Selective Tax, defined by tax reform, will be charged on cars | Photo: Rafa Neddermeyer/ Agência Brasil
The government of President Luiz Inácio Lula da Silva (PT) proposed to the National Congress the levy of the new Selective Tax (IS) on vehicles, including cars, boats and aircraft, cigarettes, alcoholic and sugary drinks and mineral extraction goods, such as oil and natural gas.
The tax has been called a “sin tax” because it will be applied to products that are harmful to health and the environment, making room for a higher rate with the intention of discouraging the consumption of these goods.
The IS incidence list is in tax reform regulation. The first complementary bill on the subject was delivered on Wednesday (24) by the Minister of Finance, Fernando Haddad, to the presidents of the Chamber of Deputies, Arthur Lira (PP-AL), and of the Senate, Rodrigo Pacheco (PSD- MG). The proposal must now be analyzed by Congress.
This first text basically deals with the rules for applying the Tax on Goods and Services (IBS), the Social Contribution on Goods and Services (CBS) and the IS, which will replace the current tax model. The average rate of taxes on consumption must be 26.5%, which can vary between 25.7% and 27.3%.
The second text, on specific aspects of IBS management and inspection, will be sent to the National Congress in the coming days. Lira and Pacheco’s intention is to finalize the tax reform regulations by the end of this year.
It is not yet possible to estimate what the “sin tax” rate will be. The project presented states that it specifies the products of incidence and the form in which taxation will take place, but that the tax rates to be charged will be defined at another time, through an ordinary law that must also be approved by deputies and senators.
It is already certain, however, that the IS will be levied only once on the asset and will be administered and monitored by the Federal Revenue Service. The tax will be similar to the current Tax on Industrialized Products (IPI), under federal jurisdiction.
Understand the application of the ‘sin tax’ on cars
The government justified the application of the IS on vehicles, aircraft and vessels “because they emit pollutants that cause harm to the environment and humans”. Specifically in relation to vehicles, the proposal is that the rates apply to vehicles classified as automobiles and light commercial vehicles and vary based on a base rate, according to the attributes of each vehicle.
To define the final rate, for each vehicle, the vehicle’s power, energy efficiency, structural performance and driving assistive technologies, material recyclability, carbon footprint and technological density will be considered. “Therefore, the base rate for each vehicle may be increased or decreased according to the criteria listed”, says the text.
Cars and light commercial vehicles considered sustainable (with criteria on carbon dioxide emissions, among others) will have a zero rate. The reduced IS rate will be applied to vehicles sold to people with disabilities or to professional drivers (taxi drivers), provided that a similar benefit has been recognized within the scope of IBS and CBS.
Cigarettes
The IS will focus on smoking products, “universally identified as harmful to health in a wide range of academic studies”. The text mentions that the most widely consumed smoking products are cigarettes, and that “taxation on these products is a notoriously effective state instrument to discourage smoking, as indicated by numerous studies related to the topic.”
“According to the Pan American Health Organization – PAHO, the collection of taxes on tobacco proves to be an effective instrument to reduce its consumption. Therefore, taxation on cigarettes is a public health policy. Brazil has adopted it for years the combination of ad valorem and specific rates levied on the production of cigarettes”, adds the text.
This strategy, according to the government, has produced positive results both in terms of revenue and in reducing the consumption of products. Cigars, cigarillos and artisanal cigarettes may have the same tax treatment as cigarettes, “since they produce the same negative effects on health”.
Other smoking products, whether or not derived from tobacco, must also have the IS, such as chopped tobacco for making artisanal cigarettes, tobacco for pipes, tobacco for hookahs.
To combat the illegal market in the production and sale of tobacco products, the proposal establishes the application of the penalty of forfeiture (confiscation) in the case of transport, deposit or display for sale of these products unaccompanied by tax documentation proving their origin, without prejudice to the collection two.
“The illegal market for tobacco products, mainly cigarettes, has been a serious economic and public security problem, with the growing participation of criminal organizations in their manufacture and distribution, which justifies the penalty of forfeiture in the proposed form”, explains the government .
Alcoholic beverages
The government also justified that the consumption of alcoholic beverages represents a serious public health problem in Brazil and around the world, presenting data from the World Health Organization (WHO) that indicate that this consumption is associated with chronic diseases, such as cardiovascular, liver and neoplasms. It also mentions that excessive alcohol use is related to mental health problems and the occurrence of violence and traffic accidents.
“Research presented by the National Cancer Institute – INCA indicates that, in 2018, total spending on treating cancers associated with alcohol consumption represented an expense of R$ 1.7 billion to the public coffers, considering only the outpatient and hospital procedures paid for by the federal government. It is estimated that more than R$4 billion will be spent by 2040, corresponding to an increase of 139% compared to 2018”, he says.
The intention is that part of the tax rate takes into account the amount of alcohol. The IS must be applied when the drinks are first sold by the manufacturer, with the exception of specific situations, such as imports, auctions and non-onerous transfers. “This approach facilitates the administration of the tax, since the sector’s economic chain is known for having a structure concentrated in manufacturers, but very fragmented in the distribution and retail phases”, states the proposal.
Sugary drinks
Similar logic was stated for the IS charge on sugary drinks. “There is consistent evidence that the consumption of sugary drinks harms health and increases the chances of obesity and diabetes in several studies carried out by the World Health Organization – WHO. And taxation was considered by the WHO as one of the main instruments to contain demand this type of product”, he says.
The government cited that 83 WHO member countries already tax sugary drinks, mainly soft drinks. The tax must be charged to the manufacturer on the first sale, to the importer and to the bidder in the event of an auction. This definition, according to the text, happens because the economic sector has a structure concentrated in manufacturers and fragmented in the distribution and retail phases.
Extracted mineral goods
The government proposed the incidence of IS on the extraction of iron ore, oil and natural gas. The tax must be applied on the first sale by the extractive company, even if the ore is intended for export. There is also a possibility of impact on the non-costly transfer of extracted or produced mineral goods.
“In situations where companies use ore extracted in their own production chain, the triggering event was defined as the consumption of the mineral good, whose calculation basis will be defined by a reference price in accordance with the methodology established in the Complementary Law. The reduction of the rate to zero for natural gas intended for use as an input in an industrial process”, the project provides.
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