11

SUPPORT:

ORGANIZED BY:ORGANIZED BY:

STATE TAX REVENUE STATE TAX REVENUE DEPARTMENT OF RIO DEPARTMENT OF RIO GRANDE DO NORTEGRANDE DO NORTE

NATAL/RN – March 29, 2007

AN ALTERNATIVE TO TAXATION OF

GOODS AND SERVICES IN

BRAZIL

22

Working Program Forum/FGV 2006/07Working Program Forum/FGV 2006/07Group 1: Partial Result Group 1: Partial Result Subgroup: Scenario of Tax Reform Subgroup: Scenario of Tax Reform with Dual Taxation with Dual Taxation

33

TAXATION OF GOODS AND SERVICES IN TAXATION OF GOODS AND SERVICES IN BRAZILBRAZIL

Starting from the assumption that a tax Starting from the assumption that a tax reform on goods and services in Brazil is reform on goods and services in Brazil is necessarynecessary

Please note that it will not be possible to Please note that it will not be possible to comment on existing problems in current comment on existing problems in current legislationlegislation

The purpose of this brief presentation is The purpose of this brief presentation is to comment on an alternative to address to comment on an alternative to address the issue of taxation of goods and the issue of taxation of goods and servicesservices

This consists in Dual Taxation or Dual VATThis consists in Dual Taxation or Dual VAT

44

DUAL VAT: WHAT IS IT? WHAT’S DUAL VAT: WHAT IS IT? WHAT’S IT FOR?IT FOR?

One VAT at the Federal Government level and One VAT at the Federal Government level and another VAT at the State Government levelanother VAT at the State Government level

Replaces (to be discussed): IPI, PIS, COFINS, Replaces (to be discussed): IPI, PIS, COFINS, CIDE, ICMS, ISS?CIDE, ICMS, ISS?

Enable enhancement of quality of taxation on Enable enhancement of quality of taxation on goods and servicesgoods and services

To use a phrase: a civilized form of two levels To use a phrase: a civilized form of two levels of government in the federative context to use of government in the federative context to use the same tax base with a VAT type taxthe same tax base with a VAT type tax

In a word: In a word: harmonizationharmonization ( unless there is an unless there is an intent to harmonize taxation there is no such intent to harmonize taxation there is no such thing as Dual VAthing as Dual VATT

55

DUAL VAT: WHAT IS IT? WHAT’S DUAL VAT: WHAT IS IT? WHAT’S IT FOR?IT FOR?

Therefore Dual VAT is a step towards Therefore Dual VAT is a step towards harmonizing taxation on goods and servicesharmonizing taxation on goods and services

One might call it Dual One might call it Dual TaxationTaxation since tax since tax regimes in Brazil that deviate from the pure regimes in Brazil that deviate from the pure concept of VAT are here to stayconcept of VAT are here to stay

Nevertheless, it is possible to have two Nevertheless, it is possible to have two harmonized VATs even if they are not harmonized VATs even if they are not perfect VATsperfect VATs

This converges closely with the proposal by This converges closely with the proposal by the federal governmentthe federal government

Yet, how did the idea of a Dual VAT come Yet, how did the idea of a Dual VAT come about?about?

66

ORIGIN OF THE DUAL VATORIGIN OF THE DUAL VAT Dual VAT in literature (Bird and Gendron) is a Dual VAT in literature (Bird and Gendron) is a

perception that VAT type taxes can be collected perception that VAT type taxes can be collected by the subnational governmentby the subnational government

This leads us to an older mode of Dual VATThis leads us to an older mode of Dual VAT The IPI/ICM in 1967 The IPI/ICM in 1967 ( even though with a different even though with a different

model and context model and context Brazil was the 1Brazil was the 1stst Country Country to to provide a VAT type tax to two levels of provide a VAT type tax to two levels of government government

the origin, therefore, is not with the FHC the origin, therefore, is not with the FHC Government (PEC 175/95), nor with the Lula Government (PEC 175/95), nor with the Lula Government (Mar/07), nor with the Fiscal Forum of Government (Mar/07), nor with the Fiscal Forum of States, nor is it the Canadian arrangement States, nor is it the Canadian arrangement adopted in 1992 (adopted in 1992 (Good and Services TaxGood and Services Tax – GST – GST and and Quebec Sales TaxQuebec Sales Tax – QST) – QST)

