Transcript Tax Reform in Brazil Recent Development and Perspectives

Tax Reform in Brazil
Recent Developments and Perspectives
Nelson Barbosa
Presentation at the Inter-American Development Bank
Washington DC, Sep 19, 2013
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STRUCTURE
1)
2)
3)
4)
5)
6)
Current situation and principles of reform
The ICMS problem
The PIS-COFINS problem
Payroll taxes
Direct taxes
Other important issues
2
Current Situation and Principles of Reform
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Tax Burden and Economic Development
• Brazil has a high tax burden for its per capita GDP
• The increase in the tax burden was concentrated in two periods:
• The macroeconomic adjustment to the international crises of the
late 1990s
• The positive impact of the boom in commodities in the mid and
late 2000s
• All of the recent increase in the federal tax burden has been
channeled to income transfers to families (social security, social
assistance and unemployment insurance)
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Brazil: Gross Tax Burden
36%
35%
34%
33%
32%
31%
Macroeconomic
adjustment to
the crises of the
late 1990s
International boom
in commodities and
growth acceleration
30%
29%
28%
27%
Source: MF/SRFB until 2011 and author's estimate for 2012
26%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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Federal Tax Burden
• The federal recurring tax revenue has been stable around 21% of GDP
since 2005
• Tax cuts as a tool to accelerate growth and development since
2006
• Automatic stabilizers and countercyclical policy in 2009-10
• The increase in federal primary revenues has been concentrated in
other revenues than taxes and social contributions
• Dividends from state companies
• Federal government take of oil income
• Contributions of government employees to pension funds
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Brazil: Federal Gross Recurring Primary Expenditure in % of GDP
25
24
23
22
21
20
19
Taxes and Contributions
(includes Social Security)
Total
18
17
16
Source: MF/STN
15
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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What should be the aim of tax reform?
• The tax burden should be compatible with the people’s demand from
the state (political and distributive issue)
• The tax burden should also be collected in the most efficient way
• In the case of Brazil there is much to be done in terms of reducing
complexity and conformity costs, for both the private and public
sectors, with the same tax burden
• And the same tax burden can also be collected in a more progressive
way
• Taxes are also an important tool for economic development (“more
than revenue”)
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The ICMS problem
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The origin of the “fiscal war”
• In Brazil the states’ VAT taxes is divided between the point of
production and the point of sale
• The interstate ICMS rate is 12% and the usual state rate is
18% (the “producer state” gets 12% of the 18% paid by
consumers)
• This system lead states to give tax credits for firms to locate
production in their territory, but to report to the rest of the
country that firms have paid 12% in interstate transactions
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The end of the “fiscal war”
• Unilateral states’ incentives became a general practice in
recent years, which in its turn neutralized its effect (if
everybody does the same, nobody wins)
• Many states’ incentives have been contested in judicial
courts, since in theory they should be approved by all 27
states before coming into effect
• The uncertainty regarding many states’ incentives has
already reached a level in which it reduces investment in
Brazil as a whole (national problem)
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What is the proposed reform?
• Gradually reduce the interstate ICMS tax rate from 12% to
4% in most transactions
• Preserve a high rate only for some products and some interstate flows
• End the current tax uncertainty through a general tax
agreement of all 27 states (“Convalidação”)
• Create a federal transfer system to aid the states’ budget
during the transition (FCR) and to foster regional
development (FDR)
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Composition of interstate ICMS operations and proposed reform
DESTINATION
O
R
I
G
I
N
South and Southeast
Regions, except ES
North, Northeast and
Midwest regions, plus ES
South and
Southeast
Regions, except
ES
North, Northeast
and Midwest
regions, plus ES
48%
(ICMS 12% to 4%)
24%
(ICMS 7% to 4%)
17%
(ICMS 12% to 7%)
11%
(ICMS 12% to 4%)
Fonte: COTEPE/CONFAZ – Interstate balance of trade 2011
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Estimate of potential loss of potential ICMS revenue with a
common intestate rate of 4% (in R$ billions)
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Amazonas
16
ES / SC / GO
Brasil - outros
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4,6
12
2,5
10
8
1,8
6
4
2
3,2
2,9
3,4
3,4
3,4
3,4
3,4
4,3
5,9
4,2
6,9
4,0
4,7
4,7
4,7
4,7
4,7
5,5
6,2
4,7
4,0
4,0
4,0
4,0
4,0
3,4
3,1
2018
2019
2020
2021
2022
2023
2024
2,4
0,9
1,2
3,8
2,2
3,9
0
2014
2015
2016
2017
2025
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When it will be done?
