News that the new tax reform rate could reach 25% raised fears that products and services would see massive price adjustments. As reported by the g1 This Thursday (16) a rate of 25% for future Value Added Tax (VAT) levied on consumption in Brazil would be one of the highest in the world.
But despite the horror the rate itself does not necessarily represent a general price increase.
Because the tax burden of some products in the current system is higher than the 25 percent VAT rate which in these cases would mean a reduction in value for the end consumer. However, there are sectors that are below this average and should see upward corrections, such as services.
As a reminder, the government’s idea is to replace at least five taxes with two. The following would be wiped out: ICMS (country), PIS/Cofins and IGE (federal government) and municipal ISS. They would be replaced by a VAT and also by a selective tax (the socalled sin tax).
With the flat tax, the 25% rate replaces a tangle of taxes that apply to different categories of products. The government promises that the overall tax burden will be maintained.
O g1 Attorney Carolina Romanini asked Miguel, tax partner at Cescon Barrieu, to show the impact of the new tax on different sectors. The survey includes companies based in São Paulo.
Despite numerous exceptions and special rules provided for in the Brazilian system, she highlights some (of the myriad) examples of affected activities:
- Hydraulic Work Execution Service: 5% ISS and 3.65% PIS/Cofins = 8.65%
- IT technical support: 2.90% ISS and 3.65% PIS/Cofins = 6.55%
- Laboratory clinical analysis service: 2% ISS and 3.65% PIS/Cofins = 5.65%
- Telecom Services: 18% ICMS and 3.65% PIS/Cofins = 21.65%
- Collective passenger transport: 12% ICMS and 3.65% PIS/Cofins = 15.65%
“Because regimes are very different today, it’s not possible to generalize about an increase or decrease in the cost of living. Everything is very scattered: some sectors have tax credits, some don’t. Some work for supposed profit, some don’t.” ‘ says the lawyer.
“What is known is that the tax implications will be unified. From there we will have losers and winners.”he says.
Most winners are in industry. The new set represents a single collection of what was previously a chain tax incidence—that is, each industrial process had a new “bite” and added tax value to the end product.
See some examples below:
- Sale of perfumes (extracts) by manufacturer: 12% ICMS, 27.3% IPI and 12.5% PIS/Cofins = 51.8%
- Cologne sales by manufacturer: 12% ICMS, 7.8% IPI and 12.5% PIS/Cofins = 32.3%
- Car sales by manufacturer: 12% ICMS, 18.81% IPI and 11.6% PIS/Cofins = 42.41%
- Sale of insecticides and similar products: 18% ICMS, 30% IPI and 9.25% PIS/Cofins = 57.25%
service sector
The harmonization of taxes hurts the service sector more and is likely to lead to an increase in taxation of the most important sector of the economy.
The obstacle to the service sector is that there are no stages of production such as those at the bottom of economic activity. So there is no advantage in being able to deduct taxes on credit as would be the case in industry.
Although the measure increases the tax burden for the service sector, economists rate the proposal as a positive for simplifying Brazil’s tax system.
One of the highest rates in the world
According to the Tax Foundation, more than 170 countries use the VAT collection model, including all European countries.
- The average sales tax in the countries of Organization for Economic Cooperation and Development (OECD)the socalled “Rich Club”, which the Jair Bolsonaro government invited Brazil to join, is 19%.
- The average ruleset of European Union is 21%six percentage points above the minimum sales tax rate required by region regulations.
- Japan has a VAT of 10%
- Hungary have the with 27% the highest value added tax in the world.
- Croatia, Denmark and Sweden have an excise tax 25%
- Luxembourg has a rate of 16%, Malta 18% and 19% Germany.
A The only major economy in the world without sales tax is the United States. In the countryside, each state has its own sales regime instead of a federal tax. However, the average consumption tax in the US is low: 7.4%.
tax reform
The issue is being discussed again in the National Congress, where two proposals on the subject are already under discussion: PEC 110, which has begun discussion by the Senate, and PEC 45, which has begun discussion by the Chamber of Deputies.
The main objective of the reform is to simplify and facilitate tax collection. This measure is seen as essential to boost the economy and boost the country’s growth and job creation.
crossing
In Brazil, the transition discussed in the legislature provides for a phase of gradual migration from the old taxes to the new VAT over a period of five years.
- After the transition to the new VAT in Brazil, the proposals stipulate that the three entities of the federation would have autonomy in setting the tax rate.
- That means each state and municipality would be free to increase their rate even further, which could be higher than the 25% originally set (depending on the location of the country).
new tax
With the introduction of VAT in Brazil, Taxes would not be cumulative. Along the production chain, taxes would only be paid once by all those involved in the process. Currently, each stage of the chain pays taxes individually, which are incurred up to the end consumer.
Another change is that the Excise duty (VAT) would be levied at “destination”, that is, at the place where the products are consumed and no longer where they are made. This would help fight the socalled “tax war”, as the dispute between states over the location of companies on their territory is called.
However, the proposals discussed in the National Congress provide for: a Transitional arrangement from origin to destination for a period of 40 to 50 years, considering that in the first few decades the collection achieved by the previous rule would be shielded by the inflation adjustment. The purpose of this long period would be to ensure that there is no loss of resources for states and local authorities.