Which is an advantage, since if “an old tax is a Which is an advantage, since if “an old tax is a good tax” perhaps there is room to discuss an good tax” perhaps there is room to discuss an alternative to the Dual VATalternative to the Dual VAT

77

HARMONIZATION OF TAXATION OF HARMONIZATION OF TAXATION OF GOODS AND SERVICESGOODS AND SERVICES

This is the key concept of Dual Taxation as it This is the key concept of Dual Taxation as it enables:enables:

Movement towards quality of taxation on Movement towards quality of taxation on goods and servicesgoods and services

enhanced efficiency to the system enhanced efficiency to the system reduced conflicts in the federationreduced conflicts in the federation achieving achieving

unity even in diversity, inherent to unity even in diversity, inherent to federationsfederations

upholds subnational autonomy to define upholds subnational autonomy to define budget sizesbudget sizes

Below is a graphic display of gains that could Below is a graphic display of gains that could be achieved through harmonizationbe achieved through harmonization

88

Costs of harmoniza-tion

Current Taxation Unified National VAT

HARMONIZATION OF TAXATION OF GOODS AND HARMONIZATION OF TAXATION OF GOODS AND SERVICESSERVICES

a d

f

i

a a ( Current Taxation( Current Taxation

dd ( National VAT ( National VAT

Costs of lack of harmonization

com

plex

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99

Costs of harmoniza-tion

Current Taxation National VATDual Taxation

HARMONIZATION OF TAXATION OF GOODS AND HARMONIZATION OF TAXATION OF GOODS AND SERVICESSERVICES

a b c d

f

g

h

i

aa(( Current Taxation Current Taxation

dd(( National VAT National VAT

cc ( Harmonized Dual VAT ( Harmonized Dual VAT

bb ≤ space of dual taxation≤ c ≤ space of dual taxation≤ c

Costs with lack of harmonization

c = Dual VAT ( enhanced VAT possible in federative c = Dual VAT ( enhanced VAT possible in federative contextcontext

1010

TAXATION OF GOODS AND SERVICES TAXATION OF GOODS AND SERVICES WITH AND WITHOUT HARMONIZATIONWITH AND WITHOUT HARMONIZATION

Costs Costs several dimensions several dimensions Inverse relation Inverse relation quality of taxation x quality of taxation x

costscosts Current system Current system low quality of taxation low quality of taxation Central VAT Central VAT least possible cost least possible cost Dual harmonized VAT Dual harmonized VAT ( least possible cost least possible cost

within federative context within federative context ( reference modelreference model Reform of taxation of goods and services Reform of taxation of goods and services

space between current system and space between current system and reference modelreference model

More or less quality of taxation depends on More or less quality of taxation depends on choices between principles of harmonization choices between principles of harmonization x autonomy x autonomy from “b” moving towards “c” from “b” moving towards “c”

1111

HARMONIZATION OF TAXATION OF GOODS AND HARMONIZATION OF TAXATION OF GOODS AND SERVICESSERVICES

Quality in taxation

Benefits

Current Taxation

Space of reform

sim

plifi

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n, e

ffici

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in

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, citi

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C= Dual VAT C= Dual VAT (( enhanced VAT possible in enhanced VAT possible in federative contextfederative context

1212

BENEFITS OF HARMONIZATIONBENEFITS OF HARMONIZATION IN TAXATION OF GOODS AND SERVICES IN TAXATION OF GOODS AND SERVICES

Benefits Benefits several dimensions several dimensions Direct relation: quality of taxation Direct relation: quality of taxation ( benefits benefits simplification, efficiency in collection, simplification, efficiency in collection,

neutrality, citizenship rights, neutrality, citizenship rights, intergovernmental cooperation, legal-intergovernmental cooperation, legal-institutional stability, federative balance, institutional stability, federative balance, competitivenesscompetitiveness

Preserves autonomy of subnational Preserves autonomy of subnational governments to adjust their financial needsgovernments to adjust their financial needs

Dual Taxation facilitates the adoption of the Dual Taxation facilitates the adoption of the principle of destinationprinciple of destination

1313

FINAL NOTESFINAL NOTES

Reform of taxation of goods and services should Reform of taxation of goods and services should be part of a broader reform be part of a broader reform

This is because it automatically results in a This is because it automatically results in a discussion on revenue sharingdiscussion on revenue sharing

