Taxes on Consumption of Goods and Services in Brazil

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1 Taxes on Consumption of Goods and Services in Brazil 1) General Features of Taxation on Consumption 2) Specific Features of Taxes on Consumption 3) Tax Reform of Taxes on Consumption in Brazil Lecturer Raimundo Eloi de Carvalho Secretaria da Receita Federal Brasilia November 2006

2 1) General Features of Taxation on Consumption 1.1) Taxes on Consumption 1.2) Share in tax collection and in GDP 1.3) Cumulativity; non-cumulativity and conection elements. 1.4) 1960s: Elimination of da Cumulativity in Taxation on Consumption 1.5) VAT x ICMS 1.6) Evolution of Tax Collection on Consumption (Cumulativity x non-cumulativity )

3 1.1) Tributos Incidentes sobre o Consumo de Bens e Serviços no Brasil Tributos Competência Tributária Forma de Incidência Base de Incidência 1) IPI: Tax on Industrialized Goods Federal Non-cumulative Industrialized Goods 2) ICMS: Tax on the Circulation of Goods and Transportation and Communication Services States Non-cumulative Goods and (only) Transportation and Communication Services 3) ISS: Tax on Services 4) COFINS: Contribution for the Financing of the Social Security 5) PIS: Social Integration Program Municipal Cumulative Services Federal Cumulative/Non-cumulative Goods and Services Federal Cumulative/Non-cumulative Goods and Services 6) CIDE-Combustíveis: Economic Contribution on Fuel Federal Single stage Gasoline and diesell

4 1.2) Share in Tax Collection and in GDP Tax Bases Collection (R$ million) Share % Tax collection GDP Consumption (*) 309, % 15.98% Income/Property (**) 179, % 9.26% Social Security 133, % 6.90% Others 101, % 5.23% Total 724, % 37.37% (*) IPI, ICMS, ISS, Pis/Pasep, Cofins e CIDE. (**) I. Renda, CSLL, IPTU, ITR, IPVA, ITCD e ITBI. Source: SRF/Copat - Carga Tributária

5 Share in Tax Collection Others 14,01% Social Security 18,46% Consumption 42,77% Income/Property 24,77%

6 1.3) Cumulativity Incidence in each stage of the production process without deduction of the tax due in the previous stage a) Disadvantages Afects competitivity (domestic and foreign); Lack of neutrality and transparency; Encourages forms of organization of production, in order to reduce tax burden (verticalization); Harms international tax harmonization; High burden on capital goods b) Advantages: High potential collection with low tax rate Simplicity for the tax administration and the taxpayer Ex.: Cofins.

7 1.3) Non-Cumulativity Incidence in each stage of the production process with deduction of the tax due in the previous stage (value-added tax) Advantages: Take into consideration principles of neutrality and transparency Low burden on production Facilitates border s fiscal adjustment a) Disadvantages: Complexity (more bureaucratic control); Frauds (credit not due, counterfeit bills); Need for high rates Ex.: Value-Added Taxes IVA; ICMS e IPI.

8 1.3) Conection Elements Taxation in Origin: Rates equal or similar; Tax exports and exempts imports; Fiscal wars (different brackets and tax benefits); No need for border s fiscal adjustment Taxation in Destination: Tax imports and exempts exports; Tax evasion; Need for border s fiscal adjustment.

9 1.4) 1960s: Beginning of the Process of Elimination of Cumulativity CUMULATIVITY (I. C; I. V. C.) NON-CUMULATIVITY (IPI; ICM)

10 1.5) VAT x ICMS VAT (EUROPE) ICMS (BRASIL) 1) INSTITUTION - CENTRAL GOVERNMENT - STATES 2) TAX BASIS 3) RATES 4) CREDIT 5) PRINCIPLE OF TAXATION - BROAD (GOODS AND SERVICES) -FEW - TAX-EXCLUSIVE BASIS - MONETARY: NO RESTRICTIONS TO CAPITAL AND CONSUMPTION GOODS - RESTRICT (GOODS AND ONLY TRANSPORTATIONS AND COMMUNICATION SERVICES) ) - MANY (INTRA AND INTER STATES) - TAX-INCLUSIVE BASIS - FÍSIC: RESTRICTIONS TO CAPITAL AND CONSUMPTION GOODS - DESTINATION - MIXED (ORIGIN AND E DESTINATION)

