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11SUPPORT:ORGANIZED BY:ORGANIZED BY:STATE TAX REVENUE STATE TAX REVENUE DEPARTMENT OF RIO DEPARTMENT OF RIO GRANDE DO NORTGRANDE DO NORTEENATAL/RN –March 29, 2007AN ALTERNATIVE TO TAXATION OF GOODS AND SERVICES IN BRAZIL
Working Program Forum/FGV 2006/07 Working Program Forum/FGV 2006/07
Group 1: Partial Result Group 1: Partial Result
Subgroup: Scenario of Tax Reform Subgroup: Scenario of Tax Reform
with Dual Taxation with Dual Taxation
2
TAXATION OF GOODS AND SERVICES IN BRAZIL TAXATION OF GOODS AND SERVICES IN BRAZIL
���� Starting from the assumption that a tax reform Starting from the assumption that a tax reform
on goods and services in Brazil is necessary on goods and services in Brazil is necessary
���� Please note that it will not be possible to Please note that it will not be possible to
comment on existing problems in current comment on existing problems in current
legislation legislation
���� The purpose of this brief presentation is to The purpose of this brief presentation is to
comment on an alternative to address the comment on an alternative to address the
issue of taxation of goods and services issue of taxation of goods and services
���� This consists in Dual Taxation or Dual VAT This consists in Dual Taxation or Dual VAT
3
DUAL VAT: WHAT IS IT? WHAT DUAL VAT: WHAT IS IT? WHAT’S IT S IT
FOR? FOR?
���� One VAT at the Federal Government level and One VAT at the Federal Government level and
another VAT at the State Government level another VAT at the State Government level
���� Replaces (to be discussed): IPI, PIS, COFINS, Replaces (to be discussed): IPI, PIS, COFINS,
CIDE, ICMS, ISS? CIDE, ICMS, ISS?
���� Enable enhancement of quality of taxation on Enable enhancement of quality of taxation on
goods and services goods and services
���� To use a phrase: a civilized form of two levels of To use a phrase: a civilized form of two levels of
government in the federative context to use the government in the federative context to use the
same tax base with a VAT type tax same tax base with a VAT type tax
���� In a word: In a word: harmonization harmonization (unless there is an intent unless there is an intent
to harmonize taxation there is no such thing as to harmonize taxation there is no such thing as
Dual VA Dual VAT
4
DUAL VAT: WHAT IS IT? WHAT DUAL VAT: WHAT IS IT? WHAT’S IT S IT
FOR? FOR?
���� Therefore Dual VAT is a step towards harmonizing Therefore Dual VAT is a step towards harmonizing
taxation on goods and services taxation on goods and services
���� One might call it Dual One might call it Dual Taxation Taxation since tax regimes since tax regimes
in Brazil that deviate from the pure concept of VAT in Brazil that deviate from the pure concept of VAT
are here to stay are here to stay
���� Nevertheless, it is possible to have two Nevertheless, it is possible to have two
harmonized harmonized VATs VATs even if they are not perfect even if they are not perfect
VATs VATs
���� This converges closely with the proposal by the This converges closely with the proposal by the
federal government federal government
���� Yet, how did the idea of a Dual VAT come about? Yet, how did the idea of a Dual VAT come about?