At the Fiscal Forum of the States, the perception At the Fiscal Forum of the States, the perception is that taxation, revenue sharing, regional is that taxation, revenue sharing, regional development, retirement/ welfare, budgetary development, retirement/ welfare, budgetary restrictions… are interlinked issuesrestrictions… are interlinked issues

We have seen We have seen anan alternative to address taxation alternative to address taxation of goods and services in a federative contextof goods and services in a federative context

Time is lacking for us to go into greater detailTime is lacking for us to go into greater detail Below is a draft of aspects of Dual Taxation to be Below is a draft of aspects of Dual Taxation to be

made available and discussed at another made available and discussed at another opportunityopportunity

1414

DIMENSIONS OF THE REFORMDIMENSIONS OF THE REFORM

Reference Model Reference Model where we want to gowhere we want to go Operational aspects Operational aspects requirements to requirements to

achieve the idealized modelachieve the idealized model Transition Transition care to… care to… get there get there to the idealized modelto the idealized model not get lost along the waynot get lost along the way reduce uncertainty/ insecurity/ lossreduce uncertainty/ insecurity/ loss proper increments over timeproper increments over time

1515

REFERENCE MODEL – GUIDELINES AND REFERENCE MODEL – GUIDELINES AND CHARACTERISTICS OF DUAL TAXATIONCHARACTERISTICS OF DUAL TAXATION

Both taxes inciding on same baseBoth taxes inciding on same base Broad base Broad base includes servicesincludes services Better yet if the Calculation base is the same Better yet if the Calculation base is the same

or quite similaror quite similar Deductive indirect method Deductive indirect method debits - credits debits - credits Both taxes only record consumptionBoth taxes only record consumption credit for goods of use and consumption of credit for goods of use and consumption of

company and for fixed assets (asset: company and for fixed assets (asset: unburden or provide credit)unburden or provide credit)

Principle of destination in transactions as in Principle of destination in transactions as in the rest of the world the rest of the world exports unburdened exports unburdened and imports taxes at the same bracket (load) and imports taxes at the same bracket (load) as applied to national goods and servicesas applied to national goods and services

1616

REFERENCE MODEL – GUIDELINES AND REFERENCE MODEL – GUIDELINES AND CHARACTERISTICS OF DUAL TAXATIONCHARACTERISTICS OF DUAL TAXATION

Within Brazil, tax factors should not constitute Within Brazil, tax factors should not constitute an obstacle for free circulation of goods and an obstacle for free circulation of goods and servicesservices

Principle of destination to allocate revenues Principle of destination to allocate revenues from state VAT collection from state VAT collection model for fiscal model for fiscal adjustments at borders is an operational issue adjustments at borders is an operational issue

‘mitigated’ boat ‘mitigated’ boat Fewer brackets Fewer brackets requirements for VAT to requirements for VAT to

functionfunction Federal and State governments preserve Federal and State governments preserve

autonomy to set brackets autonomy to set brackets predetermined predetermined space and marginsspace and margins

Autonomy linked to the possibility of Autonomy linked to the possibility of defining budget sizedefining budget size

1717

Within Brazil, tax factors should not constitute Within Brazil, tax factors should not constitute an obstacle for free circulation of goods and an obstacle for free circulation of goods and servicesservices

Principle of destination to allocate revenues Principle of destination to allocate revenues from state VAT collection from state VAT collection model for fiscal model for fiscal adjustments at borders is an operational issue adjustments at borders is an operational issue

‘mitigated’ boat ‘mitigated’ boat Fewer brackets Fewer brackets requirements for VAT to requirements for VAT to

functionfunction

REFERENCE MODELREFERENCE MODELGUIDELINES AND CHARACTERISTICS OF THE GUIDELINES AND CHARACTERISTICS OF THE

DUAL VATDUAL VAT

1818

REFERENCE MODEL - DIFFICULTIESREFERENCE MODEL - DIFFICULTIES

Coexistence of differentiated regimesCoexistence of differentiated regimes National ‘Simples’ TaxNational ‘Simples’ Tax Tax ReplacementTax Replacement Manaus Free Trade ZoneManaus Free Trade Zone Municipal taxation on services (ISS) or Municipal taxation on services (ISS) or

alternative sourcealternative source Size of bracketsSize of brackets explanation of tax burdens and fiscal explanation of tax burdens and fiscal

citizenshipcitizenship makes simplification difficultmakes simplification difficult Calibrating brackets Calibrating brackets even if correct, will even if correct, will

affect sectoral burdenaffect sectoral burden

1919

REFERENCE MODEL - DIFFICULTIESREFERENCE MODEL - DIFFICULTIES

Vertical competition on higher consumption Vertical competition on higher consumption basesbases delimiting space for each VAT?delimiting space for each VAT?

