The discussions on tax reform have hardly begun, but they are already causing an earthquake between the governors of the country’s 27 states and the government of Luiz Inácio Lula da Silva. At the encounters fostered by Lula, the representatives of the states have made it clear that such a reform is fundamental, but they are alert to possible losses of the taxation cake with the proposed changes. The only issue that seems to be taking on the looks of consensus is the starting point for restructuring: making the legislation about the Sales and Services Circulation Tax (ICMS) uniform across all the states.
“The differentiation of interstate ICMS is proving to be an enormous evil for the country. If there were an equalization of this tax, it would potentially be possible to reduce economic losses of between R$ 4.5 billion and as much as R$ 9 billion a year, that is to say, two Zero Hunger programs, just with losses in logistics. The current structure affects the costs of logistics and decisions on the location of installations”, explains Hugo Tsugunobu Yoshida Yoshizaki, a professor at the Polytechnic School of the University of São Paulo (USP), which carried out the research Impact on the Circulation of Goods and Services in the Brazilian Logistical Network, with support from FAPESP, and recently defended a professorial thesis on the theme.
According to the legislation in force, each state of the federation has a law on the tax. In the state of São Paulo, the general rate is 18%; in other states it comes to 17%, but the rate is reduced to 12% in sales to other states, and to 7% for sales from companies in the states of the south and southeast to other regions of the country. The first result of this process is that it favors transactions between states. However, Yoshizaki points out a serious side effect, which he defines as a wide space for fiscal maneuvers. “As the ICMS is a tax calculated as credits and debits along the chain, there could be the possibility of creating a scheme for tax evasion, in which the tourism of products plays the central role”, the professor from the Poly believes.
Tourism of products is how the specialists define artificially created traffic for gain from tax advantages. A good example is of a factory located in São Paulo, but which has a warehouse in Minas Gerais to serve customers in the state of São Paulo. “In actual fact, the product goes to Minas Gerais only for tourism, since its destination is another. It is its place of origin: São Paulo”, he comments.
Fiscal tourism occurs in Brazil because of the variation in ICMS between the states. If the above company sells products to customers in São Paulo, the rate applied will be 18%. However, if these same customers are served from Minas Gerais, the rate will be 12%, giving the manufacturer a margin of 6%. The conclusion is simple: “ICMS is contributing to artificially increase operating costs with logistics, in order to get tax advantages, generating one more Brazil cost”, is Yoshizaki’s criticism.
This seems to explain the fact that some wholesalers and distributors have preferred to install themselves in the south of Minas Gerais, close to the largest consumer centers, such as Greater São Paulo and Greater Rio de Janeiro. For the professor, this logistical strategy begins to be profitable with merchandise of over R$ 600 a ton. However, in the simulations presented in his thesis, “the extra cost of the ICMS” may have an increase that varies between 3.5% and 11%, when this strategy of interstate tax advantage is followed. In the study, he simulated scenarios – founded on mathematical models for optimization – on the basis of a non-durable consumer goods industry (food, products for cleaning and hygiene, etc.) and that were extrapolated for the economy as a whole.
“Should the consumer goods industries adopt a conservative hypothesis of a potential 20% of evasion in the ICMS chain, the logistical network drawn up generates an increase of 3.49% in the operating costs of the basic scenario. Considering that around 15% of distribution is handled by the big chains, pointed out as being non-evaders, one can adopt as an upper limit for evasion a portion of 80%, and, in this case, the logistical increase comes to 11.63%”, Yoshizaki explains.
Another flaw in the current ICMS legislation is what is outside the law: tax evasion. According to Yoshizaki, it is very complicated to determine the influence of ICMS in the tourism of merchandise, since the percentage of non-payers of the tax is unknown. ICMS follows the logic of non-accumulation, which means that, for the purposes of ascertaining the tax due, one should deduct from the tax applicable to the outgoing merchandise the tax already charged on previous operations relating to the circulation of that merchandise or of the raw material needed for its manufacture.
