Rio das Ostras: Autonomy to Define IBS Rates in the Tax Reform

The recently approved Tax Reform gives Rio das Ostras the right to determine its own IBS rates, a new tax that will replace ICMS and ISS.

The Tax Reform recently approved by the Chamber of Deputies authorizes states and municipalities, such as Rio das Ostras, to establish their own IBS (Tax on Goods and Services) rates, a new tax that will replace the current ICMS (Tax on Circulation of Goods and Services ) and ISS (Service Tax).

Disputes Around the Reform

Critics of the Reform argue that the autonomy given to municipalities to determine their IBS rates may undermine efforts to simplify the National Tax System. Supporters of the approved text, however, reject this view, claiming that variations in rates from place to place will be limited. They also claim that the new device reinforces the autonomy of states and municipalities, an aspect strongly demanded by critics of the Reform.

The aforementioned Tax Reform is now awaiting analysis by the Federal Senate. The political process involved in implementing a rate higher than that practiced in the rest of the country cannot be ignored, since it can be seen as an advantage or disadvantage, depending on who assesses the situation.

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The Consequences of the New IBS

In an optimistic perspective, the political cost could restrict the desire of rulers to increase taxation on their taxpayers. However, in the pessimistic view, there would be pressure to set a reference rate as high as possible to meet all entities, without customizing wear and tear.

The text of the PEC (Proposed Amendment to the Constitution) approved in the Chamber of Deputies provides for the unification of five taxes on consumption into two new ones, the IBS (state and municipal competence) and the federal CBS (Contribution on Goods and Services). The transition would start in 2026, with full migration expected in 2033.

Implementation of Tax Reform and its Challenges

After the enactment of the PEC, a resolution of the Federal Senate will set the tax reference rate for each federative sphere, “which will be applied unless otherwise provided in a specific law”. This law must be approved by the local legislature and may define the charge in its territory, even if this means a different rate from that applied in other places.

The difference is that, after the Reform, the choice will take place in a simpler system than the current one, where governors and mayors establish various rates, differentiated according to goods, services or sectors.

In practice, each entity may adopt a higher or lower rate for all goods and services covered by the IBS. However, any ruler who wishes to increase the IBS rate in his territory will need to “bear the political burden” of this decision.

Conclusion: The Future of Tax Reform in Rio das Ostras

Experts in the tax area argue that permission to change rates does not nullify the objective of simplifying the system. However, other critics of the Reform believe that changing rates may encourage pressure to set the reference rate as high as possible.

In any case, the autonomy guaranteed to states and municipalities such as oysters River to set its own IBS rates is a significant change in the National Tax System. How this new reality will play out remains to be seen.