Source: Folha de S. Paulo, 25/05/2009

COMPLEXITY and regional variation in ICMS rules are capable of undermining even promising tax innovations.

It should be emphasized what this Folha showed yesterday about the so-called tax substitution in the State of São Paulo. The idea is simple: instead of charging each trader his share of tax, the São Paulo State Farm collects from the industry - or, alternatively, from the importer or wholesaler who buys from other States - all the tax that will be generated in the chain that goes from the factory to the final consumer.


The efficiency of the new collection proved to be very high, particularly in circuits where a limited number of large producers supply a market full of small retailers. Think, for example, in the paint sector or in the soft drink sector. In these segments, tax evasion, virtually impossible to be 100% detected in retail, could be avoided by the mere transition from collection to a handful of large producers.


However, it did not take long for the inconsistencies of the ICMS legislation in the country to give rise to the scam. Traders from São Paulo soon discovered that it was cheaper to buy from suppliers in other states. In this interstate transaction, products are recorded at a lower rate - in addition, other state governments do not practice tax substitution.


By law, the tax difference should be paid to the São Paulo coffers by the merchant who brings the goods from the other state. It should, but in practice it is not always so. Without overt actions on the roads, the São Paulo tax authorities cannot guarantee the application of this standard. The asymmetry thus constituted becomes an attraction for São Paulo wholesalers to transfer their business to other states.
Fazenda de São Paulo is betting on another innovation - the electronic invoice - to detect these tax evaders, but the fact is that the loophole weakens the main asset of tax substitution. All the tax is no longer collected at the factory door, a facility that dispenses with the action of inspectors and the lengthy process of processes to recover the money. Furthermore, the need to inspect a multitude of retail merchants is restored.

The dribble in tax substitution is yet another indication of the urgency of setting national legislation for ICMS, which simplifies and harmonizes tax rates and methods of collection and ends the fiscal war. This is the promise of the tax reform proposal underway in the Chamber - although there is no glimpse, in Congress and among governors, of a political concert capable of approving it.