5
ORIGIN OF THE DUAL VAT ORIGIN OF THE DUAL VAT
66����Dual VAT in literature (Bird and Dual VAT in literature (Bird and GendronGendron) is a ) is a perception that VAT type taxes can be collected by perception that VAT type taxes can be collected by the the subnationalsubnationalgovernmentgovernment����This leads us to an older mode of Dual VATThis leads us to an older mode of Dual VAT����The IPI/ICM in 1967 The IPI/ICM in 1967 (even though with a different even though with a different model and context model and context Brazil was the 1Brazil was the 1ststCountry Country to to provide a VAT type tax to two levels of government provide a VAT type tax to two levels of government ����the origin, therefore, is not with the FHC the origin, therefore, is not with the FHC Government (PEC 175/95), nor with the Lula Government (PEC 175/95), nor with the Lula Government (Mar/07), nor with the Fiscal Forum of Government (Mar/07), nor with the Fiscal Forum of States, nor is it the Canadian arrangement adopted States, nor is it the Canadian arrangement adopted in 1992 (in 1992 (Good and Services TaxGood and Services Tax––GST and GST and Quebec Quebec Sales TaxSales Tax––QST)QST)����Which is an advantage, since if Which is an advantage, since if ““an old tax is a good an old tax is a good taxtax””perhaps there is room to discuss an alternative perhaps there is room to discuss an alternative to the Dual VATto the Dual VAT
HARMONIZATION OF TAXATION OF GOODS HARMONIZATION OF TAXATION OF GOODS
AND SERVICES AND SERVICES
This is the key concept of Dual Taxation as it This is the key concept of Dual Taxation as it
enables: enables:
Movement towards quality of taxation on goods and Movement towards quality of taxation on goods and
services services
enhanced efficiency to the system enhanced efficiency to the system
reduced conflicts in the federation reduced conflicts in the federation achieving achieving
unity even in diversity, inherent to federations unity even in diversity, inherent to federations
upholds upholds subnational subnational autonomy to define budget autonomy to define budget
sizes sizes
Below is a graphic display of gains that could be Below is a graphic display of gains that could be
achieved through harmonization achieved through harmonization
7
8
Costs of harmoniza-tionCurrent TaxationUnified National VATHARMONIZATION OF TAXATION OF GOODS AND HARMONIZATION OF TAXATION OF GOODS AND SERVICESSERVICESadfia a ( Current Taxation( Current Taxationdd( National VAT( National VATCosts of lack of harmonizationcomplexity, lack of neutrality,vertical competition, horizontal competition (tax war), delinquency and evasion, high tax admin and enforcement costs, corruption
Costs of harmoniza-tionCurrent TaxationNational VATDual Taxation 9
HARMONIZATION OF TAXATION OF GOODS AND HARMONIZATION OF TAXATION OF GOODS AND SERVICESSERVICESabcdfghiaa((Current TaxationCurrent Taxationdd((National VATNational VATcc( Harmonized Dual VAT( Harmonized Dual VATbb≤≤space of dual taxationspace of dual taxation≤≤ccCosts with lack of harmonizationc = Dual VAT ( enhanced VAT possible in federative contextc = Dual VAT ( enhanced VAT possible in federative context
1010TAXATION OF GOODS AND SERVICES WITH TAXATION OF GOODS AND SERVICES WITH AND WITHOUT HARMONIZATIONAND WITHOUT HARMONIZATION����Costs Costs several dimensionsseveral dimensions����Inverse relation Inverse relation quality of taxation x costsquality of taxation x costs����Current system Current system low quality of taxationlow quality of taxation����Central VAT Central VAT least possible costleast possible cost����Dual harmonized VAT Dual harmonized VAT (least possible cost within least possible cost within federative context federative context (reference modelreference model����Reform of taxation of goods and services Reform of taxation of goods and services space space between current system and reference modelbetween current system and reference model����More or less quality of taxation depends on choices More or less quality of taxation depends on choices between principles of harmonization x autonomy between principles of harmonization x autonomy from from ““bb””moving towards moving towards ““cc””
1111HARMONIZATION OF TAXATION OF GOODS AND HARMONIZATION OF TAXATION OF GOODS AND SERVICESSERVICESQuality in taxationBenefitsCurrent TaxationSpace of reform simplification, efficiency in collection, neutrality, citizenship rights, intergovernmental cooperation, legal-institutional stability, federative balance, competitivenessabcefdC= Dual VAT C= Dual VAT ((enhanced VAT possible in federative enhanced VAT possible in federative contextcontext
BENEFITS OF HARMONIZATION BENEFITS OF HARMONIZATION
IN TAXATION OF GOODS AND SERVICES IN TAXATION OF GOODS AND SERVICES
����Benefits Benefits several dimensionsseveral dimensions����Direct relation: quality of taxation Direct relation: quality of taxation (benefitsbenefits����simplification, efficiency in collection, neutrality, simplification, efficiency in collection, neutrality, citizenship rights, intergovernmental cooperation, citizenship rights, intergovernmental cooperation, legallegal–institutional stability, federative balance, institutional stability, federative balance, competitivenesscompetitiveness����Preserves autonomy of Preserves autonomy of subnationalsubnationalgovernments to governments to adjust their financial needsadjust their financial needs����Dual Taxation facilitates the adoption of the Dual Taxation facilitates the adoption of the principle of destinationprinciple of destination12 12
