At least 71 components of the tax reform need regulation

Rules need to be detailed in supplementary law and sent to Congress within six months.

Eduardo Salusse

With the tax reform approved, Brazil’s Congress now faces the task of crafting all the regulations for newrules. At least 71 components will need to be detailed in supplementary law. However, certain aspects are indispensable for successfully implementing the new model.

The staff at the Special Office of Tax Reform is working with the initial expectation of three laws: one forthe new taxes, another for the management committee of Tax on Goods and Services (IBS), and a thirdone for the excise taxes levied on specific goods or services.

The “clarifications” by means of supplementary law will replace a significant portion of the 218 articles ofBrazil’s 1966 Tax Code, which governs the country’s current tax system. The texts will be drafted by the government and must be sent to Congress within six months, as stipulated in the approved reform text.

“With PEC 45 approved, the most challenging phase begins now,” said lawyer Eduardo Perez Salusse, apartner at Salusse, Marangoni, Parente, Jabur Advogados, the law firm responsible for examining the 71components. He adds that all the issues that depend on the law are important within the new tax system,but four are essential, and without them, the reform will not get off the ground.

The first component deals with defining the Contribution on Goods and Services (CBS) and the IBS—thefoundations of the new tax system. In this case, it will determine the triggering event for each tax, therates, who should pay, and to whom. “These are the minimum elements needed to make the existence ofthe tax itself viable,” said Mr. Salusse.

The second component, which depends on supplementary law, involves aspects of the tax administrationof the IBS, provided in article 156-B of the constitutional amendment bill (PEC) 45. Mr. Salusse explains that this refers to the authority to institute, supervise, and collect the tax, in addition to settling disputes.Article 156-B also provides for creating a management committee to collect, administer, and distribute thetax. According to Mr. Salusse, the PEC’s text is generic and still very open in its definitions.

The third component is the distribution of the money collected and the creation of funds for possiblelosses in revenue for states and municipalities as a result of the tax reform. The third point pertains to the distribution of the funds collected and the establishment of funds for potential revenue losses incurred bystates and municipalities as a result of the tax reform. The fourth, he says, involves the regulation of numerous exceptions and specificities, including differentiated regimes, specific provisions, and credit reimbursements, to name a few.

Dozens of sectors have managed to enter these regimes. According to tax expert Ana CarolinaMonguilod, a partner at CSMV Advogados, Article 9 of PEC 45 contains 13 items encompassing various sectors that benefit from the 60% reduction, including finance, education, health, and sports activities.

“We still have no idea what this taxation will look like. Next year, the work of the Congress is expected tobe even more intense because all of this must be regulated by supplementary law,” she said, adding that the text has gained more exceptions over the course of the process, which does not prevent other sectors from being included in new PECs in the coming years.

According to her, it would be better to have a text with a minimum number of exceptions so that the rates could be lower for everyone and the system could be simplified. “The more exceptions there are, the more complex it becomes, and the tax rate tends to increase,” she explained. “Now, with the textapproved, we have to work to ensure it is well-regulated.”

For Lina Santin, a collaborator at the think tank Centro de Cidadania Fiscal (CCiF) and coordinator of the Tax Studies Center (NEF) at the Fundação Getulio Vargas’ Law School, the regulation could go beyond the components that PEC 45 expressly delegated to supplementary law.

“Just as it is today for ICMS, ISS, and other taxes, it will be the same for IBS and CBS now. All through supplementary law,” she said. “We expect a single law to provide details on IBS and CBS. The excisemay come in another law, but in all of them, it will be clear what the triggering event for each tax is, the tax rate, who should pay, and to whom.”

Furthermore, she adds that a procedural law will be needed to specify the competent authority foroversight, how the revenue will be shared, and who will adjudicate the proceedings related to each newtax. “In short, there are still many issues to be addressed,” said Ms. Santin.

According to the lawyer, the CciF had already drafted a bill for a supplementary law to regulate the PEC,which is on the desk of Bernard Appy, the Minister of Finance’s secretary for tax reform. “In fact, some of this material was prepared when Mr. Appy himself was still at the CCiF.”

She explains that the CCiF is working on a proposal for a unified and pre-filled tax return (accessoryobligation) for taxpayers, “which would significantly simplify tax compliance”. As for deadlines, according to Ms. Santin, in the best-case scenario, the supplementary laws areexpected to be approved by Congress by the end of 2024. “If that’s not enough time, we’ll still have until September 2025 because the PEC provides for the collection of the IBS and CBS test rate to start in2026,” she explained. This way, the principle that a law creating or increasing a tax can only take effect inthe following year or after 90 days would be adhered to for initiating a new tax.

The lawyer also points out that passing supplementary law is more straight forward than passing PECs.The approval of supplementary law requires an absolute majority (41 senators and 257 representatives), with the Senate voting in a single round and the Chamber of Deputies (Lower House) voting in tworounds. For the approval of PEC 45, the quorum was three-fifths (49 senators and 308 representatives).“If a PEC has been approved, we have greater confidence that the supplementary laws will also be approved.”

Edison Fernandes, a partner at Fernandes, Figueiredo, Françoso e Petros Advogados, believes that “thebackbone is already there”. He further adds, “The supplementary law won’t be able to deviate much from what has been approved”. For him, the most urgent components for regulation are broad non-cumulativeness and how litigation will be regulated.

According to the lawyer, another important component to be defined is the tax rate, which may beresolved closer to the entry of the text into force after 2026. “Monitoring the rate calibration will be very important,” he noted. Mr. Fernandes refers to studies suggesting a rate of around 27%, but he also highlights the possibility of it not being confirmed, emphasizing that the extent of allowable tax credits for businesses will play a crucial role.

The system of credits and refunds, the functioning of the management committee, and the scope of thelist of products with favorable taxation are among the concerns of companies regarding the new taxsystem. Ana Cláudia Akie Utumi, a partner at Utumi Advogados, emphasized that these aspects shouldbe prioritized in the definitions established by the supplementary laws.

“This system of crediting and refunding credits is very important considering the promise of simplicity andeconomic growth. Keeping funds idle in the hands of tax authorities won’t inspire greater enthusiasm forinvestment in Brazil and advance the economy,” she explained.

*As opiniões expressas neste artigo são de responsabilidade exclusiva do(s) autor(es), não refletindo necessariamente a posição institucional da FGV.


  • Eduardo Salusse

    Professor of Tax Law at the São Paulo Law School (FGV Law SP) and other institutions, serving as an executive responsible for research at the Tax Studies Center of the School. Founding partner of the law firm responsible for the tax law area. Honorary Counselor and current President of MDA – Advocacy Defense Movement. Columnist at Valor Econômico newspaper (Fio da Meada).

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