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Taxes on Consumption of Goods and Services in Brazil

Taxes on Consumption of Goods and Services in Brazil. 1) General Features of Taxation on Consumption. 2) Specific Features of Taxes on Consumption. 3) Tax Reform of Taxes on Consumption in Brazil.

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Taxes on Consumption of Goods and Services in Brazil

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  1. Taxes on Consumption of Goods and Services in Brazil 1) General Features of Taxation on Consumption 2) Specific Features of Taxes on Consumption 3) Tax Reform of Taxes on Consumption in Brazil LecturerRaimundo Eloi de CarvalhoGeneral-Coordination of Tax PolicySecretaria da Receita Federal Brasilia – November 2006

  2. 1) General Features of Taxation on Consumption 1.1) Taxes on Consumption 1.2) Share in tax collection and in GDP 1.3) Cumulativity; non-cumulativity and conection elements. 1.4) 1960s: Elimination of da Cumulativity in Taxation on Consumption 1.5) VAT x ICMS 1.6) Evolution of Tax Collection on Consumption (Cumulativity x non-cumulativity )

  3. 1.1) Tributos Incidentes sobre o Consumo de Bens e Serviços no Brasil Competência Tributos Forma de Incidência Base de Incidência Tributária 1) IPI: Federal Tax on Industrialized Goods Non-cumulative Industrialized Goods 2) ICMS: Tax on the Circulation of Goods and Transportation and Communication Services Goods and (only) Transportation and Communication Services States Non-cumulative 3) ISS: Tax on Services Municipal Cumulative Services 4) COFINS: Contribution for the Financing of the Social Security Federal Cumulative/Non-cumulative Goods and Services 5) PIS: Social Integration Program Federal Cumulative/Non-cumulative Goods and Services 6) CIDE-Combustíveis: Federal Single stage Gasoline and diesell Economic Contribution on Fuel

  4. 1.2) Share in Tax Collection and in GDP- 2005 Share % Tax Bases Collection (R$ million) Tax collection GDP Consumption (*) 309,711 42.77% 15.98% Income/Property (**) 179,339 24.77% 9.26% Social Security 133,644 18.46% 6.90% Others 101,419 14.01% 5.23% Total 724,113 100.00% 37.37% (*) IPI, ICMS, ISS, Pis/Pasep, Cofins e CIDE. (**) I. Renda, CSLL, IPTU, ITR, IPVA, ITCD e ITBI. Source: SRF/Copat - Carga Tributária

  5. Share in Tax Collection - 2005 Others 14,01% Consumption Social Security 42,77% 18,46% Income/Property 24,77%

  6. 1.3) Cumulativity • Incidence in each stage of the production process without deduction of the tax due in the previous stage • Disadvantages • Afects competitivity (domestic and foreign); • Lack of neutrality and transparency; • Encourages forms of organization of production, in order to reduce tax burden (verticalization); • Harms international tax harmonization; • High burden on capital goods • Advantages: • High potential collection with “low” tax rate • Simplicity for the tax administration and the taxpayer Ex.: Cofins.

  7. 1.3) Non-Cumulativity • Incidence in each stage of the production process with deduction of the tax due in the previous stage (value-added tax) • Advantages: • Take into consideration principles of neutrality and transparency • Low burden on production • Facilitates border’s fiscal adjustment • Disadvantages: • Complexity (more bureaucratic control); • Frauds (credit not due, counterfeit bills); • Need for high rates Ex.: Value-Added Taxes – IVA; ICMS e IPI.

  8. 1.3) Conection Elements • Taxation in Origin: • Rates equal or similar; • Tax exports and exempts imports; • Fiscal wars (different brackets and tax benefits); • No need for border’s fiscal adjustment • Taxation in Destination: • Tax imports and exempts exports; • Tax evasion; • Need for border’s fiscal adjustment.

