Goiás will go to Congress to discuss the tax war.

Chamber Agency The Joint Committee analyzing the Provisional Measure aimed at combating tax wars (MP 599/12) will hear on Wednesday (20) Finance Secretaries from five Brazilian states, including producing and non-producing states. The Finance Secretaries of Bahia, Luiz Alberto Bastos Petitinga; Goiás, Simão Cirineu Dias; Santa Catarina, Antonio Gavazoni; Pará, José Fostes Neto; and São Paulo, Andrea Calabi, were invited to the debate.

The Provisional Measure that initiates the reform of the Tax on the Circulation of Goods and Services (ICMS) aims to combat tax competition by creating a compensation fund for states considered "non-producing." Tax competition refers to the practice of states that export few products reducing ICMS rates to attract investment. The argument of these "non-producing" states is that they historically collect much less ICMS than producing states.

The Provisional Measure gradually reduces the ICMS (Value-Added Tax) rate on interstate transactions until it reaches 4%. The time to reach this rate varies depending on the region. To compensate for potential losses to states and municipalities, the Executive Branch establishes the payment of financial aid to these federated entities in proportion to the losses verified. The aid will be limited to R$ 8 billion annually. If losses exceed this limit, the money will be distributed proportionally to the observed losses.

Mandatory transfer

According to the text, the financial aid will be a mandatory transfer, payable for a period of 20 years. Payments will be made in 12 equal installments, until the last business day of each month. Debts of states or municipalities to the Union will be deducted from the transfers. The states will receive 75% of the total losses calculated, while the remaining 25% will be delivered directly to the municipalities.

The Federal Revenue Service will be responsible for determining any potential losses due to the ICMS reduction by July of each year, based on electronic invoices issued in the previous fiscal year. However, the payment will refer to the second year prior to the compensation, and the amounts will be adjusted based on the average variation in the Gross Domestic Product (GDP) of the four-year period immediately preceding the fiscal year in which the amounts are determined.

New rates
For these measures to take effect, however, the Senate will first have to approve a resolution with the new interstate ICMS (Tax on Circulation of Goods and Services) rates. For operations and services carried out in the North, Northeast, and Central-West regions and in Espírito Santo, destined for the South and Southeast regions, the tax should be reduced by 1 percentage point per year over 12 years – starting at 11% in 2014 and reaching 4% in 2025.

In transactions originating in the South and Southeast regions and destined for the North, Northeast, and Central-West regions, as well as Espírito Santo, the ICMS (Value-Added Tax) is expected to reach 4% within three years, starting in 2016. In 2014, it will be 6%.
For other operations and services, the rates will be 9% in 2014, 6% in 2015, and 4% in 2016. Products from the Manaus Free Trade Zone and natural gas will remain subject to the current 12% state tax.

Development fund

The provisional measure also establishes the Regional Development Fund (FDR), with the purpose of financing investment and productive development projects. Between 2014 and 2033, the Union plans to allocate R$ 222 billion to the fund, adjusted by the Long-Term Interest Rate (TJLP). In addition, it will allocate another R$ 74 billion directly to states and municipalities for the same period, with the same objective.

According to Finance Minister Guido Mantega, the creation of the fund is fundamental for the reform of the ICMS (Value-Added Tax) and aims to replace the fiscal war.

To integrate state projects and evaluate the results of actions, the Provisional Measure also creates the FDR Management Council. This body will be directly linked to the Ministry of Finance.

Agenda blocking
Starting March 21st, the Provisional Measure will block the agenda of the House (Chamber or Senate) where it is being processed.

The public hearing will be held at 10:00 AM in Plenary Room 6 of the Senator Nilo Coelho Wing, in the Senate.