Tax Reform: Chamber approves PEC in 2nd round; Understand the main changes and impacts
The PEC of the tax reform was approved in the second round by the Chamber of Deputies. The vote registered 375 approved votes, 113 against and three abstentions.
The tax reform was approved with a wide margin of votes in both rounds - Photo Reproduction/Agência Câmara de Notícias/Flickr
In the early hours of this Friday (07), the Proposed Amendment to the Constitution (PEC) of the tax reform was approved in the second round by the Chamber of Deputies. The text received 375 votes in favor, 113 against and three abstentions. Before being forwarded to the Senate, deputies must analyze the highlights, which consist of suggestions for changes in the original text. Four of these highlights will be voted on this Friday morning.
Amendment Proposal
The main objective of the reform is to simplify federal, state, and local taxes. After processing, the "Proposal" underwent changes, which were released last Thursday by the rapporteur, Aguinaldo Ribeirthe (PP-PB). According to the new text, five taxes will be replaced by two Value Added Taxes (IVAs), one administered by the Union and another with shared management between states and municipalities.
A Contribution on Goods and Services (CBS), under federal management, aims to unify IPI, PIS and Cofins taxes. In addition, the Tax on Goods and Services (IBS), with shared management between states and municipalities, seeks to unify ICMS (state tax) and ISS (municipal tax).
The tax reform addresses several important measures, including the implementation of the Value Added Tax (IVA) and the creation of a transition phase for its implementation. In addition, it proposes the definition of the IVA rate, the creation of a Federative Council, the institution of a Regional Development Fund and the inclusion of the national basic food basket.
Other contemplated measures are the introduction of the 'cashback' system to encourage consumption, the application of reduced rates, the imposition of taxes on products considered as "sin" and the granting of exemptions. The difference in income and assets is also addressed, in addition to different treatments for certain categories. In addition, other funds and the relationship of the reform with religious entities are mentioned.
Creation of IVA
IVA represents the Value Added Tax, also known as Tax on the Mentioned Value. In the current proposal, two VATs replace five existing taxes, taken in the so-called dual IVA model. In this new model, three federal taxes (PIS, Cofins and IPI) will be consolidated into a single Contribution on Goods and Services (CBS), which is federal responsibility. In addition, the state ICMS and municipal ISS will be unified to form the Tax on Goods and Services (IBS), which will be jointly managed by states and municipalities.
Transition
According to the proposal, a seven-year transition period, between 2026 and 2032, to unify taxes. Starting in 2033, current taxes will be eliminated. Aguinaldo Ribeiro proposed starting this transition in 2026. In this initial phase, called the test, the federal Value Added Tax (IVA) will have a rate of 0.9%, while state and municipal IVA will have a rate of 0.1% . In the initial version of the opinion, the rapporteur established that migration would begin in 2026, covering only federal taxes (PIS, Cofins and IPI).
Three years later, the transition to the Tax on Circulation of Goods and Services (ICMS) and the Tax on Services (ISS) would begin. In addition, according to Ribeiro, the inclusion of states and municipalities already in the test phase of the rate, in 2026, would be carried out to meet the demand of the states.
In 2027, PIS and Cofins taxes will be eliminated, and the IPI rate will be reduced to zero, except for products that have also gone through industrialization processes in the Manaus Free Trade Zone (ZFM). At this stage, federal IVA with a reference rate will be implemented. The next phase of the transition will begin in 2029, with a phased reduction in state and local tax collection. Each year, the ICMS and ISS rate in effect will be reduced by 1/10.
A completion of the transition is scheduled for 2032. During this period, state and local IVA rates will be gradually increased to match the original collection of taxes that will be eliminated. In addition, there will be a proportional reduction in tax benefits granted by states and municipalities. In 2033, state and local taxes will be eliminated.
Federal Council
It was defined that the Federal Council will have the responsibility to centralize the collection of the future state and municipal Value Added Tax (IVA), which will replace the Tax on Circulation of Goods and Services (ICMS) and the Tax on Services (ISS). The way in which each state would be represented in the body and the weighting of its decisions were targets of criticism by the governors. During the discussion of the text on Wednesday (05), Ribeiro did not present details about the council, stating that an agreement would be reached by the time of the vote.
In the new version of the report, the rapporteur responded to a demand from the governors and defined the composition of the structure as follows: Twenty-seven councilors will represent the states and the Federal District (one per unit of the Federation), four representatives will be elected by the municipalities, with an equal vote, and thirteen representatives will be elected by the municipalities, with the weight of the vote weighted by the number of inhabitants.
Regional Development Fund
The proposal aims to establish the Regional Development Fund (FDR) in order to combat regional disparities. The implementation period will start in 2029, without setting a definitive deadline for completion. In the first year, the fund will have a total amount of R$ 8 billion, gradually increasing until 2032. From 2033, the federal government will allocate approximately R$ 40 billion to FDR. The distribution of resources between the states is still under discussion and has not been defined.
Exemptions
The opinion establishes the opportunity to exempt the collection of Value Added Taxes (IVAs) on a variety of goods and taxes. The decisions will be taken by means of a complementary law. Some specific medicines used in the treatment of cancer, basic menstrual health care products, medical devices and accessibility for people with disabilities, vegetables, fruits and eggs may be exempt from paying future IVA.
In addition, there will be a 100% reduction in the federal IVA rate (known as CBS) applied to higher education services (Prouni). It will also be possible for rural production, both individuals and legal entities, with annual revenues of up to R$3.6 million to be exempted from paying future IVA.
Taxation of income and wealth
In the rapporteur's opinion, changes were incorporated regarding the collection of taxes on income and assets, including the IPVA for jets, yachts and speedboats. Currently, these vehicles are exempt from this tax. The text proposes the implementation of charging this tax in the states, also considering the possibility of a progressive approach, taking into account the environmental impact of the vehicle.