FINAL NOTESFINAL NOTES����Reform of taxation of goods and services should be part Reform of taxation of goods and services should be part of a broader reform of a broader reform ����This is because it automatically results in a discussion This is because it automatically results in a discussion on revenue sharingon revenue sharing����At the Fiscal Forum of the States, the perception is that At the Fiscal Forum of the States, the perception is that taxation, revenue sharing, regional development, taxation, revenue sharing, regional development, retirement/ welfare, budgetary restrictionsretirement/ welfare, budgetary restrictions……are are interlinked issuesinterlinked issues����We have seen We have seen ananalternative to address taxation of alternative to address taxation of goods and services in a federative contextgoods and services in a federative context����Time is lacking for us to go into greater detailTime is lacking for us to go into greater detail����Below is a draft of aspects of Dual Taxation to be made Below is a draft of aspects of Dual Taxation to be made available and discussed at another opportunityavailable and discussed at another opportunity1313
DIMENSIONS OF THE REFORMDIMENSIONS OF THE REFORM����Reference Model Reference Model where we want to gowhere we want to go����Operational aspects Operational aspects requirements to achieve the requirements to achieve the idealized modelidealized model����Transition Transition care tocare to……����get there get there to the idealized modelto the idealized model����not get lost along the waynot get lost along the way����reduce uncertainty/ insecurity/ lossreduce uncertainty/ insecurity/ loss����proper increments over timeproper increments over time14 14
REFERENCE MODEL REFERENCE MODEL ––GUIDELINES AND GUIDELINES AND CHARACTERISTICS OF DUAL TAXATIONCHARACTERISTICS OF DUAL TAXATION1515����Both taxes Both taxes incidingincidingon same baseon same base����Broad base Broad base includes servicesincludes services����Better yet if the Calculation base is the same or quite Better yet if the Calculation base is the same or quite similarsimilar����Deductive indirect method Deductive indirect method debits debits –creditscredits����Both taxes only record consumptionBoth taxes only record consumption����credit for goods of use and consumption of company credit for goods of use and consumption of company and for fixed assets (asset: unburden or provide and for fixed assets (asset: unburden or provide credit)credit)����Principle of destination in transactions as in the rest Principle of destination in transactions as in the rest of the world of the world exports unburdened and imports exports unburdened and imports taxes at the same bracket (load) as applied to taxes at the same bracket (load) as applied to national goods and servicesnational goods and services
REFERENCE MODEL REFERENCE MODEL ––GUIDELINES AND GUIDELINES AND CHARACTERISTICS OF DUAL TAXATIONCHARACTERISTICS OF DUAL TAXATION����Within Brazil, tax factors should not constitute an Within Brazil, tax factors should not constitute an obstacle for free circulation of goods and servicesobstacle for free circulation of goods and services����Principle of destination to allocate revenues from Principle of destination to allocate revenues from state VAT collection state VAT collection model for fiscal adjustments at model for fiscal adjustments at borders is an operational issue borders is an operational issue ‘‘mitigatedmitigated’’boatboat����Fewer brackets Fewer brackets requirements for VAT to requirements for VAT to functionfunction����Federal and State governments preserve autonomy Federal and State governments preserve autonomy to set brackets to set brackets predetermined space and predetermined space and marginsmargins����Autonomy linked to the possibility of defining Autonomy linked to the possibility of defining budget sizebudget size1616
REFERENCE MODEL REFERENCE MODEL
GUIDELINES AND CHARACTERISTICS OF THE DUAL GUIDELINES AND CHARACTERISTICS OF THE DUAL
VAT VAT
����Within Brazil, tax factors should not constitute an Within Brazil, tax factors should not constitute an obstacle for free circulation of goods and servicesobstacle for free circulation of goods and services����Principle of destination to allocate revenues from Principle of destination to allocate revenues from state VAT collection state VAT collection model for fiscal adjustments at model for fiscal adjustments at borders is an operational issue borders is an operational issue ‘‘mitigatedmitigated’’boatboat����Fewer brackets Fewer brackets requirements for VAT to requirements for VAT to functionfunction17 17
