By Guilherme Martins and João Pedro Riccioppo Cerqueira Gimenes

The plenary of the Chamber of Deputies approved last Friday (07/07), in two rounds, the text of the Proposed Amendment to the Constitution (PEC) No. 45 of 2019, a landmark of symbolic relevance taking the first step towards Tax Reform.

Throughout the day, members of parliament returned to the plenary to vote on four amendments. The vote is expected to take place in two rounds. Next, it will be the Federal Senate's turn to analyze and decide on the consumption tax reform.

The solution envisaged by the Reform consists, in short, of the conversion/unification of 5 taxes existing in our tax system, namely: PIS, COFINS, IPI, ICMS and ISS, into three new taxes. They will be replaced by a “Dual VAT”, which will be composed of the Contribution on Goods and Services (“CBS”), under the jurisdiction of the Union, and the Tax on Goods and Services (“IBS”), managed by the Federative Council, which is composed of the States and Municipalities, in addition to a Selective Tax (“IS”), which will be levied on goods and services that are harmful to health and the environment.

The new taxes will be levied on transactions and imports involving tangible or intangible goods, including rights, or services, and their main characteristics are full non-cumulativeness, a broad tax base and collection at the destination. The following are explained:

Full non-cumulativity consists of the possibility of offsetting the tax through unrestricted crediting, with the exception of acquisitions for personal use or consumption, as well as for exempt transactions or transactions subject to immunity.

The broad basis is that which includes all material or immaterial goods, including rights and services, and which will occur with the “external” calculation.

The destination principle advocates collection on consumption, or rather, focused on the final consumer, rather than occurring at the place of origin of the product or service.

As for the tax rates, there are three hypotheses, which are the standard tax rate – which must be defined in ordinary law by each federative entity –, the reduced tax rate of 50% and the zero tax rate. The aim is to simplify the tax system, eliminating the numerous tax rates present in the current system, which may vary according to origin, destination, location, type of good or service, among other hypotheses.

Regarding tax benefits, the New Model intends to eliminate them in their current form. The Reform aims to establish the absence of tax benefits, except in specific cases, such as the Manaus Free Trade Zone, the Simples Nacional regime, the basic food basket, and other situations defined by the PEC.

One element of great social importance contemplated by the Reform is the institution of the so-called cashback – in other words, the refund of taxes paid to end-consumer individuals. The rules of this institution – both as limits and determination of possible beneficiaries – should be established later by means of a Complementary Law.

This transition to the New Model must occur gradually, over a period of 7 years, with some important milestones highlighted:

(i) In 2026, the effective implementation, with a rate of 0.9% for CBS and 0.1% for IBS;

(ii) In 2027, PIS, Cofins and IPI would be abolished;

(iii) From 2029 onwards, the ICMS and ISS rates would be reduced annually, until their extinction;

(iv) In 2032, the new regime would come into force in its entirety, however with a 50-year period of gradual transition of revenue to States and Municipalities, ending in 2078.

Furthermore, as pointed out, the text defines the creation of a Selective Tax of an extra-fiscal nature, under the jurisdiction of the Union, which will be levied on the production, marketing or import of goods and services that are harmful to health or the environment. It is important to emphasize that the choice of the rate of this Tax is the responsibility of the Federal Executive Branch.

Regarding the Federative Council, through which States and Municipalities will carry out shared management of the IBS, it is endowed with technical, administrative, budgetary and financial independence, with decisions made based on votes distributed equally between states and the Federal District, and municipalities. Its regulation and establishment are the responsibility of the subsequent Complementary Law on the subject.

All that remains is to wait for the text to be forwarded to the Federal Senate, where further changes to the text of the Reform are likely to occur.

Our team is available to provide any clarifications on the subject.