In Lula’s victory, the Senate approves tax reform

The Senate approved this Wednesday (8.Nov.2023) by 53 votes to 24 the tax reform proposal (PEC 45 of 2019). The score was the same in the 1st and 2nd rounds.

At least 49 votes (3/5 of the House’s composition) were needed at each stage to approve the text. On Thursday (Nov 2), the Minister of Finance, Fernando Haddad, stated that he expected more than 60 votes to approve the reform in plenary, but the government’s estimate was 51 to 55.

The approval is a victory for the president of the Senate, Rodrigo Pacheco (PSD-MG), and the government of President Luiz Inácio Lula da Silva (PT). The enactment of the reform in 2023 is Lula’s number 1 priority. The presidents of the Chamber, Arthur Lira (PP-AL), and the Senate have also stated since the first semester that the PEC will be enacted by December.

The senators approved only one highlight in the 2nd round. Establishes a sustainability and economic diversification fund for states in the Western Amazon and Amapá. It will be created by complementary law.

Before going to the plenary, the proposal was approved by 20 votes to 6 in the CCJ (Constitution and Justice Commission) on Tuesday (Nov 7), with a score within the government’s estimate.

After the vote in the Senate has concluded, as amended, the text will return to the Chamber for analysis. There, too, two votes will be needed, with at least 308 of the 513 in favor. Braga’s opinion brought a series of changes in relation to the text approved in the Chamber on July 6.

The Senate rapporteur included the possibility of periodic review every 5 years of tax benefits that reduce taxation of specific sectors. This review will be carried out based on what is defined in future complementary law.

Braga increased the value of the FDR (Regional Development Fund) from R$40 billion to R$60 billion. The change had the approval of the Ministry of Finance and was defended by the States. The excess R$20 billion will be distributed over 10 years from 2034.

Another change suggested by Braga was the reference lock, a ceiling on the tax burden of new taxes. The ceiling will be the average revenue in the period from 2012 to 2021, calculated as a proportion of GDP (Gross Domestic Product).

Negotiations until approval

The PEC was the subject of intense negotiation by the rapporteur, the government and congressmen involved in processing the proposal. This Wednesday (Nov 8), the extraordinary secretary for Tax Reform, Bernard Appy, followed the vote in the plenary.

The PEC rapporteur in the Chamber, deputy Aguinaldo Ribeiro (PP-PB), was also present in part of the debate. The president of the CCJ, Davi Alcolumbre (União Brasil-AP), and Pacheco walked around the plenary articulating in favor of the proposal.

At the beginning of the week, on the eve of the vote in the CCJ, Eduardo Braga met with President Luiz Inácio Lula da Silva (PT), ministers and senators allied with the Executive. Before, he participated in a lunch with the president of the Senate and with the leaders of the Government in the House, Jaques Wagner, and in Congress, Randolfe Rodrigues (no party-AP), in addition to the minister Alexandre Padilha (Institutional Relations).

Final adjustments

The 1st version of Braga’s report was presented on October 25th. On the 3rd (7.nov), the day of voting at the CCJ, he released a complement to the opinion with adjustments agreed with the Treasury. He accepted around 250 amendments out of the 802 presented by senators. In recent days, he negotiated the changes to increase acceptance of the proposal among senators.

Among the changes made is the inclusion of bottled gas (liquefied petroleum gas) in the cashback mandatory for low-income families.

Regarding the transition period of the reform, Braga accepted an amendment to benefit entities that increase their revenue over time. The measure “rewards” those who demonstrate greater efficiency in monitoring the new reform rules. The federal transition for the distribution of revenue will last 50 years.

“The proposed mechanism creates an adjustment factor, so that entities that increase their revenue over time, compared to others, will receive a larger portion of the amount to be redistributed”, he stated. Braga also changed the amount of IBS (Goods and Services Tax) to be withheld from 90% to 80% from 2029 to 2032.

Another accepted amendment preserves the current exemption for the purchase of cars by taxi drivers, people with disabilities or those on the autism spectrum. The rapporteur welcomed the suggestion to allow tax benefits for the automotive sector to be extended to the production of alcohol-powered vehicles.

The government is in a hurry to approve the text and expects the vote in Congress to be completed by the end of the year. The Executive’s intention in 2024 is for the analysis and approval of complementary laws to regulate the PEC to be carried out in 2024. According to Eduardo Braga’s text, the government will have 240 days (8 months) to send the proposals after promulgation.

Standard tax rate

Braga’s report expands the exceptions to the reference rate of dual VAT (Value Added Tax), composed of 2 new taxes: CBS (Contribution on Goods and Services) and IBS (Tax on Goods and Services).

CBS will be administered by the Union and will replace IPI, PIS and Cofins. The IBS will be managed shared by States and municipalities and will be the union of ICMS and ISS.

Braga defined in the report a reference ceiling in the standard rate that considers the average revenue from 2012 to 2021 in relation to GDP (Gross Domestic Product). He calls the rule a “block” on reform.

The Ministry of Finance estimates that the Senate’s changes should increase the standard dual VAT (Value Added Tax) rate that will be created by 0.5 percentage points. With the Senate’s changes, the rate could be up to 27.5%, according to Minister Fernando Haddad (Finance).

Members of the opposition to the government in the Senate criticized the estimate of the standard rate. They stated that they represented the VAT “higher” of the world. Governors from the South and Southeast also criticized the changes made by Braga.

Other changes

Read other changes in relation to the text approved in the Chamber made by the rapporteur in the Senate:

• steering committee – collegiate takes the place of the Federative Council. It removes the possibility of a law initiative by the body. The discussion in the committee will be carried out by an absolute majority;
• income insurance – rises from the 3% predicted by the Chamber to 5%;
• selective tax – weapons and ammunition must be taxed by the so-called “sin tax”; the electricity and telecommunications sectors were left out;
• specific regime for sectors – fuel rates will be defined by Senate resolution;
• differentiated rates – 60% reduction for the public road and subway transport sectors, national artistic, cultural, journalistic and audiovisual productions, sporting activities and institutional communication; food intended for human consumption, personal hygiene and cleaning products consumed by low-income families;
• intermediate tax rate – 30% for the provision of services by regulated professions, the so-called independent professionals;
• state funds – maintains until December 31, 2032;
• automotive sector – extends benefits until the end of 2032;
• inheritances – the Causa Mortis and Donation Transmission Tax, which is levied on inheritances, will have a progressive rate and defined in a complementary law.

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