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The Weakening of the States Tax Room in Brazil

Characteristics of Current System of Indirect Taxation in Brazil2•Expansion of social contributions on the basis of ICMS by the Federal Government –PIS/COFINS/CPMF;•Expansion of incidence of municipal ISS (LC no. 116/03);•Institution of unified “Super Simples”tax regime•Concentration of collection in States using “selective”ICMS•Expansion of the regime of Tax Replacement•Hybrid system of origin and destination
3EXPANSION OF TAXATION ON THE BASIS OF ICMS BY DIFFERENT LEVELS OF GOVERNMENTDISTRIBUIÇÃO DA CARGA TRIBUTÁRIA SOBRE BENS E SERVIÇOS POR ESFERA DE GOVERNO30%35%40%45%50%55%60%198819891990199119921993199419951996199719981999200020012002200320042005e2,00%4,00%6,00%8,00%10,00%IPI, PIS/PASEP, COFINS, CPMF e IOFISSICMSSource: COTEPE and Department of the National Treasury
4��Large universe of taxpayers subject to regime, breaking the VAT chain and introducing a great deal of cumulativityin the system = encouraging tax evasion;��Return to “IVC”?��Tax regime on business and not on consumption��This regime is incompatible with adoption of the national harmonized dual VAT��Election year promises –simplemindedness and not simplificationINSTITUTION OF UNIFIED SUPER SIMPLES”TAX REGIME
5Brazil –Composition of “selective”ICMS collection in Total ICMSConcentration in “Selective”ICMS19972006Using tax bases where collection is easiest: ICMS charged on oil, electricity and telecommunications with characteristics of selective taxation Source: COTEPE
Concentration in “Selective”ICMSUF19972006UF19972006Amapá58,6%Santa Catarina34,7%48,2%Paraná37,2%55,8%Rio de Janeiro29,4%48,2%Mato Grosso Sul36,3%52,8%Minas Gerais29,3%47,0%Maranhão50,6%Paraíba47,0%Piauí50,4%Pernambuco20,9%46,5%Pará50,0%Roraima45,9%Ceará24,3%49,8%Rio Grande Sul45,1%Bahia33,8%48,9%Goiás30,9%45,1%Mato Grosso28,5%48,7%São Paulo25,9%36,3%Distrito Federal41,2%48,5%Espírito Santo15,0%31,2%27,5%42,9%TOTAL BRASIL (apenas dados consistentes)Participação do ICMS “Seletivo” no ICMS Total Arrecadado Por Cada EstadoSource: COTEPE6
7Expansion of the regime of Tax ReplacementAMAZONAS6,1%ACRE14,3%PARAÍBA9,8%PARÁ16,3%BAHIA8,4%CEARÁ4,2%MINAS GERAIS5,0%RIO GRANDE NORTE6,5%ESPÍRITO SANTO9,2%SANTA CATARTINA9,0%RIO DE JANEIRO6,9%MATO GROSSO14,1%SÃO PAULO3,8%DISTRITO FEDERAL5,9%PARANÁ7,1%RIO GRANDE SUL6,6%MATO GROSSO SUL8,9%GOIÁS22,3%Substituto Interno + Interestadual em 2003Apenas Substituto Interestadual em 2003ICMS DO REGIME DE SUBSTITUIÇÃO TRIBUTÁRIA – % NO ICMS TOTAL DA UF (1)(1) não inclui o setor de combustíveis para evitar dupla contagem com o ICMS “Seletivo”.Source: COTEPE
Lack of Budgetary Autonomy8��The states receive, as a result of calculated collection, 75% ofthe total amount collected as ICMS and 50% as IPVA.��This revenue is not made available to the state because of constitutional constraints��Health -12%.��Education -25%��Debt servicing –up to 13% ��Above note the commitment of nearly 50% of a state’s revenues��One must consider that, in addition to the obligations listed, the state has its payroll, which absorbs a significant part of its revenues, with very little funds remaining to perform investments and improvements desired by the population and necessary to development.
9��Fragmentation of indirect tax bases –ICMS; PIS; COFINS; IPI; CPMF; IOF;��Compression of ICMS tax bases by social contributions;��Increasing conflicts and disputes between ICMS and ISQN jurisdictional bases��Lack of coordination in the ICMS system at the national level, generating disputes for investments and assurance of revenue –tax war��Legislation that is confused, complicated, unharmonious, a largenumber of accessory obligations, providing space for tax evasion and delinquency��Lack of characterization of the ICMS as a VAT –more than half of the tax is charge in a single phase and much of it in a cascading manner��“Selective”ICMS��Tax Replacement and��“Super Simples”��Impossibility to remove the large cumulative effect that falls upon indirect taxation��Excessive concentration in “selective”ICMS –Limited possibilities for new collection booms and burdening of basic inputs��System that is burdensome, inefficient, typical of closed economies and that compromises competitiveness of national production on world markets –incompatible with harmonized dual VATProblems of the Current System
10��Alternative 1= remain with the current system, signifying an ongoing “race to the pits”with loss to the States (loss of jurisdictions and revenues);��Alternative 2= correct distortions in current system and maintain its current structure;��Alternative 3= create a new model of harmonized indirect taxation on goods and services.Alternatives