  9. 1.4) 1960s: Beginning of the Process of Elimination of Cumulativity CUMULATIVITY (I. C; I. V. C.) NON-CUMULATIVITY (IPI; ICM)

  10. 1.5) VAT x ICMS VAT ICMS (EUROPE) (BRASIL) - CENTRAL GOVERNMENT - STATES 1) INSTITUTION - RESTRICT (GOODS AND ONLY 2) TAX BASIS - BROAD (GOODS AND SERVICES) TRANSPORTATIONS AND COMMUNICATION SERVICES) ) - MANY (INTRA AND - FEW 3) RATES INTER STATES) - TAX-EXCLUSIVE BASIS - TAX-INCLUSIVE BASIS - MONETARY: NO RESTRICTIONS - FÍSIC: RESTRICTIONS TO 4) CREDIT TO CAPITAL AND CONSUMPTION CAPITAL AND CONSUMPTION GOODS GOODS 5) PRINCIPLE OF TAXATION - DESTINATION - MIXED (ORIGIN AND E DESTINATION)

  11. 1.6) EVOLUTION OF COLLECTION ON CONSUMPTION

  12. 2) Specific Features of Taxes on Consumption 2.1) ICMS 2.2) ISS 2.3) IPI, COFINS e PIS

  13. 2.1) ICMS • Specific Features: • State’s tax; • 83% of States own tax collection; • Non-cumulative; • Exemption or non-levy, except as otherwise determined in the law, Shall not imply credit for compensation relative to the amount due in the subsequent transactions or rendering of services; • Non incidence on exports; • tax-inclusive basis (the ICMS is part of its own tax basis).

  14. 2.1) ICMS • Tax Due: • When the good leaves the premises of the taxpayer, even for another premise of the same taxpayer; • On the entry of goods imported from abroad; • On communications services

  15. 2.1) ICMS • Rates: • Internal: defined by the state • Interstate: defined by the Senate; • tax-inclusive basis: lack of transparency; • (Ex.: Nominal rate18% =. Efective rate 21,95%) • Many rates: around 44; • Basic rate: 17% e 18%

  16. 2.1) ICMS Ex. 1): São Paulo 7% (origin) Ceará 11% (destination)* • Place of taxation: • Mixed principle (origin and destination): redistribute for consumer states Ex. 2): São Paulo 12% (origin) Rio Grande do Sul 6% (destination)* * Difference between internal (18%) and interstate rate

  17. 2.1) ICMS • Administration: • 27 different legislations • Fiscal wars: tax competition for new investments

  18. 2.1) ICMS • Drawbacks of Fiscal Wars: • Affects Public Finances: loss of tax collection due to tax benefits • Distortion in Allocation of Resources : allocation based on tax costs, not on factors of production • Distortion in free marked: advantages for companies benefited by tax reduction.

  19. 2.1) ICMS • Other features: • Use of Credits: postponment of use of capital goods credits and no concession of credits related to consumption goods; • Accumulation of credits in exports; • Single stage taxation: broad use

  20. 2.2) ISS • General features: • Municipal; • Cumulative; • Collection concentrated in few municipalities; (Ex.: 1% of municipalies = 73% of collection) • Highest and Lowest rates, defined by complementary law.

  21. 2.2) ISS • Tax due: services included in a muncipal list.

  22. 2.2) ISS • Rates: • Lowest: 2% • Highest: 5%

  23. 2.2) ISS • Concentration of Collection: Collection % municipalities Municipalities R$ Million % Top 50 6.704 72,66 0,90 Top 100 7.431 80,54 1,80 Top 200 8.074 87,50 3,60 Demais 1.153 12,50 96,40 Total 9.227 100,00 100,00 Fonte: Secretaria do Tesouro Nacional Obs.: Total de Municípios: 5.558.

  24. 3) Tax Reform on Taxes on Consumption in Brazil 3.1) Aims 3.2) Brief history 3.3) Present stage 3.4) Perspectives

  25. Main propositions of changes in Taxation on Consumption, aiming at implementing a VAT in Brazil • 1988: Tax Reform and Fiscal descentralization Committee • 1992: Executive Committee of Fiscal Reform • (CERF); • 1995: PEC nº 175/95; • 2003: PEC nº 41/03.

  26. Stages, established by Congress, of Reform of Taxes on Consumption, aiming at implementing a VAT • First (EC nº 42/03): • Gradual reduction of IPI on capital goods • Exemption of exports, keeping the credits • Partial non-cumulativity of contributions Second (2005): • At most five rates of ICMS, uniform in all the national territory • National legislation. • Third (2007): • Implementation of a VAT, with the fusion of ICMS, IPI, ISS, Cofins e Pis/Pasep.

  27. Difficulties for Tax Reform • Destination and allocation of revenues • Tax competence • Place of taxation • Redistribution of government responsabilities.

  28. End

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