President Luiz Inácio Lula da Silva sanctioned this Thursday, 16th, with vetoes, the first law that regulates the tax reform of taxes on consumption, approved by Congress in December. The text creates the Value Added Tax (VAT), which, according to government estimates, could have a standard rate of 28%, the highest in the world, according to the Organization for Economic Cooperation and Development (OECD) ranking in 2022. the last available.
The text sanctioned in a ceremony at Palácio do Planalto brings the main operating rules of VAT, which will be dual: the Contribution on Goods and Services (CBS), the federal VAT, and the Tax on Goods and Services (IBS), the VAT on States and municipalities. They will replace five taxes that currently affect consumption and are embedded in product prices: IPI, PIS/Cofins, ICMS and ISS.
“The projection of the data we have today points to a (VAT) rate of 28%. It doesn’t mean that this will be the case,” said the extraordinary secretary for tax reform, Bernard Appy, at a press conference on the vetoes on tax reform regulations. Asked about the VAT rate ceiling established by Congress in the project, at 26.5%, Appy said that this issue will only have to be reviewed in 2031, when the government will have to present a proposal to cut tax benefits to bring the rate to the limit approved by the Legislature.
The sanctioned law lists the items that will make up the national basic food basket, which will have a zero rate; the targets of the Selective Tax, called the “sin tax”, which will apply to items considered harmful to health and the environment; the cashback rules, the return of part of the tax to low income, and the products and services that will have a reduced rate, among others.
Refinery
The government maintained the benefit to the Amazônia Refinery (Ream), from the fuel distributor Atem – one of the biggest obstacles to approval by Congress. Appy stated that the decision not to veto the device was to prevent the benefit from becoming broader – that is, more companies accessing the advantage of the Free Zone. According to him, the decision was technical.
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In the final phase of the regulation of the tax reform, during its processing in the Senate, rapporteur Eduardo Braga (MDB), who is from Amazonas, included the refining sector among those served by tax incentives from the Manaus Free Zone, benefiting a single company from the Northern region.
The way the benefit was written created a trap for Lula, since, as it is not possible to veto just a portion of an article, the Ministry of Finance’s understanding was that the veto could widen the gap for more tax incentives.
What was vetoed
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Appy stated that President Lula’s vetoes of the project maintain the essence of what was approved by Congress. “Fifteen blocks of vetoes in a project of 544 articles is very little,” he said. According to Appy, the Executive’s option was to respect the decisions of the Legislature.
Lula vetoed an additional benefit given to companies in the Free Zone. The original Treasury text offered a presumed credit of 6% to sectors that had the IPI reduced to zero by government decision. As they lost their comparative advantage over companies from other regions – which is based on the IPI –, the presumed credit was offered as a kind of compensation.
The text approved in Congress extended this presumed credit to sectors that today already have zero IPI, that is, they do not depend on it to have an advantage over competitors. The Treasury understood that granting the benefit to these sectors would go beyond the benefits that currently exist in the region – and, therefore, recommended a veto to Lula.
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The president also vetoed a section that prohibited the collection of Selective Tax on exports of mineral goods, in addition to another that exempted investment funds from the new IBS and CBS.
Next steps
The government still needs to approve the second tax reform regulation project, which deals with the IBS Management Committee, VAT for states and municipalities. The project was approved by the Chamber and is now in the Federal Senate. Yesterday, the Minister of Finance, Fernando Haddad, stated that “the Senate is ready to vote on another tax regulation”.
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Furthermore, the government will still send other projects to Congress, such as the one that defines the “sin tax” rates. Appy said that the submission of this project “should occur in the next few months, but there is no deadline yet”.
Asked about the deadline for installing the Management Committee, Appy said it was four months, but that it would depend on the election of municipal representatives to form the body. “As it is a critical point, the option made in Congress, with our support, was to foresee the creation (of the Management Committee), temporarily, in 2025, so that it could function in operationalization”, he said, highlighting that the rules are yet to come in the second tax regulation project.
Political tone
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The ceremony also had a political tone. President Lula said that “a miracle happened” in Brazil to allow the approval of tax reform during his term.
“When I was elected (in my third term), I heard that it was impossible to govern this country, at a time when Congress had stolen the president’s budget and that the right had elected more people than the left. Many people said that it would be impossible to govern and approve the tax reform, because the government was very minority”, he stated, praising that the democratic regime allowed dialogue and debate on the proposal so that it could be approved after decades.
The president of the Senate, Rodrigo Pacheco (PSD-MG), said that the election of President Luiz Inácio Lula da Silva was “decisive” for the approval of the tax reform and its regulation. “The election of President Lula, his inauguration and his prioritization of tax reform were decisive in the fact that today we are exhausting this great journey of decades”, said the senator.
Representing Congress, Pacheco said that the reform was possible “due to the reciprocal understanding of the Chamber and Senate” and because “society understood that the current system could no longer prevail”.
The senator, who is leaving the presidency of the Senate, said he was proud that it was his “last act (in office) on this long journey of tax reform to hand it over to President Lula for sanction”.