• Brazilian Tax Reform
    Federal Pact and National Development

    By Hugo Reis Dias


    Tax Reform, like the Social Insurance Reform and the Labor Reform, is not, by any means, a new discussion amongst Brazilian politicians, economists and legal experts.

    Recently, however, the subject has acquired new contours with statements of the new Brazilian Minister for Economic Affairs – the economist Paulo Guedes – who sustains that the country is in dire need of a “brutal” Tax Reform, that must be achieved through a dramatic simplification of taxes and its means of collection.

    The Minister, in various occasions, has been a severy critic of the actual system, considering it a “barbarity” and a “savagery”, proposing, as an alternative, the combination of three to five federal taxes in a “Single Federal Tax” (Imposto Único Federal, in Portuguese).

    It must be said, however, that his proposition is not the only one already being considered by the Republic Presidency.

    Nonetheless, the Minister’s proposal holds two advantages that can give it a more prominent place between all those Tax Reform proposals.

    For a brief explanation, it must be said that the Brazilian Federal Constitution of 1988 defines the fiscal competence of each federative entity (Federal Union, States, and Municipalities). This way, each federative entity has the competence to collect determined taxes, over specified triggering events. Brazilian States, for instance, are competent to collect and regulate the Services and Merchandises Circulation Tax (ICMS, in Portuguese), which represents most of their Tax Revenue.

    It must also be explained that the Brazilian National Tax System, as defined in the Federal Constitution, has five taxes.

    The two that must be mentioned for the comprehension of this article are the “Taxes”, per se (in Portuguese: Impostos – which will be referred to only between quotation marks, so as to not be mistaken by taxes, latu sensu), that are not bounded to any specific government activity, and there are the “Social Contributions”, which can only be created and regulated by the Federal Union and are destined to the funding of specific state activities, like health, social insurance and welfare.

    That being said, and returning to the matter in hands (the Minister Paulo Guedes’ Tax Reform proposal), the first advantage to be observed is its simplicity over other proposals.

    We can see that, with the combination of only federal taxes (those which collection is under the Federal Union competence), including “Taxes” and “Social Contributions”, in a single Federal “Tax”, there is no need for a general renovation of the Brazilian National Tax System, which would be the case of Federal Deputy Luiz Carlos Hauly’s proposal, that aims the creation of a National “Tax” on Transactions with Goods and Services (IBS, in Portuguese), and would be similar to the Value-Added Tax (VAT), employed in the USA and some European countries.

    The so-called IBS would be, then, a unified national “Tax” over goods and services, in substitution to, for instance, the ICMS and ISS (“Tax” on Services, which competence to collect belong to the Municipalities), among others. The trouble is that the creation, in Brazil, of a VAT of some sorts, would demand a total restructuration of the National Tax System, since the taxing of goods and services is not just under the Federal Union’s competence, but also under the States’ and Municipalities’ – although, for truth’s sake, it would have a huge impact in a big problem that haunts Brazilian States’ relationship: fiscal war (albeit some poorer States might want, and truly need, this “war” to thrive and prosper).

    In contrast, the Minister’s proposal aims the reunion of only federal taxes, which would avoid political disputes between the Federal Union and other Federative Entities, as the last would certainly not be eager to waive their bigger source of income (actually, the Brazilian tax that generates the biggest revenue between them all - ICMS) and the possibility to formulate and apply their own fiscal policies.

    The second advantage that stands out is that it would propitiate a better distribution of tax revenue between the Federal Union and the other Federal entities – which was, moreover, pointed out by the Minister, who treats it as a promise to States and Municipalities.

    The emphasis on this second advantage arises from the great contrast between the tax revenue of the Federal Union and the other Federative Entities.

    It helps to comprehend that contrast the analysis drafted by the Brazilian Federal Revenue Office (Receita Federal do Brasil) about the national tax revenue between the years 2006-2017 (“Carga Tributária no Brasil no Ano de 2017. Análise por Tributos e Bases de Incidência”).

    In this analysis, it is pointed out that, in 2017, 68,03% of all tax revenue in the country arise from federal taxes – equivalent to R$1,447,106,000.00 (one trillion, four hundred and forty-seven billion, one hundred and six million Brazilian currency unities – “Reais”).

    The other 31,97% of national tax revenue comes from taxes under States and Municipalities competence – 25,72% from Brazilian States and 6,26% from its Municipalities.

    It is true that a portion of the taxes collected by the Federal Union are shared with the other Federative Entities. Those taxes, however, are only “Taxes”, per se, which does not include “Social Contributions”.

    In this scenario, it is known that the Federal Union tends to prioritize Social Contributions income over “Tax” income, as the foremost one is not shared with anyone. The revenue from “Taxes” is approximately 24% of the total Federal Union income, while the income from Social Contributions represents approximately 35% of its receipt.

    It can be seen, then, that with the reunion of at least some Social Contributions – as proposes Paulo Guedes – in a single Federal “Tax”, there would be an increase in the Federal Union receipts that are shared with the other Federative Entities – this is to say, a raise in the portion of receipts shared with States and Municipalities.

    We must stress that said raise would not only answer long-time requests from States and Municipalities, but also attest to the Federal Pact and foster National Development.

    From another point of view – this one related to the taxpayers – the reunion of taxes, be it as intended by either Paulo Guedes or Luiz Hauly, represents relevant simplification that, for sure, will have a positive reflex in the reduction of companies’ expenses with tax compliance.

    According to the World Bank, by 2015, each Brazilian company spent approximately 1958 hours with bookkeeping and tax compliance – for instance, Latin America and Caribbean Region companies average 330 hours per year, while Germany companies spend only 218 hours per year and North American companies spend as little as 175 hours per year.

    It can be seen, thus, that a Brazilian Tax Reform that targets a general simplification in tax obligation bureaucracies, specially, as demonstrated in this article, the one proposed by the Brazilian Minister for Economic Affairs, Paulo Guedes, represents an important step in the Brazilian struggle to strengthen its business environment, and, if done properly, can have huge positive impacts to Brazilian taxpayers and Federative Entities alike.

    Written in collaboration with Matheus Alvarez Peres.

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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Hugo Reis Dias

Professor, Attorney and Legal Adviser based in Belo Horizonte, Minas Gerais. Attending Masters Degree in Public Law, Specialization degree in Tax Law and Law graduate from Pontifical Catholic University of Minas Gerais (PUC/MG). Experience as attorney and legal adviser in the area of Corporate Law, with a focus in Tax Law. Experience with international legal practice at Trowers and Hamlins’ tax team, based in London. Post-graduation professor at IEC – PUC/MG (Tax Law). Post-graduation professor at “Centro de Atualização em Direito Tributário – CAD” (Upgrade Center in Tax Law). Post-graduation professor at “Escola Superior de Advocacia – ESA da Ordem dos Advogados do Brasil” (Lawyer’s Superior School of the Brazilian Bar Association). Chief-Counselor of Três Corações’ Municipal Taxpayers Board. Member of the Brazilian Association of Tax Law (ABRADT) and Tax Law Committee of the Brazilian Bar Association’s Minas Gerais Section.

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