• Fiscal and political constraints blocked the ICMS reform in
2013
• But the tax uncertainty regarding the current system remains
and this will eventually lead to a reform
• The reform will probably follow the guidelines already set by
the government and Congress
• But the transition to the new system will be slow, starting
sometime between 2015 and 2018
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Externalities of the ICMS reform
• Competitiveness: the centralized registration of the balance of trade
between states can facilitate the use of tax credits through a national
clearing system, managed by the federal government, which in its
turn will reduce the ICMS tax burden on investment and exports
• Transparency and accountability: the centralized registration of all
ICMS incentives and the balance of trade of each state will also
facilitate the cost-benefit analysis of states’ tax incentives
• Tax burden: the reduction in the inter-state tax rate will change the
logic of the ICMS, from production to consumption, which will
naturally lead to a revision of the high indirect taxation on goods and
services
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The PIS-COFINS problem
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The PIS-COFINS system
• The PIS-COFINS was reformed in 2002-03 and it now consists of three
main systems
• A cumulative tax rate of 3.65% on some sectors and firms
• A non-cumulative tax rate of 9.25% on other sectors and firms
• And various special systems in which taxation is concentrated in
one phase of the production chain (ex: fuel, meat, coffe, etc)
• The legislation became increasingly complex since the last reform,
with very high conformity costs for both the government and the
private sector
• Example: not all inputs generate tax credits in the non-cumulative
system
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PIS-PASEP and COFINS in % of GDP
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COFINS
Source: MF/STN
PIS-PASEP
5
1.0
4
0.9
0.9
0.9
1.0
1.0
1.0
3.8
3.9
1.0
1.0
1.0
1.1
1.0
3.6
3.7
3.8
1.0
1.0
4.0
3.9
0.9
3
0.8
0.8
4.1
2
3.0
1
2.0
3.4
3.6
3.5
3.5
4.1
4.0
1.9
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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Composition of Revenues from PIS, PASEP and COFINS in 2011
Financial sector, 7%
Special
systems, 10%
Cumulative system,
21%
Non-cumulative
system, 62%
Source: MF/SRFB
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What is the possible reform?
• Simplify the non-cumulative system: all inputs generate a tax credit
• Reduce the scope of the cumulative system: only for small and
medium enterprises in the service sector, which will generate a tax
credit equal to the amount they pay on their revenue
• The change will greatly benefit sectors with high intermediary
consumption (manufacturing)
• The non-cumulative tax rate remain the same (9.25%), but the
government looses revenues in the short run due to the high volume
of tax credits (estimated in 0.3% of GDP)
• The special systems remain the same
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When will it be done?
• The high initial cost of the reform of the PIS-COFINS did not allow it to
go through in 2011-14 (fiscal constraint)
• The political climate in the Brazilian Congress also does not
recommend structural reforms in 2013-14 (political constraint)
• But even when the economy recovers and the political climates
becomes less polarized, the reform of the PIS-COFINS will cause a
temporary loss of revenue in the short run
• Due to the increase in efficiency and competitiveness, the loss will be
more than compensated in 3 to 4 years.
• The reform will probably be done in 2015-18
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Payroll Taxes
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Payroll, Competitiveness and Social Security
• The Brazilian system has a high tax burden on payroll for employers
• The government recently reduced the employers’ contribution for
social security to zero in some sectors, in exchange for a small, nonneutral, contribution on revenues (a “social” VAT)
• The logic of the reform was to increase the competitiveness in highskill and labor-intensive sectors
• The change also tied the finance of social security to a larger tax base
that is directly linked to labor productivity
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7.0
Contributions to social security in % of GDP
6.5
6.0
5.5
5.0
4.5
Source: MF/STN
4.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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What is the problem?
• The first initiative was successful in boosting competitiveness in sectors
where Brazil was already very competitive (ex: airplanes and buses)
• In traditional labor intensive sectors (shoes, textiles and clothing) the
results were mixed
• The initiative was supposed to be horizontal across the sectors included in
it, but it became segmented by products and services within the same
sector during the legislative process
• The final result is a complex system that is supposed to end in December
31st, 2014.
