Tax reform may encourage cash flow practice


Source: Folha de S.Paulo, 14/08/2005


The tax reform in progress at the Congress can bring new stimulus to the cash flow of private sector companies, cause more distortions in tax collection and curb the economy and employment.

An unprecedented study by the Getúlio Vargas Foundation reveals that the distortions between formal and informal companies tend to be accentuated if the pressure of the states, now overriding, for a “leveling up” of the current rates of the ICMS (Tax on the Circulation of Goods and Services) in the reform.

The work shows that one of the most likely scenarios, of increasing the effective average rate of ICMS paid by the productive sector from the current 11,5% to 13,6%, for example, can have devastating consequences.

According to the work, prepared by GVConsult, an increase like this can bring down the GDP (Gross Domestic Product) by almost 6% and cost about 4 million jobs (see table).

The results of the study will be discussed on Monday, in São Paulo, between representatives of the federal and São Paulo government and more than 300 entrepreneurs in a meeting sponsored by Etco (Brazilian Institute of Ethics in Competition).

"The tax burden, which may increase with the reform, today falls completely unevenly on several companies in the same sector, stimulating cash flow and tax evasion, which finance this parallel state that we are seeing there", says Emerson Kapaz, president of Etco.

For Gilberto Luiz do Amaral, president of IBPT (Brazilian Institute of Tax Planning), there is a “culture” of cashier in Brazil that ends up leading to illegality in the political area. "When we see someone recognize cashier two, there is recognition of the tax offense."

Today, almost all the weight of the “average” tax burden in various sectors is borne by companies that operate in formality. Even so, there is an “induction” to cashier two due to the high tax burden. This occurs more systematically in companies prone to informality.

In the civil construction sector, for example, FGV found that, although the average tax burden is 26,6%, formal companies even pay 45,7% in taxes. Informal, 15,5%.

The balance is that formal companies, which hold 35% of the construction sector, account for more than 70% of the collection.

Another analysis, done for McDonald's, revealed that the fast food chain, for acting in formality, ends up paying 5,3 percentage points more in taxes than the average of other companies (formal and informal) that operate in its sector .

Sectoral inequality

The new study by GVConsult also shows a huge inequality in the weight of the IRS on 47 economic activities. Their average tax burden (considering formal and informal companies) is 23,9%, but it varies from 9,9% (agriculture) to 57,5% (cars, trucks and buses).

The rapporteur on tax reform, Mr Virgílio Guimarães (PT-MG), foresees the vote on the second stage of the matter in the Chamber in September. In December, the reform may go to the Senate.

The main concern of businesspeople in relation to the ongoing reform is focused on fixing the ICMS rates, which should be unified.

“There is an enormous risk that the current situation will end up getting worse,” says Ana Maria Castelo, one of the authors of FGV's work.

The proposal is to establish a “reference” rate for ICMS for almost all products. Exceptions could have lower rates, and others, higher. In addition, states could charge an additional five percentage points on fuels and three more products.

The problem is that states that today depend heavily on the collection of ICMS on energy, for example (cases in Pará and Maranhão), will hardly accept lowering their rates (around 25%) to the “reference” level. "Therefore, there is a risk that the reform will end up leveling the ICMS" above "to accommodate the demands", says Ana Castelo.

The reform provides for a compensation fund for states that lose revenue, but there is enormous suspicion about how it works.