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The Approved Text Brings Greater Complexity for the Secretary Compared to the Original Version, but Still Represents a Significant Improvement Over the Current Model. The New Draft Seems to Be More Efficient and Comprehensive.
According to the analysis presented, economic growth is affected by three main factors. The first factor is complexity, which influences the bureaucratic costs associated with tax assessment and payment, as well as litigation. The second factor is cumulative taxation, which increases investment costs and affects the competitiveness of domestic production. The third factor is allocative distortions. The tax reform has completely resolved the effects of cumulative taxation and allocative distortions, and partially addressed the complexity issue. Although we have not achieved an ideal model, there has been a significant advance in terms of complexity compared to the current situation.
Moreover, the existing system generates significant distortions in the organization of the economy. This results in allocative distortions, where the economy is organized inefficiently due to the distortions present in the current tax system – and this needs to be fully corrected,’ he explained.
The transition from an origin-based to a destination-based taxation model, according to him, will have a profound impact on how the economy will organize itself and should end fiscal competition among the States. Additionally, the prohibition of preferential treatment concessions to specific sectors, beyond what is provided in the PEC (which, despite growing in parliament, is still significantly smaller than the current one), should prevent inefficiencies in resource allocation. This measure is crucial to ensuring a more efficient and equitable allocation of resources in the economy.
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Impact of the Tax Reform on Economic Growth
During the interview, the minister emphasized that the impact of the tax reform on the country’s potential economic growth is not limited to the simplification of the system − which has a direct effect on business efficiency and the willingness to invest. He also pointed out that other aspects maintained in the bill should result in significant effects if approved by the National Congress.
“This is one of the factors at play, but there are two others, which are the current tax burden on investments and the detrimental competition of domestic production − and both are comprehensively addressed in the proposed text,” he argued.
According to the source, the level of complexity and litigation is currently around 100, and without exceptions, we would expect something around 10. With the proposed changes during the congressional process, the expectation is that the level of complexity will be about 30. This represents a considerable reduction compared to the current model, but still a significant increase compared to the absence of exceptions,” stated the source.
“The issue of complexity and litigation go hand in hand,” he warned during an interview with InfoMoney. According to a study conducted by Insper, Brazilian tax litigation reached R$ 5.44 trillion in 2019. The country ranks 124th in the Doing Business ranking, which ranks economies based on the ease of doing business.
Appy emphasizes, however, that despite the changes made during the legislative process, the bill represents a significant advancement compared to the current tax system, as it still offers greater simplicity, eliminates cumulative taxation, and combats allocative distortions that harm the productivity of the Brazilian economy. He also believes that the matter can unlock the country’s potential Gross Domestic Product (GDP), end fiscal wars, and provide greater transparency to taxpayers.
The amendments made by lawmakers to the proposed tax reform of the consumption taxes (PEC 45/2019), while being debated in the National Congress, may not only negatively influence the standard rate of the new taxes to ensure a neutral tax burden, but also complicate the system beyond what was initially planned.
The extraordinary secretary of the tax reform of the Ministry of Finance, Bernard Appy, one of those responsible for the original version of the text under discussion, argues that more intricate rules can, to some extent, undermine one of the pillars of the PEC: the reduction of the level of litigation in judicial and administrative matters related to tax issues – one of the main problems of the current model.
Source: InfoMoney
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