Source: Jornal Brasil - 11/06/2011

After appeals from the governors, the government agreed to expand the tax reform proposal it plans to send to Congress at the beginning of the second half. Initially restricted to the reduction of the Interstate Goods and Services Circulation Tax (ICMS), now the discussion will extend to other issues. The Ministry of Finance, however, wants consensus among the states to avoid intensifying debates in Congress.

The topic with the greatest consensus within the economic team concerns the revision of the states' debt index. According to the executive secretary of the Ministry of Finance, Nelson Barbosa, Minister Guido Mantega admitted to including the subject in the tax reform. The concern of the economic team, however, is that the change would require the amendment of the Fiscal Responsibility Law (LRF).

"The minister showed himself willing to address this issue, as long as there is a commitment that this is the only point to be changed in the Fiscal Responsibility Law", said Barbosa last Tuesday (7) after meeting with governors of the North and the Midwest.

Currently, state debts are adjusted by the IGP-DI plus 6% or 7,5% per year, depending on the case. In times of high inflation, as in recent months, debts soar and compromise the investment capacity of state governments. The governors proposed the creation of a lock on the indexer. The correction would be limited to the Selic rate (basic interest on the economy), which corrects a large part of the federal public debt.

Another theme that must be included in the tax reform is the change in the distribution of the State Participation Fund, formed by federal taxes that the Union passes on to governors. Last year, the Federal Supreme Court (STF) considered the distribution criteria outdated and determined the replacement of the current rules until December 2012. Barbosa admitted that the new criteria may be included in the reform, as long as there is consensus between the states and the proposal which creates compensation funds for states that lose out on tax reform to be sent to Congress via a supplementary bill.

According to the economic team, most of the claims will have to be debated by the National Council for Farm Policy (Confaz), which brings together the finance secretaries of the 27 Federation units, to avoid disagreements in Congress. Among the points that will require agreement at Confaz are the regulation of electronic commerce and the validation of the tax incentives dropped by the Supreme Court about ten days ago.

Today, all the ICMS on goods purchased over the Internet remains with the states where the e-commerce pages are registered. The governors of the buying states want the tax to be shared, as is the case with automobiles. According to Barbosa, the issue can be resolved internally by Confaz, but the government can send a bill or provisional measure to Congress if states wish.

Only at two points did the government not yield to the governors. The interstate ICMS rate will not be differentiated between rich and poor states. The economic team also refused to include the redistribution of oil royalties and pre-salt income in the tax reform. "In fact, this issue is federative, but it has its own dynamics and is already being discussed in Congress," said Barbosa last week.