Brazil fails on ICMS tax reform

Sun 12th Apr 2015

The Brazilian government has failed last week in its latest attempts to gain agreement between the 27 States on the reform and harmonisation of the ICMS / VAT regime. The antiquated intra-state tax is seen as a major constraint to developing an internal free market and helping the Brazilian economy recover from its latest recession.

Brazil recently returned to recession, with a forecasted 1% contraction of the economy in 2015. The multi-tiered consumption tax regime, including Federal, State and Municipal taxes is seen as a major contributor to the lack of economic growth. In addition, many States have been competing on their respective ICMS rates to attract and retain inward investment.

By contrast, Chinese VAT and Indian GST reforms are both well progressed, and look set to delivery major GDP boosts.

Brazilian ICMS tax burden

ICMS (Imposto Sobre Operações Relativas à Circulação de Mercadorias e Serviços de Transporte Interestadual de Intermunicipal e de Comunicações) is a consumption tax on commercial goods and services that also applies to the movement of goods between Brazilian States. Since States are free to set their own taxes, in the past this has meant double taxation on movements of stocks, which puts a large fiscal bill on trade within the country. To help alleviate this, states should seek prior approval for any ICMS changes via the National Council of Fiscal Policy (CONFAZ). However, many States have ignored this.

This has put a heavy fiscal drag on the development of Brazil’s internal market.

Attempts at unifying ICMS

The latest discussions on harmonization or unifying ICMS were being led by the Brazilian finance minister, Joaquim Levy. But discussions broke down on Friday 10 April. Aside from a concern of losing control of their tax revenues, some States highlighted that they use ICMS as a competitive tool to attract inward investment. The principle disenters were Parana, Rio Grande do Norte, Pernambuco and Ceara.

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