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Brazilian Tax Reform and the Digital Economy


Gabriela de Souza Conca; Luiz Roberto Peroba Barbosa

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​The Brazilian tax system is globally known for its enormous complexity from a legal and administrative standpoint. It is one of the most relevant hurdles for foreign capital attraction and economic growth.
The new administration has undertaken to approve in the next presidential term several reforms to facilitate doing business in the country and one of them is the tax reform. The bill that is currently in the most advanced stage was proposed by Congressman Luiz Carlos Hauly (PEC No. 293/2004) and intends to simplify and combine all current taxes imposed on consumption (ISS, ICMS, IPI, PIS, COFINS, IOF, CIDE-Fuel) into one single tax so-called Goods and Services Tax (GST) to be collected by States, following the model of the VAT adopted worldwide.
This bill was introduced in the House of Representatives and has received several amendments so far. One of the most relevant amendments was proposed by Congressman Antonio Carlos de Mendes Thame and foresees the simplification of the tax system by combining ISS, ICMS, IPI, PIS and COFINS into one single consumption tax VAT alike (also called GST). This draft was originally proposed by an independent think tank called C.CiF (Fiscal Citizenship Center) after being subject to several rounds of debates in the academia.
C.CiF´s initiative is one of the most innovative proposals that Brazil has seen in the past years and has gained support from several scholars, public officials and members of Congress. It addresses the main concern of the federative entities regarding their fiscal autonomy by providing a shared taxing power to impose and collect the GST.
Under both Congressmen Thame and Hauly´s proposals, GST shall be a broadly-based consumption tax assessed at a single rate on the value added at each stage of production and distribution (including the import) regardless of the denomination attributed to the transaction that triggered the tax levy (whether sale of goods, service provision, license of rights, royalties, etc.).
It is key to the reform that GST's base is broad enough to encompass all onerous transactions carried out by individuals or entities taxpayers, including transactions with intangibles (games, apps, audiovisual content, etc.) and all types of licenses (license of software, license to explore audiovisual work, license of any rights, etc.) that currently stand in a grey area of taxation. Internet and entertainment companies established in Brazil or providing services for Brazilian consumers may be affected by this bill as they shall be subject to GST at the same rate applied to all other businesses.
Except for a few essential items that shall be exempted or subject to a more favorable taxation, tax authorities are forbidden to grant any tax benefit that would result in an unequal tax treatment of taxpayers. A few industries that now benefit from tax incentives, such as IT companies that enjoy PIS, COFINS and IPI reductions, shall no longer be contemplated with such advantages once the tax reform is approved.
Combined with the single flat rate applicable to all businesses, another significant improvement to the tax system brought by the current proposals is the implementation of the "destination principle", pursuant to which GST shall be collected to the State where consumption occurs. This measure shall put an end to the "tax war" between States that use unauthorized subsidies to attract investment and level the playing field among taxpayers and States.
Besides the GST, both proposals foresee the creation of a federal excise tax to regulate and prevent the consumption of items that cause negative externalities effect. Hauly´s list of items that could cause negative externalities is larger than the one in Thame´s proposal and comprises telecommunication services. Telecommunication companies may hence be subject to an excise tax on top of the GST depending on the final wording of the amendment.
Even though the current proposals do not address all issues that are relevant to the digital economy - such as the levy of CIDE-Remittance and CONDECIDE, for instance – they are overall beneficial to businesses in Brazil. A tax reform as intended shall promote transparency and legal certainty, and reduce compliance and litigation costs. This scenario shall be particularly interesting for Brazil's e-commerce, which shows a positive growth trend.
Although the several failed attempts to reform the Brazilian tax system in the past decades and the numerous challenges to a reform implementation, the current administration is very positive about PEC No. 293/2004. The new Secretary of Internal Revenue Office, Marcos Cintra, is an enthusiastic of the tax reform that aims the simplification of the system and unification of consumption taxes. He also stated publicly that supports a lower tax burden for entities and shall fight for the reduction of the income tax rates applied to companies and increase of the income tax rates for wealthy individuals. With a less complex and fairer system, he also believes that amnesty programs shall be banned.
Even though these changes to the federal income tax do not require a constitutional amendment, the creation of a GST still requires changes to the Constitution and has to follow a stricter legislative procedure. In order to be approved, PEC No. 293/2004 must pass through two qualified rounds of voting (3/5 of favorable votes) in each House (Senate and House of Representatives). The bill was already approved by the Committee composed of members of the House of Representatives last December and shall be soon voted in the first round by the House.

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