Model for fiscal agreement at interstate Model for fiscal agreement at interstate borders borders accumulation of credit accumulation of credit

Losses from tax war and development Losses from tax war and development policies policies tax war that uses interstate tax war that uses interstate brackets as an instrument will end, a regional brackets as an instrument will end, a regional development policy would have to be development policy would have to be establishedestablished

Compensation for losses to reduce Compensation for losses to reduce insecuritiesinsecurities

2020

OPERATIONAL ASPECTS AND TRANSITIONOPERATIONAL ASPECTS AND TRANSITION

The major part of taxation reform of goods and The major part of taxation reform of goods and services is in the transition and operational services is in the transition and operational aspectsaspects

Convergence of legislation and regulationsConvergence of legislation and regulationsApproximation of tax regimes (example: Approximation of tax regimes (example:

replace taxation in two VATs)replace taxation in two VATs)Convergence of tax calculation basesConvergence of tax calculation basesAccommodating and calibrating bracketsAccommodating and calibrating bracketsPrinciple of destination for allocating revenue Principle of destination for allocating revenue

and operational model for fiscal agreement at and operational model for fiscal agreement at interstate bordersinterstate borders

Tax benefits Tax benefits how to resolve losses from how to resolve losses from tax war, including to render adoption of the tax war, including to render adoption of the principle of destination feasible?principle of destination feasible?

2121

OPERATIONAL ASPECTS AND TRANSITIONOPERATIONAL ASPECTS AND TRANSITION

Administrative integration:Administrative integration: accessory obligationsaccessory obligations recordsrecords surveillancesurveillance administrative proceedingsadministrative proceedings consultations; interpretation; conflict consultations; interpretation; conflict

resolutionresolution Alternative for transition Alternative for transition implementation by segments / activities?implementation by segments / activities? Progressive harmonization of bases before Progressive harmonization of bases before

adoption of Dual VAT?adoption of Dual VAT?

2222

LACK OF HARMONY IN CURRENT LACK OF HARMONY IN CURRENT TAXATION OF GOODS AND SERVICESTAXATION OF GOODS AND SERVICES

Many taxes on the same itemMany taxes on the same itemoperation, legal act, operation, legal act, business deal…business deal…

Differentiated regime for each tax Differentiated regime for each tax Differentiated regime for each taxDifferentiated regime for each tax Single phase and multi-phaseSingle phase and multi-phase Cumulative and non-cumulativeCumulative and non-cumulative “ “Cumulativity” in non-cumulative taxes (use/consumption, asset, Cumulativity” in non-cumulative taxes (use/consumption, asset,

exportation)exportation) Different calculation methods to obtain non-cumulativity: deductive Different calculation methods to obtain non-cumulativity: deductive

direct method (non-VA bracket); deductive indirect method (debits – direct method (non-VA bracket); deductive indirect method (debits – credits)credits)

Regimes: normal, National “Simples”, Tax Replacement (TR)Regimes: normal, National “Simples”, Tax Replacement (TR) Lack of harmony in TR Lack of harmony in TR hypotheses and taxes submitted to hypotheses and taxes submitted to

regime/ states that apply regime/ states that apply Different forms and terms for appropriation of credits (example: fixed Different forms and terms for appropriation of credits (example: fixed

assets)assets)

2323

LACK OF HARMONY IN CURRENT LACK OF HARMONY IN CURRENT TAXATION OF GOODS AND SERVICESTAXATION OF GOODS AND SERVICES

ICMS tax warICMS tax war Brackets hidden inside and outsideBrackets hidden inside and outside Multiple nominal brackets and infinite effective Multiple nominal brackets and infinite effective

bracketsbrackets Taxes are part of calculation base of other taxes, at Taxes are part of calculation base of other taxes, at

times simultaneouslytimes simultaneously On the operational plane, triplication of effortsOn the operational plane, triplication of efforts surveillancesurveillance “ “accessory” obligationsaccessory” obligations payment termspayment terms recordsrecords information systems.information systems. consultationsconsultations administrative proceedings administrative proceedings We could spend the day on examples…We could spend the day on examples…