Author: Clóvis Panzarini

Source: The State of S. Paulo - 06/04/2010

The National Confederation of Industry (CNI), in a recent study on foreign trade, showed that the accumulation of tax credits, that is, taxes that are unduly imposed on exports and are not returned by the state and federal governments, affects the decision to export from 44,3% of Brazilian exporting companies. In the case of predominantly exporting companies, those whose sales abroad account for more than 50% of revenues, the problem of credit accumulation reduces their export drive by 54,6%. These credit balances of exporters related to value-added taxes, such as IPI, PIS, Cofins, federal taxes and, mainly, ICMS, which are the responsibility of the state, occur whenever the tax credits on the raw materials used in the process of manufacturing of the exported goods reach a higher value than the debts related to internal exits, since exports are immune. The company then becomes the creditor of the Union or of the States, which, when they do not honor such debts, become “delinquent”. It is estimated that the liabilities of the federal government and state governments to exporters exceed R $ 35 billion.

It is interesting to observe the asymmetry between the treatment given to the taxpayer's default and that of the Tax Authorities. In the first case, the taxpayer, when he does not collect the tax within the statutory period, suffers a fine and interest on arrears, in addition to, in theory, being liable for a crime against the tax order. As for the “default” of the tax authorities, there is not even a deadline for the payment of the debt. In the case of ICMS, the Constitution determines that it does not apply "to operations that send goods abroad (...), ensuring the maintenance and use of the amount of tax charged in previous operations and installments". It guarantees, therefore, not only immunity on export, but also the return to the exporter of any amount of ICMS charged along the productive chain of the exported good. This is an unconditional right, but states, as a rule, seek to hinder their enjoyment, frustrating the full exemption from exports. A tax bias is thus created against sales abroad, since the greater its share in the company's revenue, the greater the impoundment of credits.

The fact is that, given the lack of time for governments to honor this debt, they can comfortably improve their cash flow with the working capital of exporters and this compromises the competitiveness of Brazilian industry in the international market, since companies from other countries countries that compete with Brazilians do not have this type of problem.

Countries with a modern tax system do not export taxes! Exporters have celebrated tax reform proposals that envisage the adoption of the ICMS destination principle in interstate transactions, which, supposedly, would mitigate the problem of accumulated credit in exports, as the interstate sales that precede them would not be taxed. This, however, is a partial and false view of the problem. There are only two ways to implement the destination principle in interstate operations: the most obvious, the adoption of the zero rate at the interstate exit, or the adoption of the “full” (internal) rate at the source and the transfer of the revenue to the destination state of the merchandise. In the first case (adoption of zero rate at origin), interstate sales would have, in the process of credit accumulation, the same effect as an export. In the second case (adoption of the “full” rate at the source), interstate credits, currently marked by the rates of 7% and 12%, would be changed to the rate of 18%. The problem would be aggravated and not mitigated!

The fact is that value added taxes are inadequate to be included in subnational jurisdiction, but in the case of the ICMS, this is an accomplished political fact.

Economist, former tax coordinator of the São Paulo Finance Department. He is a managing partner of Cp Consultores Associados Ltda. site: WWW.CPCONSULTORES.COM.BR