Tax on consumption and income may change, but burden does not fall under the next government

Changes in income and consumption taxation that reduce the tax burden on the poorest and increase the tax on the richest are seen as a priority for the next government by presidential candidates and tax lawyers.

Although they are in agreement with the diagnosis, the vision of how to reduce inequality and the complexity of the tax system has not found consensus in the political and business world. Several proposals in this regard have reached Congress since 2019, two of them from the government itself, but none have come to fruition so far.

Among them are three consumer tax reforms (one of them by the current government) and the Ministry of Economy’s project to correct the Income Tax table, tax dividends and reduce the tax rate on companies.

The latter was even modified and approved by the Chamber, but it has been in the Senate Economic Affairs Committee for a year and faces strong opposition from the business sector and liberal professionals.

In his government program, President Jair Bolsonaro (PL) says he will continue to work for the project. Candidates Lula (PT), Simone Tebet (MDB) and Ciro Gomes (PDT) also talk about changing the Income Tax to tax the richest.

Ciro and Tebet cite the proposals that unify consumption taxes, such as the federal IPI and PIS/Cofins, the state ICMS and the municipal ISS, among the priorities. Currently, they are stuck in Congress for lack of agreement in the political area and with the productive sector.

Former President Lula also talks about simplifying and reducing the taxation of consumption of goods and services, within his “solidarity, fair and sustainable tax reform”.

Tatiana Cappa Chiaradia, partner at Candido Martins Advogados, highlights two points of these projects, the correction of the income tax table and the simplification of taxes on goods and services, as priorities to make the tax system more progressive.

“If you seek a slightly fairer taxation, you need to organize the issue of consumption and income tax”, he says.

Brazil is a country that taxes consumption more and less income and property, compared to other countries, according to the IBPT (Brazilian Institute of Tax Planning). As a result, it penalizes the poorest, as shown by several studies in the area.

Another problem is that taxes on consumption are more concentrated on goods, which proportionately weigh more in the shopping basket of low-income people, and less on services, which are more present in the budget of higher incomes.

Gilberto Luiz do Amaral, president of the IBPT, highlights the consensus among most candidates around another point, the taxation of dividends, a historic claim by the Brazilian left that tried to be implemented by the current government in the IR reform.

Proposals from candidates in the tax area

Jair Bolsonaro (PL)

Return taxation of profits and dividends
Correction of the IR table, with exemption of up to five minimum wages
Reduction and simplification of taxes such as import, IPI and ICMS
Extend exemption to the worker

Lula (PT)

“Solidarity, fair and sustainable tax reform”
Simplify and reduce consumption taxation
Rich people will pay more income tax
Unburden products with higher added value and embedded technology

Ciro Gomes (PDT)

Reduction of taxation on production and consumption and increase on income
Combination of the five taxes on consumption (VAT of PEC 110)
20% cut in subsidies in 2023
Income tax on profits and dividends and taxation of large fortunes (over BRL 20 million)

Simone Tebet (MDB)

Reform taxes on consumption, with the creation of VAT
IR reform
Tax reduction target
Zero taxes related to technology transfer

Source: Proposals submitted to the TSE

The tax expert believes that the best way to approve this and other changes is to work on a single proposal that makes the system more progressive (burdening the richest more heavily), which would help break resistance from politicians and businessmen.

He believes that it is not possible to reduce the tax burden, given the amount of demands that Brazilian society has, but that it can be redistributed.

“A general reform that affects income tax, taxation on consumption and on property. Let it be done at once, taking advantage of this first year of the next term. Otherwise, it will be left to the next president, as has always happened.”

Ricardo Maitto, partner in the tax area of ​​the TozziniFreire office, also says that, in addition to simplifying and unifying, as proposed in Congress, it is necessary to reduce the burden on consumption.

This drop in revenue must be offset by greater taxation of income, not through higher rates, but through mechanisms to combat distortions, such as pejotization and the broad scope of special regimes such as Simples and Presumed Profit.

In the Income Tax reform, he says that all presidential candidates talk about taxing dividends, but that this must be done in conjunction with reducing the burden on legal entities.

“What is not possible, as some presidential candidates are saying, is just to tax dividends. It would be a brutal increase in the burden. The problem with the IR is not a rate, it is pejotization, a very special regime, which means that the collection does not talk to the income production in Brazil.”

Simone Musa, partner at Trench Rossi Watanabe, says that the taxation of dividends, accompanied by a lower tax on legal entities, is a way of reducing the regressiveness of the tax system and also increasing the country’s competitiveness, since this is the model followed by several economic partners. Such a measure must be accompanied by international treaties to avoid double taxation.

“If the government really wants to achieve the so-called progressivity, there is no other way than to reduce the taxation of legal entities and tax those who are receiving, and not the business activity itself”, he says. “I don’t see any harm in this legislative change. People fight a lot against it, but it’s looking at individual interests and not the more global interest.”

She also sees chances that other important tax changes for the country’s competitiveness will come out of the picture by next year, regardless of who wins the elections, such as transfer pricing legislation — the way countries divide tax revenue into international operations carried out by multinationals within the same economic group.

“This is a reform that I see happening regardless of the government and whether Brazil joins the OECD or not.”

Review of the Brazilian Tax System

Problems and possible answers

Highly complex tax system (many rules and ancillary obligations)

• Unification of value-added taxes (IPI/ICMS/ISS and PIS/COFINS) in a single VAT
• Unification of accessory obligations

High level of litigation, creating an environment of insecurity

• Simplification of PIS/COFINS regimes or extinction of taxes for the creation of a single VAT

High regressivity of the system, which proportionally taxes those who have less income and assets

• Reduction of tax rates on consumption
• Review of IR collection methodologies in order to combat the problem of “pejotization” and restrict the application of special regimes
• Review of the rules on property taxation (IPTU, ITR, IPVA, in addition to the ITCMD)

Lack of transparency in the granting of tax benefits, antagonism in the tax/taxpayer relationship and inefficiency in debt collection

• Reduction in the percentage of fines
• Creation of alternative dispute resolution mechanisms (mediation, arbitration)
• Strengthening administrative courts and standardizing their rules

Source: Ricardo Maitto/TozziniFreire