• The payroll tax cut will probably be extended for some years, but it needs
to be revised and simplified to preserve social security and competitiveness
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Direct Taxes
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Corporate and Personal Income Taxes
• In recent years both personal and corporate income taxes have
increased in approximately 0.5% of GDP
• This is associated with the increase in the formal economy and the
high profits associated with the boom in commodity prices (Vale and
Petrobras)
• The other, non-conventional, sources of income tax decreased in
importance
• Despite the recent growth, income taxes correspond to just 30% of
the federal government’s primary revenues
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Income Tax in % of GDP
8
Source: MF/STN
1.3
7
1.4
6
1.7
5
4
3
1.6
0.9
1.8
2.2
2.1
2.0
1.6
1.8
1.7
1.4
1.6
1.3
1.2
1.4
1.3
1.3
3.9
3.8
1.1
1.4
1.7
2.3
2.0
1.9
2.0
3.2
3.0
3.1
1.8
1.9
1.9
3.6
3.5
3.9
4.2
4.0
3.6
6.8
2
1
2.0
2.0
2.1
2.2
2.1
2.0
2.2
2.3
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Personal income tax (IRPF and IRRF-Labor)
Corporate income tax (IRPJ and CSLL)
Other income tax
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What is under study?
• In the 1990s Brazil adopted a series of incentives (direct tax cuts) to
firms in other to attract foreign investment and close its gap in the
balance of payments (examples: “JCP” and tax exemption for capital
gains in mergers and acquisitions)
• These incentives are no longer necessary and can be phased out
gradually
• Brazilian firms also grew more international in recent years and this
requires an adaptation in the country’s taxation of offshore profits
• Finally, many high-income individuals can reduce their personal
income tax through loopholes in the country’s tax system for SMEs
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Other Important Issues
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SUPERSIMPLES and the “Peter Pan” Problem
• Brazil has a special tax system for SMEs, the SUPERSIMPLES, in which
federal, state and municipal taxes are collected together as a fixed % of
revenues
• This system started in 2007 and so far it has been very successful in
increasing formality among SMEs
• The government estimates that the total incentives amount to 0.5% of GDP
in “loss” revenue, but this is hard to evaluate against the alternative case
• Despite its success, the SUPERSIMPLES creates an incentive for firms not to
grow, in order to avoid the higher and more complex regular tax code
• The solution is to expand the SUPERSIMPLES in a way that gradually
reduces the “jump” in the tax burden when firms cease to qualify as a SME
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What is the role of the IPI?
• The Brazilian IPI is a VAT on industrial products, with high rates on
superfluous goods, and low rates on essential goods
• But the logic has been changing according to the new priorities of
economic policy
• Investment: zero IPI on capital goods and construction materials
• Public health: high IPI on alcoholic beverages and cigarettes
• GHG emissions: variable IPI according to the energy efficiency of
durable consumer goods
• Innovation: temporary IPI incentives to investments in innovation,
regional development and local production (auto industry)
• Regional governments resist any reduction in the IPI rates
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2.0
IPI in % of GDP
1.8
1.6
1.4
1.2
1.0
Source: MF/STN
0.8
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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CIDE and Urban Transportation
• The CIDE is a an excise tax on some specific activities, especially on fuels
(gasoline and diesel oil)
• In recent years the government reduced the CIDE on fuels to zero to
control inflation
• But public demand for better urban transportation can resuscitate the CIDE
on gasoline as a way to cross subsidize mass transportation
• And regional governments also want the CIDE back to finance their
investments in transport infra-structure
• The current macroeconomic situation prevents any change in the short-run
• But the CIDE should increase its role as a “carbon tax” in the future
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0.6
CIDE on Fuels in % of GDP
0.5
0.4
0.3
0.2
Source: MF/STN
0.1
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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IOF and financial regulation
• The IOF became an important source of revenue after the end of the
Brazilian financial-transaction tax (CPMF) in 2008
• Despite this gain, the high IOF on credit operations ends up raising
market interest rates (spreads) and, through this, it reduces financial
deepening and the efficiency of monetary policy.
• The IOF on credit operations should be phased out according to the
government’s budget constraint
• But the IOF should be preserved as a tool to inhibit high-risk financial
operations (prudential taxation), regulate capital flows and improve
the government supervision of financial derivatives
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CPMF and IOF in % of GDP
1.6
1.4
1.2
CPMF
IOF
1.0
0.8
0.6
0.4
0.2
Source: MF/STN
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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Wealth and Taxes
• The Brazilian constitution divides wealth taxation among the federal (IGF),
state (ITCMD) and municipal administrations (ITBI)
• The state and municipal taxes functions as an inheritance or “transfer” tax
• The federal tax is supposed to be a wealth tax, but so far it has not been
put in effect
• Left parties usually defend the IGF as new source of revenue for the
government, but the international experience indicates that this is not the
case
• To be effective, the IGF should be transformed in a federal inheritance tax,
that complements the ITCMD and ITBI, only for high values (ex: UK, US,
Germany, France, Japan, Norway, etc)
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