REFERENCE MODEL REFERENCE MODEL –DIFFICULTIESDIFFICULTIES����Coexistence of differentiated regimesCoexistence of differentiated regimes����National National ‘‘SimplesSimples’’TaxTax����Tax ReplacementTax Replacement����Manaus Free Trade ZoneManaus Free Trade Zone����Municipal taxation on services (ISS) or alternative Municipal taxation on services (ISS) or alternative sourcesource����Size of bracketsSize of brackets����explanation of tax burdens and fiscal citizenshipexplanation of tax burdens and fiscal citizenship����makes simplification difficultmakes simplification difficult����Calibrating brackets Calibrating brackets even if correct, will affect even if correct, will affect sectoralsectoralburdenburden1818
REFERENCE MODEL REFERENCE MODEL –DIFFICULTIESDIFFICULTIES����Vertical competition on higher consumption basesVertical competition on higher consumption basesdelimiting space for each VAT?delimiting space for each VAT?����Model for fiscal agreement at interstate borders Model for fiscal agreement at interstate borders accumulation of creditaccumulation of credit����Losses from tax war and development policies Losses from tax war and development policies tax war that uses interstate brackets as an tax war that uses interstate brackets as an instrument will end, a regional development policy instrument will end, a regional development policy would have to be establishedwould have to be established����Compensation for losses to reduce insecuritiesCompensation for losses to reduce insecurities19 19
OPERATIONAL ASPECTS AND TRANSITIONOPERATIONAL ASPECTS AND TRANSITION2020The major part of taxation reform of goods and The major part of taxation reform of goods and services is in the transition and operational aspectsservices is in the transition and operational aspectsConvergence of legislation and regulationsConvergence of legislation and regulationsApproximation of tax regimes (example: replace Approximation of tax regimes (example: replace taxation in two taxation in two VATsVATs))Convergence of tax calculation basesConvergence of tax calculation basesAccommodating and calibrating bracketsAccommodating and calibrating bracketsPrinciple of destination for allocating revenue and Principle of destination for allocating revenue and operational model for fiscal agreement at interstate operational model for fiscal agreement at interstate bordersbordersTax benefits Tax benefits how to resolve losses from tax war, how to resolve losses from tax war, including to render adoption of the principle of including to render adoption of the principle of destination feasible?destination feasible?
OPERATIONAL ASPECTS AND TRANSITIONOPERATIONAL ASPECTS AND TRANSITION����Administrative integration:Administrative integration:����accessory obligationsaccessory obligations����recordsrecords����surveillancesurveillance����administrative proceedingsadministrative proceedings����consultations; interpretation; conflict resolutionconsultations; interpretation; conflict resolution����Alternative for transition Alternative for transition ����implementation by segments / activities?implementation by segments / activities?����Progressive harmonization of bases before adoption Progressive harmonization of bases before adoption of Dual VAT?of Dual VAT?21 21
LACK OF HARMONY IN CURRENT TAXATION OF LACK OF HARMONY IN CURRENT TAXATION OF
GOODS AND SERVICES GOODS AND SERVICES
����Many taxes on the same itemMany taxes on the same itemoperation, legal act, business operation, legal act, business dealdeal……����Differentiated regime for each tax Differentiated regime for each tax ����Differentiated regime for each taxDifferentiated regime for each tax����Single phase and multiSingle phase and multi–phasephase����Cumulative and nonCumulative and non–cumulativecumulative����““CumulativityCumulativity””in nonin non–cumulative taxes (use/consumption, asset, exportation)cumulative taxes (use/consumption, asset, exportation)����Different calculation methods to obtain nonDifferent calculation methods to obtain non–cumulativitycumulativity: deductive direct : deductive direct method (nonmethod (non–VA bracket); deductive indirect method (debits VA bracket); deductive indirect method (debits ––credits)credits)����Regimes: normal, National Regimes: normal, National ““SimplesSimples””, Tax Replacement (TR), Tax Replacement (TR)����Lack of harmony in TR Lack of harmony in TR hypotheses and taxes submitted to regime/ hypotheses and taxes submitted to regime/ states that apply states that apply ����Different forms and terms for appropriation of credits (example:Different forms and terms for appropriation of credits (example:fixed assets)fixed assets)2222
LACK OF HARMONY IN CURRENT TAXATION LACK OF HARMONY IN CURRENT TAXATION
OF GOODS AND SERVICES OF GOODS AND SERVICES
����ICMS tax warICMS tax war����Brackets hidden inside and outsideBrackets hidden inside and outside����Multiple nominal brackets and infinite effective bracketsMultiple nominal brackets and infinite effective brackets����Taxes are part of calculation base of other taxes, at times Taxes are part of calculation base of other taxes, at times simultaneouslysimultaneously����On the operational plane, triplication of effortsOn the operational plane, triplication of efforts����surveillancesurveillance����““accessoryaccessory””obligationsobligations����payment termspayment terms����recordsrecords����information systems.information systems.����consultationsconsultations����administrative proceedings administrative proceedings ����We could spend the day on examplesWe could spend the day on examples……2323