General-Coordination of Tax Policy Taxes on Consumption of Goods and Services in Brazil Lecturer Raimundo Eloi de Carvalho General-Coordination of Tax Policy Secretaria da Receita Federal Brasilia – November ) General Features of Taxation on Consumption 2) Specific Features of Taxes on Consumption 3) 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 Bens e Serviços no Brasil Tributos Competência Tributária Forma de IncidênciaBase de Incidência 1) IPI: Tax on Industrialized Goods Federal Non-cumulativeIndustrialized Goods 2) ICMS: Tax on the Circulation of Goods and Transportation and Communication Services StatesNon-cumulative Goods and (only) Transportation and Communication Services 3) ISS: Tax on Services MunicipalCumulativeServices 4) COFINS: Contribution for the Financing of the Social Security FederalCumulative/Non-cumulativeGoods and Services 5) PIS: Social Integration Program FederalCumulative/Non-cumulativeGoods and Services 6) CIDE-Combustíveis: Economic Contribution on Fuel FederalSingle stageGasoline and diesell

General-Coordination of Tax Policy 1.2) Share in Tax Collection and in GDP Tax collectionGDP Consumption (*)309, %15.98% Income/Property (**)179, %9.26% Social Security133, %6.90% Others101, %5.23% Total724, %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 BasesCollection (R$ million) Share %

General-Coordination of Tax Policy Share in Tax Collection Consumption 42,77% Income/Property 24,77% Social Security 18,46% Others 14,01%

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 borders 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 borders fiscal adjustment Taxation in Destination: Tax imports and exempts exports; Tax evasion; Need for borders 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

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) States 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 ,66 0,90 Top ,54 1,80 Top ,50 3,60 Demais ,50 96,40 Total ,00 Fonte: Secretaria do Tesouro Nacional Obs.: Total de Municípios: 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