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Monday, January 30, 2023
HomeEconomyGovernment sews support for tax reform in Congress

Government sews support for tax reform in Congress

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The Minister of Finance, Fernando Haddad (PT), began political articulations to pave the way for the advancement of tax reform in the National Congress in the first half of the year, as signaled by the economic team.

The construction of a favorable environment for this agenda involves the new composition of the Legislative boards, whose election will take place on February 1st.

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The PT has already supported the re-election of the current mayor, Arthur Lira (PP-AL), but now other parties of the so-called broad front are moving in the same direction.

The MDB is one of those who can support the reappointment of Lira in the hope of obtaining the commitment of the President of the House with advancing the tax reform agenda – a priority issue for the party.

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PEC (Proposed Amendment to the Constitution) 45 was authored by federal deputy Baleia Rossi (MDB-SP), national president of the party. The proposal unifies a series of taxes on consumption, such as PIS/Cofins and IPI (Tax on Industrialized Products) and today has Haddad’s preference in the discussions.

The tax reform agenda was also one of the main flags of the presidential campaign of Simone Tebet (MDB), now Minister of Planning and Budget in the government of Luiz Inácio Lula da Silva (PT) and who should be included in the discussions of the measure to try to reduce resistance in Congress, an environment in which she has experience as a former senator.

Since the beginning of the government, the Minister of Finance has reinforced his intention to prioritize the approval of the reform, with emphasis on the simplification of taxes on consumption. The assessment is that the measure can help unlock the business environment and boost growth.

Last Thursday (12th), hours before presenting his first package of measures to reduce the deficit, Haddad had lunch at Lira’s official residence. The theme of the meeting was precisely the tax reform.

In addition to them, Baleia Rossi, deputy Aguinaldo Ribeiro (PP-PB) —rapporteur of PEC 45— and the special secretary for tax reform, Bernard Appy, were also present.

According to interlocutors, the president of the Chamber demonstrated, at the time, that he was committed to prioritizing this agenda in Congress. The Minister of Finance, in turn, emphasized the importance of approving the reform for the economy. The president of the MDB, on the other hand, placed the project as something relevant for the acronym.

Lira’s support for the PEC is considered a key factor for the joint’s success. In 2021, it was the mayor himself who helped undermine the chances of advancing the proposal in the House.

In May 2021, Lira extinguished the special commission of the Chamber that debated the tax reform, on the same day of the reading of the opinion on the matter in the mixed commission formed by deputies and senators. The collegiate had been constituted to debate the theme together with PEC 110, from the Senate.

The decision was taken months after Lira was elected to the Presidency of the Chamber — he was victorious after facing off against Baleia Rossi, an ally of former President of the House Rodrigo Maia.

At the time, Lira justified the decision by claiming that the objective was “to preserve the processing of the tax reform in the National Congress”. Even so, the practical effect was the invalidation of the opinion presented by the then rapporteur.

Blocking the tax reform also served the interests of former Economy Minister Paulo Guedes, who preferred to approve the changes in a piecemeal fashion.

Now, with an economic team favorable to the PEC and with the possibility of Lira embarking on the defense of the proposal, the new government has a more positive perspective on the chances of advancement.

Political leaders even hope that Aguinaldo Ribeiro will remain as rapporteur, but this will still depend on the final agreement with Lira, who usually gives preference to allies in handling strategic issues.

While awaiting the definition of the political chessboard, the economic team has also been active in technical discussions.

On January 10, Haddad had a meeting with his secretariat to kick off the internal discussions. According to interlocutors, it was just an initial presentation of the main elements of the reform.

On Tuesday (17), Appy received the president of the MDB and author of PEC 45 at the headquarters of the Ministry of Finance to discuss aspects of the reform. The meeting lasted over an hour and a half. The current secretary was one of the technical formulators of the proposal when he was still director at the CCiF (Centro de Cidadania Fiscal).

This Thursday (19), Appy should also meet with Senator Roberto Rocha (PTB-MA). He was the rapporteur for PEC 110 in the Senate and served as chairman of the joint tax reform commission – but will leave the House this month with the end of his term.

The expectation of the technicians is to be able to build a text of greater consensus, which reconciles points of PECs 45 and 110, to increase acceptance in Congress and among business sectors.

Deputy Zeca Dirceu, who will assume leadership of the PT in the Chamber in February, says he will articulate the approval of the proposal in Congress. “Everything the government sees as viable I will be the first to defend”, he says. “If there is any topic that I feel is not currently viable, I will be the first to alert you.”

The two PECs propose the unification of taxes on consumption in one IVA (Value Added Tax), which may vary in name and, mainly, in scope. In the proposal formulated by Appy, VAT would be national, while in the Senate text, VAT is dual: there would be a rate for the federal government and another for states and municipalities.

The second model faces less resistance from governors and mayors, who seek greater autonomy in defining their rates. Therefore, the topic is under discussion, although there is still no final decision on the path to be adopted.

The government will also need to face resistance from business sectors, especially services, which are concerned about the effects of fluctuations in the tax burden.

The service sector, which currently has a lower tax burden than industry, fears being harmed by a single rate. As VAT is non-cumulative, that is, it is not levied in cascade at each stage of production, a higher rate may be necessary to maintain collection. However, the segment would have few tax credits to deduct, since its main input is labor —unlike the industry, which acquires raw materials and can use the taxes paid in these operations as credits to deduct the balance to be paid with the Revenue.

José Carlos Martins, president of the Cbic (Brazilian Chamber of the Construction Industry), says that the tax reform based on the introduction of a value-added tax could have an impact on its labor market and property prices.

“The big concern we have is the aspect of taxing work. In our sector, there are six items that we don’t have taxation on: labor, land, tax expense, financial expense, administrative expense and enterprise profit. This is equivalent to 75% of my selling price,” he said.

“There is no room for cost increases other than to increase prices, there is no escape”, added Martins, who defends a differentiated treatment for the sector.

The CNM (National Confederation of Municipalities) argues that the text includes some points, such as the equal management of the tax on goods and services between states and municipalities in the federative council and the competences of the municipalities to define their own IBS rates.

In addition, it wants a prescription insurance that establishes that, for 40 years, no entity receives less than it currently receives. The confederation is also calling for the creation of a “compensation fund for states and municipalities that, despite not having a drop in revenue, may present significant reductions in the slice of the cake” —the fund would be made up of 3% of IBS free revenue and should reach to R$ 10 billion in 20 years.


MOST ADVANCED PROPOSALS AT THE CONGRESS

1) PEC 45 – report by Deputy Aguinaldo Ribeiro

  • Replaces five taxes (PIS, Cofins, IPI, ICMS and ISS) with a Tax on Goods and Services and a Selective Tax on cigarettes and alcoholic beverages

  • Six-year transition in two phases, one federal and the other with ICMS and ISS

  • Replaces the exemption of the basic food basket with the refund of taxes for lower-income families

2) PEC 110 – Senator Roberto Rocha report

  • Creation of CBS (Contribution on Goods and Services) with merger of PIS and Cofins

  • Creation of the IBS (Tax on Goods and Services), with the merger of ICMS and ISS

  • Replaces IPI with a selective tax on items harmful to health and the environment

  • Creation of the Regional Development Fund, supplied with IBS resources

  • Tax refunds for low-income families

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