Fiscal Redesign: Five Potential Transformations on the Market Horizon

Rethinking the Brazilian Tax System: Significant Advances Aim for Simplification and Equity

The proverbial phrase “haste makes waste” takes center stage in the long-awaited final report of the Tax Reform. The market and the population yearn for a straightforward and less bureaucratic national tax system. The recently released proposal brings important highlights toward this bureaucratization. However, they require careful planned engineering to not deviate from its great mission: to promote the common good.

Primarily, the proposal impacts consumption tax, always a hot point of debates regarding its excessiveness. Comparatively with other countries, our rates on goods can be up to five times higher, as pointed out by the research “Tax Statistics in Latin America and the Caribbean”.

Amid this disparity, five prospective changes stand out in the new draft of the Tax Reform.

The Changes: Simplification and Equity

Goods and Services Tax (GST) and Selective Tax: The proposal aims to unify PIS, COFINS, IPI, ICMS, and ISS into the Goods and Services Tax (GST), a dual value-added tax (VAT), federal and subnational. The latter grants greater autonomy to states, the Federal District, and municipalities. At the same time, it suggests the creation of a selective tax on goods and services harmful to health and the environment, such as alcoholic beverages and cigarettes. Although not new, this measure encourages the discouragement of this harmful consumption.

Non-cumulative Tax: The proposal strengthens the full non-cumulative nature of the GST, in addition to providing that the credit arises from the value highlighted on the invoice, regardless of proof of payment. The timeline for the transition between the current system and the reformed one, although not stipulated, must be balanced to avoid harming companies and extending the current bureaucracy.

Regional Development Fund: This sensitive point suggests the creation of a fund to offset tax benefits offered by states and municipalities in attracting companies. Legal security must be guaranteed, as well as a considerable contribution from the Union, around R$ 50 billion per year.

Tax Cashback: A strategy to combat inequalities, particularly for the economically disadvantaged population. When making a purchase, the consumer with lower purchasing power would be reimbursed for the taxes, reducing the impact of the consumption tax burden.

Property Tax on Water and Air Vehicles: The reform intends for the property tax on motor vehicles (IPVA) to also cover water and air vehicles. Although commendable for promoting greater equity in the taxation of assets, it needs to be meticulously organized.

The urgency of the Tax Reform is undeniable. However, a rushed and superficial discussion is not the answer. The analysis of these proposals needs to be expedited, but in a conscious manner, aiming for an efficient tax solution and a simpler and fair national system for all.

Credits: Gustavo Molina