11 1.6) EVOLUTION OF COLLECTION ON CONSUMPTION 16,00 14,00 12,00 10,00 EM % DO PIB 8,00 6,00 4,00 Instituição do Finsocial Reforma do Sistema Tributário Ampliação da base da Cofins 2,00 Instituição do Pis Não-cumulatividade da Cofins NÃO CUMULATIVIDADE (*) CUMULATIVIDADE (**) TOTAL (*) ICM/ICMS, IPI, COFINS (2004) e PIS/PASEP (2003 e 2004). (**) FINSOCIAL/COFINS, PIS/PASEP e ISS.

12 2) Specific Features of Taxes on Consumption 2.1) ICMS 2.2) ISS 2.3) IPI, COFINS e PIS

13 2.1) ICMS Specific Features: a) State s tax; b) 83% of States own tax collection; c) Non-cumulative; d) Exemption or non-levy, except as otherwise determined in the law, Shall not imply credit for compensation relative to the amount due in the subsequent transactions or rendering of services; e) Non incidence on exports; f) tax-inclusive basis (the ICMS is part of its own tax basis).

14 2.1) ICMS Tax Due: When the good leaves the premises of the taxpayer, even for another premise of the same taxpayer; On the entry of goods imported from abroad; On communications services

15 2.1) ICMS Rates: Internal: defined by the state Interstate: defined by the Senate; tax-inclusive basis: lack of transparency; (Ex.: Nominal rate18% =. Efective rate 21,95%) Many rates: around 44; Basic rate: 17% e 18%

16 2.1) ICMS Place of taxation: Mixed principle (origin and destination): redistribute for consumer states Ex. 1): São Paulo 7% (origin) Ex. 2): São Paulo 12% (origin) Ceará 11% (destination)* Rio Grande do Sul 6% (destination)* * Difference between internal (18%) and interstate rate

17 2.1) ICMS Administration: 27 different legislations Fiscal wars: tax competition for new investments

18 2.1) ICMS Drawbacks of Fiscal Wars: Affects Public Finances: loss of tax collection due to tax benefits Distortion in Allocation of Resources : allocation based on tax costs, not on factors of production Distortion in free marked: advantages for companies benefited by tax reduction.

19 2.1) ICMS Other features: Use of Credits: postponment of use of capital goods credits and no concession of credits related to consumption goods; Accumulation of credits in exports; Single stage taxation: broad use

20 2.2) ISS General features: a) Municipal; b) Cumulative; c) Collection concentrated in few municipalities; (Ex.: 1% of municipalies = 73% of collection) d) Highest and Lowest rates, defined by complementary law.

21 2.2) ISS Tax due: services included in a muncipal list.

22 2.2) ISS Rates: Lowest: 2% Highest: 5%

23 2.2) ISS Concentration of Collection: Municipalities Collection R$ Million % % municipalities Top ,66 0,90 Top ,54 1,80 Top ,50 3,60 Demais ,50 96,40 Total ,00 100,00 Fonte: Secretaria do Tesouro Nacional Obs.: Total de Municípios:

24 3) Tax Reform on Taxes on Consumption in Brazil 3.1) Aims 3.2) Brief history 3.3) Present stage 3.4) Perspectives

25 Main propositions of changes in Taxation on Consumption, aiming at implementing a VAT in Brazil 1988: Tax Reform and Fiscal descentralization Committee 1992: Executive Committee of Fiscal Reform (CERF); 1995: PEC nº 175/95; 2003: PEC nº 41/03.

26 Stages, established by Congress, of Reform of Taxes on Consumption, aiming at implementing a VAT First (EC nº 42/03): Gradual reduction of IPI on capital goods Exemption of exports, keeping the credits Partial non-cumulativity of contributions Second (2005): At most five rates of ICMS, uniform in all the national territory National legislation. Third (2007): Implementation of a VAT, with the fusion of ICMS, IPI, ISS, Cofins e Pis/Pasep.

27 Difficulties for Tax Reform Destination and allocation of revenues Tax competence Place of taxation Redistribution of government responsabilities.

28

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