The Fiscal War and the Defense of Competition

The ETCO Newsletter opens space for an article by Luisa Vasconcelos Araujo * on a topic of great relevance to competitive ethics.

The legislative year started on February 4 with the National Congress pending to analyze difficult issues, capable of redefining the Federation's financial balance and the relationship between States. If, in 2012, parliamentarians faced an environment of intense political conflict, 2013 should not be much different when it comes to discussions about a new federative pact.

Parliamentarians have already started the discussion on the topic, with the change in the Tax Rates on Circulation of Goods (ICMS) for imported products and the institution of a new way of distributing oil royalties. However, other topics of equal relevance were not exhausted in the last legislative session.

Issues that have generated controversy among the federal states concern the government's proposal to unify the ICMS rates at 4%, in addition to the issue of tax incentives granted by the states without approval by the National Council for Farm Policy (Confaz).

The challenge to reduce rates is part of the political agenda of the federal government, which, in order to garner support from political entities around the theme, published on 28/12/2012, Provisional Measure (MPV) 599/2012, which creates a federal compensation fund for future losses from regional governments with the unification of the ICMS rate charged on goods transported from one state to another. In addition, the Planalto Palace has also sent a complementary bill that provides for the approval of an agreement under Confaz to validate all tax incentives granted, unilaterally, by the States.

The purpose of the measures is to end the fiscal war, which generates predatory competition among the federated entities, as they grant, in an irregular manner, tax benefits to attract business investments to their territories. It should be noted that the fiscal war compromises the economic and financial balance of the different regions of the country, given that, when a federated unit takes unilateral measures to attract investments, without respecting legal and constitutional rules, economic interference is established in other entities. federated, at a high cost.

However, one cannot attempt to delegitimize the granting of tax benefits, since they are provided for in the constitutional text. What should be avoided is its unruly concession. This is because tax benefits are useful to generate economic efficiency, in the sense of pursuing economic development, and not to generate even greater inequalities.

With regard to the unilateral granting of benefits by States, it is important to highlight at least two impeding reasons for the validation of such practice: (i) the necessary neutrality that encompasses the ICMS and (ii) the impossibility for the State to intervene in free competition between economic agents.

In this sense, it should always be borne in mind that the State's actions in relation to free competition must privilege the guarantee of an environment of equal competitive conditions. Neither the imposition nor the tax exemption should cause imbalances in competition, since the power of taxation should not influence competitiveness.

In the wake of government actions aimed at eliminating practices that undermine the competitive balance, in addition to the proposed unification of the ICMS, the regulation of article 146-A of the Federal Constitution can be cited, which elevates it to the category of constitutional principle tax neutrality when providing for the possibility of the institution, by the complementary legislator of the Union, of special taxation criteria, in order to prevent imbalances in competition.

The importance of Article 146-A consists precisely in being an instrument of positive action by the State to guarantee greater concreteness to the principle of free competition and tax equality. Based on it, special regimes can be instituted without violating constitutional norms. It is exactly to ensure that there are no “winners” and “losers”, with a risk to economic, financial and social balance, and, even so, to guarantee free competition, that special regimes are justified. It is worth noting that article 146-A lacks the edition of a complementary law so that it can produce concrete effects.

Through declarations, the Planalto Palace has manifested itself in the sense that the Executive branch intends to privilege tax and federative matters, with special attention to the unification of the ICMS rates and the creation of the compensation fund, which will cover the differences, and the regional development fund, to target regions that need to attract development without promoting fiscal war.

However, in addition to the issue of provisional measures, it would be extremely important for both the Executive and Legislative branches to address other legislative possibilities, which have the purpose of dealing with federal and tax issues.

Although the unification of the ICMS rates is an important step in the resolution of the fiscal war, it does not solve the equation with regard to the possibility of granting special tax regimes, which, likewise, as already mentioned, constitutes a tool in favor balance of competition. In this sense, it is considered a measure that deserves attention the aforementioned regulation of article 146-A, with the objective of establishing the parameters so that the Union, the States, the Federal District and the municipalities can, by means of laws their own ordinary shares, establish special taxation criteria capable of preventing or restoring equal competition.

Thus, it is expected that the construction of the political agenda for this year will also include the debate on the regulation of the way in which special taxation criteria may be granted by political entities.


* Lawyer graduated from the University Center of Brasília (UniCeub) and undergraduate in Political Science from the University of Brasília (UnB). Works in the Government Relations area since 2011.