Yoshizaki cites another example of distortions, which the current legislation permits: “Let us consider that a company bought raw materials to manufacture its product, which is sold for R$ 2,500. ICMS of 17% or 18% is included in the value of the purchase of the material. On the principle of non-accumulation, this amount is kept by the industrial concern as a credit, and used against the debit of ICMS when the same company sells its product. If this goes to another state, this will only be 12%. The customer will have a credit of 12%, but will have to pay over 17% or 18%, and so be at a disadvantage. But do you think that the customer will accept this transfer passively?” the professor asks.
One alternative, according to Yoshizaki, is for the trader not to be bothered with the ICMS credit. “If he is a tax evader, he is indifferent as to where he received the merchandise from, as he doesn’t need the credit”, says the researcher. One other point would be in favor of the supplier, but only for those that have a monopoly in the sector. This is because they offer no choice, for the consumer to negotiate these interstate tax advantages. “But, in the case of a market where there is competition over prices, these savings end up being passed on to the customers. For sales made outside the manufacturer’s state, this discount is precisely the difference between the intrastate and interstate rates for ICMS, ensuring a more “competitive” price”, he explains. It is theso-called ICMS discount.
The debate over ICMS is also explained by the figures involved. In 2000, the total of tax collected in all the states was R$ 82.3 billion, which corresponds to 87% of the tax burden in the state and to 22.8% of the total Brazilian tax burden. ICMS therefore raises some 7.5% of the national GDP.
Since the starting point for tax reform has been more or less defined, giving priority to the equalization of ICMS, divergences are beginning to appear in other developments. “There is no way out. Equalization is going to have to happen. The problem is knowing whether it should be paid over at the origin or at the destination of the merchandise”, Yoshizaki explains. Today, ICMS is collected both in the state that manufactures the products and in the one that consumes them. That is to say, all the stages of the circulation of merchandise and the services supply are subject to ICMS and call for the issue of an invoice, so that the tax can be calculated by the taxpayer and paid over to the State. “In actual fact, it is the end consumer who pays the tax, but one knows that parts of the chain evade taxes, and, often, the taxpayer receives the credit, but does not pay his part, since he does not issue any invoice”, says the professor.
To alter the distortions in ICMS, the program of the Lula government proposed the creation of a Value Added Tax (VAT), which would not only be a broad one, but also one covered by unified legislation and with few different brackets. The text provided for the replacement of ICMS by a state VAT, which would be standardized and chargeable by the state where the merchandise is consumed.
This mechanism would be a way of ending the tax war, preventing states from lowering their rates of ICMS to attract companies. For some governors, though, the proposal that provides for the payment of the tax only at the destination would bring losses to the states called “net exporters”, or those that sell more than they buy from other states, a typical case being São Paulo. “Of course, São Paulo would be the great loser, because it has the largest industrial complex. That is why I understand that the discussions ought to seek neutrality from the taxation point of view, to seek the best efficiency in the issue of a model”, declared recently the governor of the state, Geraldo Alckmin.
It is no mere chance that many other governors are advocating the creation of a compensation fund to make good the losses of the states. “I am not questioning here the policy of tax exemption, which can continue, but there is no advantage for the country to work with differentiation of ICMS between states”, the professor notes.
For him, the calculations over the losses because of the “logistic advantages with the variation of ICMS” should also take other factors into consideration, such as the increase in the traffic of heavy trucks on certain roads, making traffic jams and accidents possible, besides greater wear in the paving of the highways, reducing their useful life. “It is movement that is generated in an artificial way, and which does not add any economic value to the product, characterizing another extra Brazilian cost. This shows the importance of this discussion being included in the overall ambit of the tax reform under discussion in the Congress”, the researcher from the Poly analyzes.
The Impact of ICMS on the Brazilian Logistical Network (nº 01/05376-1); Modality Regular research grant; Coordinator Hugo Tsugunobu Yoshida Yoshizaki – Polytechnic School/USP; Investment R$ 29,430.91