Haddad says VAT will not reduce municipal revenue.

Current Brazil Network - Finance Minister Fernando Haddad said on Monday (13) that the proposed new Value Added Tax (VAT) will not reduce municipal revenue. During the general meeting of the National Front of Mayors (FNP), in Brasília, he defended tax reform as a way for Brazil to grow again.

"Brazil will benefit from this reform, I have no doubt whatsoever. Everyone will benefit, because Brazil will grow. If this country doesn't grow, we have no way out. I was mayor of the largest city in the country. I would be the last person to propose something that would harm my city, or any other," Haddad stated.

In the proposals being discussed in Congress, the VAT – which “may or may not be dual,” according to Haddad – would replace five taxes: ICMS (state), ISS (municipal), PIS/Cofins and IPI (federal). The municipal movement, however, fears the effects of unification, with the loss of control over the ISS.

Haddad guaranteed that the taxation of the Services sector – the basis of the ISS (Service Tax) – will remain predominantly at the destination. “When we propose the VAT, we are proposing a tax that is transparent, with a simple cost, and that will not diminish the revenue of municipalities in any way. A large part of it will be allocated, almost 90% will remain exactly in the same place, and the destination is the large cities and the main services,” said Haddad. Any eventual changes will have a transition period of up to 40 years.

The minister is betting on the approval of the reform to "overcome the challenge of growth" in Brazil. "We have been exactly ten years without growth. We need to give our economy a shock of competence and efficiency to return to growth." 

Reindustrialization

Another argument, according to the minister, is that the tax reform should "modestly" benefit the industrial sector. Thus, mayors would also benefit, because the share of revenue from production passed on to municipalities is greater than the amounts collected from services.

“An industrial sector that currently accounts for 11% of GDP – and once accounted for 26% – will indeed benefit modestly from the reform. Because we want to reindustrialize the country. And because you will retain 25% of this sector's revenue. And which accounts for double the ISS [municipal tax],” he stated.

So he appealed to the mayors. “We’ve been growing at an average of 1% per year for the past 10 years. If you take population growth out of the equation, we’re at 0,5% per capita growth in Brazil. Are we going to keep fighting over a pie that isn’t growing?”

Dialogue and negotiation

Haddad highlighted estimates from the ministry that point to a positive impact of 20% on GDP over the next 15 years with the approval of the reform. Therefore, he stated that it is necessary to look at the overall gains, and not at any specific losses.

“We need to find a reform that will make Brazil grow. 'Ah, but the revenue of the city of São Paulo will grow 4% per year and that of Carapicuíba will grow 5%'. That's great! It's great that we found a solution for Carapicuíba, which will cease to be a dormitory town,” he highlighted, as an example.

He also stated that it is necessary to dispel "ghosts" that threaten the progress of the reform. In this sense, he said that most service providers will not be affected, because they have already benefited from the implementation of the Super Simples – also created during the Workers' Party government.

In another signal to the mayors, Haddad said he is 100% willing to dialogue and negotiate, just as he said he did during the discussions about the Fund for the Maintenance and Development of Basic Education (Fundeb). At that time, Haddad was Minister of Education.

“I gave this same speech during the approval of Fundeb. There was a march heading towards Congress against the PEC. And I gave this speech, identical, except for the difference in the topics. We approved it and, today, we celebrate a victory for Brazilian education. And the same thing will happen again.”