Government threatens to halt ICMS project.

By Luciana Otoni

Reuters - The Senate's Economic Affairs Committee (CAE) approved on Tuesday an amendment to the ICMS reform report, which could jeopardize the effectiveness of the federal government's plan to end the tax war between states and improve the Brazilian tax system.

Faced with this change, the federal government is threatening to abandon the project and not contribute to the funds that will be created to compensate the states for any potential revenue losses.

The CAE (Committee on Economic Affairs) approved an amendment that excludes from the gradual unification of interstate ICMS (Tax on the Circulation of Goods and Services) rates commercial and service operations originating in Espírito Santo and the North, Northeast, and Central-West regions and destined for consumer markets in the South and Southeast. In these operations, the ICMS rate would be 7 percent.

In the report approved in April, the 7 percent rate applied only to manufactured and agricultural products, and not to service and commercial transactions. In the opposite direction, that is, from the Southern and Southeastern states to the other regions, the rate would gradually decrease to 4 percent.

Furthermore, the CAE maintained the ICMS tax rate at 12 percent for the Manaus Free Trade Zone, rejecting an amendment that proposed reducing it to 7 percent. In practice, this would mean there would be three ICMS tax rates for interstate transactions – 12, 7, and 4 percent – ​​instead of the current two of 12 and 7 percent.

"The Senate is sovereign to make these modifications, just as we are sovereign to decide whether or not to allocate resources to the reform funds," stated the executive secretary of the Ministry of Finance, Nelson Barbosa, after the conclusion of the vote in the CAE (Committee on Economic Affairs).

The proposed ICMS (Tax on Circulation of Goods and Services) reform includes the creation of the Revenue Compensation Fund (FCR) and the Regional Development Fund (FDR), with resources from the Federal Government, to compensate the States for any losses resulting from the ICMS changes.

"That was not the proposal presented by the government. We will evaluate the extent of this modification and its potential to stimulate tax competition in commerce and services," he added, referring to the approval of the 7 percent tax rate for commerce and service transactions originating in the North, Northeast, and Central-West regions.

Barbosa also said that the government will wait a week to assess the repercussions of the changes made by the senators and define the course of action to be taken.

According to the government's original plan, the interstate tax rate was supposed to converge to 4 percent between 2014 and 2021, but some exceptions were adopted.

The chairman of the CAE, Senator Lindbergh Farias (PT-RJ), also did not consider the matter closed. "New amendments on this subject may arise in the Senate," he said. "The discussion is not yet over," he added.

The bill now goes to the full Senate for consideration.

FREE ZONE

Through a block vote on the amendments, the CAE (Committee on Economic Affairs) rejected on Tuesday the amendment that would have reduced the interstate tax rate for goods produced in the Manaus Free Trade Zone from 12 to 7 percent.

This maintains the original text of the ICMS reform bill in this respect, which was approved by the CAE in April. States such as São Paulo, Santa Catarina, and some in the North and Northeast regions contested this rate, proposing a reduction to 7 percent.

The amendment that would have reduced the interstate tax rate on natural gas from 12 to 7 percent was also rejected.
For the states, the bill approved this afternoon will make ICMS taxation even more complex.

"Operationally it becomes more complicated, of course, but we have to take into account that there are several 'Brazils' within the country, with different situations in each region. Was it the best project? We don't know. It was the one that was possible to vote on," said the secretary.

Cláudio Trinchão, from the Treasury Department of Maranhão and coordinator of the National Council of Tax Policy (Confaz).

(Additional reporting by Tiago Pariz, in São Paulo)