, legal uncertainty.
Thirdly, the GST intends to replace the existing hybrid regime (based on the principle of origin and destination) by a purely destination-oriented regime – following the European VAT. This is seen as a key measure to solve the domestic tax competition that took place among States and Municipalities through the provision of unlawful state aids. The rationale assumes that, if the place of the consumption market is entitled to jurisdiction to tax instead of the place of production, there will be fewer opportunities for tax competition since the consumption market (i.e., people) cannot be changed as easily as production factors can be.
Furthermore, adopting a purely destination-oriented regime is also understood as a key measure in order to solve the most sensitive problem created by the existing hybrid regime: the incentives created to imports instead of acquisitions of goods and services from the domestic market, and the discouragement to exports.
On the one hand, the existing system induces imports instead of acquisitions from the domestic market because the former is taxable by the importing state at a full rate whereas domestic acquisitions from other states of Brazil are taxable at a reduced rate. On the other hand, the existing system discourages exports since exporting states are commonly poor states in Brazil.
According to the Brazilian Constitution, exports are tax exempted and the taxes on consumption paid must be reimbursed to the taxpayer. Therefore, it is very clear that, from a purely exporting state perspective, inducing exports is not good business. The reform project intends to address this issue by aligning the principle of destination with redistributions of the Federal Union participation on the GST to States according to their participation in exports of manufactured products.
However, without any additional mechanism capable to reduce the economic burden faced by those exporting states, it is doubtful whether this measure will be capable to de facto induce exports. Fourthly, the transitional rules. According to the tax reform project, there will be a period of (at least) 10 years to replace the existing system by the new GST.
Meanwhile, both tax systems (i.e., the current system and the GST) will co-exist. Therefore, there is a considerable risk that the overall tax burden increases, instead of remaining unchanged. Finally, another sensitive issue that creates legal uncertainty is related to the tax credits accumulated by taxpayers. Will the taxpayer be entitled to use them on the new regime? How could those tax credits be offset against the GST? Will taxpayers be reimbursed from those credits? None of those questions have an answer, so far.
In short, we believe that the oversimplification brought by the C.CiF project raises more concerns than solutions to the existing challenges. Some issues are complex by their nature. Tax reforms involving consumption taxes bring many concerns related to Fiscal Federalism, constitutional provisions, domestic and foreign trade, the competitiveness of Brazilian corporations and legal certainty. Therefore, no magical and oversimplified solution is capable to provide for a satisfactory solution.
The main concerns raised by C.CiF project relates to the autonomy of federative entities, the rigidness of constitutional provisions on the delineation of tax competences and the tax credits accumulated under the current system. As the debate is still in its early beginning, is yet to be seen if and how Congressmen will address the several challenges arising from this project.
Texto no site oficial: http://www.ahkbrasilien.com.br/pt/publicacoes/newsletter-recht-steuern/