Letter IEDI n. 875–A tax reform for competitiveness
The current tax structure in Brazil is one of the central obstacles to development, since its profound distortions hit the main pillars necessary for a consistent and sustained economic growth.
Reforming our tax system is an urgent task, as the tangle of taxes, contributions, fees, norms and regulations of all kinds is becoming unmanageable to companies and incomprehensible to society, without guaranteeing the health of public accounts that we all desire.
This Letter IEDI —based on the study "Tax System: how to untie this node" by Bernard Appy, Director of the Center for Fiscal Citizenship, available in full on our website (in Portuguese)— seeks to concisely present the main distortions of the Brazilian tax system, with a focus on the problems in goods and services taxation. It then advances a tax reform proposal, whose core is the substitution of five current taxes (ICMS, ISS, PIS, Cofins and IPI) for a single tax on goods and services: the VAT – Value Added Tax. This is yet another work that supported the elaboration of the IEDI industrial strategy, to be released soon.
The result of this tax reform would be an enormous productivity and competitiveness gain for Brazilian companies. This is because in the current Brazilian tax system we face problems of all kinds. We have a complex structure —with a high degree of litigation resulting in legal uncertainty and less investment— that is not transparent nor fair —because it does not adequately tax the richest people in the country— and is unequal —due to numerous tax benefits and differentiated treatments, among several other distortions.
Some data illustrate this dramatic picture. According to the World Bank, a Brazilian company spends 1,958 hours a year to pay taxes, while the OECD average is 160 hours. At the end of 2014, the potential loss with tax litigation for Brazil's 30 largest non-financial corporations was 32% of their market value. By the end of 2017, 86% of the companies had legal issues regarding tax payments or non-compliance with federal agencies' determinations.
The agenda of changes in the Brazilian tax system is wide, but many of the problems are concentrated in the taxation of goods and services. Therefore, an effective tax reform must establish a genuine VAT, named IBS (the acronym in Portuguese) by Appy —Tax on Goods and Services, whose main characteristics would be:
• Non-cumulative impact on a broad base of goods and services, including operations on rights and intangibles.
• Complete exemption of exports, since a mechanism will be established for the expeditious return of credits accumulated by exporters.
• Strong stimulus to investments, through the guarantee of integral and immediate credit for goods and services incorporated in fixed assets.
• Ample credit and timely repayment of accumulated rights —credit balance will be returned within 60 days.
• Incidence on the price net of the IBS itself (the VAT is excluded from the tax basis).
• A transition regime that allows for a smooth adjustment to the new model, since companies and consumers need a reasonable time to understand how the tax works and to adapt to the new scenario that will be established. In addition, gradualism would also minimize the resistance caused by any such change.
According to the author, this set of characteristics represents what is considered today as the state of the art for a VAT, with simplification in its structure and clarity in its application as the distinguishing features.
This proposed model has a fundamental attribute: the value paid at each link of the production and distribution chain is automatically credited to the next step. With the complete exemption of exports and investments, and the collection of VAT on the destination in interstate operations, the tax will actually only affect the last link in the chain, that is, the purchase of the product or service by the consumer.