General-Coordination of Tax Policy

Taxes on Consumption of Goods and Services in Brazil

LecturerRaimundo Eloi de Carvalho

General-Coordination of Tax PolicySecretaria da Receita Federal

Brasilia – November 2006

1) General Features of Taxation on Consumption

2) Specific Features of Taxes on Consumption3) Tax Reform of Taxes on Consumption in Brazil

General-Coordination of Tax Policy

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 )

General-Coordination of Tax Policy

1.1) Tributos Incidentes sobre o Consumo de Bense Serviços no Brasil

TributosCompetência

TributáriaForma de Incidência Base de Incidência

1) IPI: Tax on Industrialized Goods

FederalNon-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

Municipal Cumulative Services

4) COFINS: Contribution for the Financing of the Social Security

Federal Cumulative/Non-cumulative Goods and Services

5) PIS: Social Integration Program

Federal Cumulative/Non-cumulative Goods and Services

6) CIDE-Combustíveis: Economic Contribution on Fuel

Federal Single stage Gasoline and diesell

General-Coordination of Tax Policy

1.2) Share in Tax Collection and in GDP- 2005

Tax collection GDP

Consumption (*) 309,711 42.77% 15.98%

Income/Property (**) 179,339 24.77% 9.26%

Social Security 133,644 18.46% 6.90%

Others 101,419 14.01% 5.23%

Total 724,113 100.00% 37.37%

(*) IPI, ICMS, ISS, Pis/Pasep, Cofins e CIDE.(**) I. Renda, CSLL, IPTU, ITR, IPVA, ITCD e ITBI.

Source: SRF/Copat - Carga Tributária

Tax Bases Collection(R$ million)

Share %

General-Coordination of Tax Policy

Share in Tax Collection - 2005

Consumption42,77%

Income/Property24,77%

Social Security18,46%

Others14,01%

General-Coordination of Tax Policy

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.

General-Coordination of Tax Policy

• 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.

1.3) Non-Cumulativity

General-Coordination of Tax Policy

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.

General-Coordination of Tax Policy

1.4) 1960s: Beginning of the Process of Elimination of Cumulativity

CUMULATIVITY

(I. C; I. V. C.)

NON-CUMULATIVITY (IPI; ICM)

General-Coordination of Tax Policy

1.5) VAT x ICMS

VAT(EUROPE)

ICMS(BRASIL)

1) INSTITUTION- CENTRAL GOVERNMENT

- STATES

2) TAX BASIS

- BROAD (GOODS AND SERVICES)

- RESTRICT (GOODS AND ONLY TRANSPORTATIONS AND COMMUNICATION SERVICES))

3) RATES- FEW- TAX-EXCLUSIVE BASIS

- MANY (INTRA AND INTER STATES)- TAX-INCLUSIVE BASIS

4) CREDIT- MONETARY: NO RESTRICTIONS TO CAPITAL AND CONSUMPTION GOODS

- FÍSIC: RESTRICTIONS TO CAPITAL AND CONSUMPTION GOODS

5) PRINCIPLE OF TAXATION

- DESTINATION - MIXED (ORIGIN AND E DESTINATION)

General-Coordination of Tax Policy

1.6) EVOLUTION OF COLLECTION ON CONSUMPTION

-

2,00

4,00

6,00

8,00

10,00

12,00

14,00

16,0019

70

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

(*) ICM/ICMS, IPI, COFINS (2004) e PIS/PASEP (2003 e 2004).(**) FINSOCIAL/COFINS, PIS/PASEP e ISS.

EM

% D

O P

IB

NÃO CUMULATIVIDADE (*) CUMULATIVIDADE (**) TOTAL

Instituição do Pis

Instituição do Finsocial

Reforma do Sistema Tributário

Ampliação da baseda Cofins

Não-cumulatividadeda Cofins

General-Coordination of Tax Policy

2) Specific Features of Taxes on Consumption

2.1) ICMS

2.2) ISS

2.3) IPI, COFINS e PIS

General-Coordination of Tax Policy

• 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).

2.1) ICMS

General-Coordination of Tax Policy

• 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

2.1) ICMS

General-Coordination of Tax Policy

• 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%

2.1) ICMS

General-Coordination of Tax Policy

• Place of taxation:

• Mixed principle (origin and destination): redistribute for consumer states

2.1) ICMS

Ex. 1):

São Paulo

7% (origin)

Ceará

11% (destination)*

Ex. 2):

São Paulo

12% (origin)

Rio Grande do Sul

6% (destination)*

* Difference between internal (18%) and interstate rate

General-Coordination of Tax Policy

• Administration:

• 27 different legislations

• Fiscal wars: tax competition for new investments

2.1) ICMS

General-Coordination of Tax Policy

• 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.

2.1) ICMS

General-Coordination of Tax Policy

• 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

2.1) ICMS

General-Coordination of Tax Policy

• 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.

2.2) ISS

General-Coordination of Tax Policy

• Tax due: services included in a muncipal list.

2.2) ISS

General-Coordination of Tax Policy

• Rates:

• Lowest: 2%

• Highest: 5%

2.2) ISS

General-Coordination of Tax Policy

• Concentration of Collection:

2.2) ISS

R$ Million %

Top 50 6.704 72,66 0,90

Top 100 7.431 80,54 1,80

Top 200 8.074 87,50 3,60

Demais 1.153 12,50 96,40

Total 9.227 100,00 100,00

Fonte: Secretaria do Tesouro NacionalObs.: Total de Municípios: 5.558.

Collection

Municipalities% municipalities

General-Coordination of Tax Policy

3) Tax Reform on Taxes on Consumption in Brazil

3.1) Aims

3.2) Brief history

3.3) Present stage

3.4) Perspectives

General-Coordination of Tax Policy

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.

General-Coordination of Tax Policy

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.

General-Coordination of Tax Policy

Difficulties for Tax Reform

• Destination and allocation of revenues

• Tax competence

• Place of taxation

• Redistribution of government responsabilities.

General-Coordination of Tax Policy

End