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The Effective Reform Will Continue to Depend on Complementary Laws, Highlights Tiago Severini.
The Proposed Constitutional Amendment (PEC 45/2019) regarding tax reform, which was approved by the Federal Senate and returned to the Chamber of Deputies due to the amendments made, deserves praise for maintaining its focus on simplifying the tax system at the macro level.
However, as mentioned in a previous article for the agency epbr, the effective success of the tax reform, despite its remarkable progress so far, is not yet guaranteed. There are challenges and uncertainties to be faced in order for the promised benefits to be fully realized.
The final text of PEC 45 will have to undergo a series of adjustments and additions through Complementary Laws (LC) to minimize existing inconsistencies. Otherwise, the new tax regime may become as complex as the current one, considerably increasing the challenges and costs of the transition.
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Preservation of Competence to Define Special Regimes Without Transition Rules for Benefits Such as Repetro
The comments present highlight the approved text that preserves the delegation to the LC of the competence to define the rules of special regimes for the new value-added taxes (VAT) instituted. However, there is no explicit provision for a transition rule aimed at ensuring the preservation, until the final deadline, of benefits with a fixed term and onerous condition, as is the case with Repetro.
In this context, the concern already mentioned in a previous article about the consequences that the approval of the PEC reform would have on the special regimes currently in force is reiterated.
These regimes, such as Repetro and Reidi, play a crucial role in the energy sector, focusing on attracting capital investments and benefiting programs such as drawback, customs warehouse, or DAC (certified bonded warehouse).
Special customs regimes play a crucial role in promoting exports and simplifying customs procedures in Brazil, as well as helping to reduce the tax burden applied to international operations. These regimes are part of projects of an international nature and are fundamental in boosting foreign trade.
Due to their strategic importance, these regimes are present in different countries, with variations, and are also provided for in international agreements of which Brazil is a signatory. This demonstrates the relevance and scope of these regimes in the global trade context.
The Repetro and Reidi programs aim to reduce capital investment costs (capex) for new projects. Their main objective is to decrease the high cost of capital for oil and gas exploration and production projects, in the case of Repetro, and for infrastructure, with an emphasis on energy projects, in the case of Reidi.
Both benefits seek to attract investments, aiming to generate jobs and income in the country. In addition, the exemption of capex can offset the amounts related to the exemption received, through Taxation direct and indirect taxes, royalties, and special participations. These programs aim to make the enterprises economically viable, generating significant benefits for the country’s economy.
Impact of Revenue Waivers and Delegation to Complementary Law
It is essential to emphasize that revenue waivers in capital investments (capex) are compensated in terms of collection. If these waivers were eliminated, many projects would be at risk of not being carried out, decreasing total revenue instead of increasing it, due to the high level of risk involved.
The transfer of competence to regulate the regimes applicable to new taxes to the Complementary Law, without establishing clear guidelines, represents a significant increase in the risk associated with any new projects involving the adoption of special regimes. This is due to the uncertainty surrounding the timing of the approval of complementary laws and the inability to anticipate the content of the proposals, which can directly impact project pricing.
The increase in risk results in rising costs, primarily concerning financing, which diminishes the appeal of new projects.
The PEC 45 project, currently in the Senate, raises concerns by suggesting that current suspensive regimes may be dispensable in a reformed tax system due to the incidence on value added and the supposed neutrality throughout the production chain and in the comparison between imported goods and locally supplied ones, as noted in the reports attached to the proposal.
After the reform, the tax system will maintain a federal value-added tax and another at the state/municipal level, without the possibility of credit compensation between them, due to federal limitations.
This means that predominantly exporting companies may face accumulated credits, similar to what occurs currently with ICMS. This happens due to the VAT collected along the chain, which is not deducted from the final export operation, resulting in accumulated credits that may not be compensated due to the lack of operations subject to the incidence of VAT.
It is important to note that the current regulation of ICMS resulted from a political agreement between the States and the Union, which began in the context of the Federal Constitution and was reinforced by the Kandir Law. This agreement provided for compensation to the States for the exemption of exports, with resources intended partially for taxpayers who accrued credits, to compensate them for the accumulated amounts.
The Problem of Compensating ICMS Credits
In practical terms, it is known that States rarely manage to compensate accumulated ICMS credits, and when they do, the compensation is only partial. This occurs because States have never been compensated by the Union based on the aforementioned agreement, which results in one of the main causes of inefficiency of the current tax system regarding ICMS.
It seems that the system brought by the new reform presents the same problem, with no alternative solution at this time.
It is clear that the Taxation of goods, rights, and services has a significant impact on credit compensation, which is a concern for various sectors, especially for companies that rely on exports as their main source of revenue.
Although the broader scope of the tax may mitigate the accumulation of credits to some extent, we believe it is not sufficient to guarantee full compensation, particularly for companies that are heavily dependent on exports.
The text of the PEC approved in the Senate does not provide a consistent mechanism to address this issue, which may lead to a vicious cycle of accumulating credits and negatively impact these specific sectors.
The expectation is that the inefficiency of the current tax system will be maintained unless there is a solution with binding character for the federative entities involved, as provided for in Complementary Law.
In light of this, we believe that the text of the tax reform approved by the Senate still requires several adjustments, which should be incorporated into the text of the PEC itself, to avoid excessive delegation of powers to the LC, without clear guidelines. This could create uncertainties during the processing of complementary laws, increasing the risk for new ventures in the short term, in addition to the possibility of new taxes with the same problems as the current system.
If the proposal is approved with a text similar to that of the Senate, it will be crucial to recognize the symbolic and political advance achieved. However, it is essential to highlight that true reform needs to be built considering the technical details and decisive aspects present in the context of complementary laws.
It is worth noting that the content expresses only the opinion of the author and does not necessarily represent the position of the institution to which he is affiliated.
Tiago Severini: Specialized Partner in Tax and Customs Law
Tiago Severini serves as a partner in the Taxation and customs issues team at the law firm Vieira Rezende. His area of focus is in tax law, customs law, and related matters, providing specialized and high-quality service to clients.
Source: Agency EPBR
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