Path to National ICMS
There is currently a lot of discussions about getting an unified ICMS interestate rate to end the tax war between states in Brazil. The federal government is proposing a sole tax rate of 4% for all the Brazilian states. Will it be better for the country's growth?
A brief introduction to ICMS tax
ICMS is stands for Imposto Sobre Operações Relativas à Circulação de Mercadorias e Serviços de Transporte Interestadual de Intermunicipal e de Comunicações (Tax on Circulation of Goods and Services for Interstate and Intercity Transportation and Communication). It is a value-added tax on sales and services and applies to the movement of goods, transportation and communication services, and to the supplying of any goods.
Overall, it is paid by private people and legal entities who commercialize goods of whatever nature; by those who import products; those who acquired the goods seized by customs and those who acquire petroleum products from abroad.
The ICMS is a state tax, only the state governments of Brazil and the Federal District have the power to institute it. Currently, there are two interstate rates for ICMS: 7% and 12% and they are charged differently in the states' commercial relations. For example, the movement of goods from São Paulo to Minas Gerais, Paraná, Rio Grande do Sul e Rio de Janeiro is calculated at a rate of 12%. However, the movement of goods from São Paulo to the other states of Brazil is calculated at a rate of 7%.
Annually, a table is designed, containing all the interstate rates that will be used during the year.
Understanding the fiscal war in Brazil
Since its creation, the ICMS tax has been generating a lot of discussions and controversy regarding different topics. The main reason is that this tax doesn't count with a unified rate for all the Brazilian states what generates several conflicts between them. As we have seen, currently, the rates vary from 7% to 12%. Considering there’s a great divergence on tax collection of the states, some richer states (such as São Paulo, Rio de Janeiro and Minas Gerais) will obviously collect more money than the poorer ones.
But aside from being an element that increases inequality between the Brazilian states, the way ICMS was established in the country has created a true fiscal war between the states. In Brazil, tax war is an instrument used by poorer states and distant from major urban centers to attract investments and avoid economic deflation. The discounts in ICMS often outweigh the logistical costs of raw material receipt and delivery of manufactured products that are lower and abundant in richer states.
These benefits have produced a predatory competition between states, contributing to aggravate the financial crisis in which some of them find themselves. What we have, in fact, is a clash between the economic interests of the states, which by granting benefits to large companies are seeking to favor their domestic economies and not the country development as a whole.
Often, the economic consequences of tax war are harmful to economic performance. The exchange of economic efficiency criteria for artificiality tributary, when planning the location of an industry, eventually reduce the private cost of production and increase its social cost.
The fiscal war strongly affects the Federal Government, because when a large company decides to come to Brazil, it occur kind of an auction, with the states disputing which offers better tax incentives, trying to provide a more advantageous environment than others. Enjoying tax incentives, this company that was already coming to Brazil anyway will pay less taxes to the government, decreasing tax collection.
The ICMS tax is under responsibility of the state governments, but part of its collection is transferred to the Federal government. In fact, this tax is one of the highest sources of money for the Federal government, responding alone for around 10% of its tax collection.
The proposal of unification of ICMS in Brazil
Ending the tax war is the main reason why the Federal government is willing to establish a unified interstate rate for ICMS. The proposal is a unified rate of 4% for all the Brazilian states to be implemented gradually, within eight years beginning in 2014. The idea is that states with higher ICMS set a plan to decrease one percentage point of its rates each year until getting on the final rate of 4%.
It would also be created a fund to compensate poorest states for eventual losses and one for the regional development of the poorest states – generally, the states that reduce ICMS tax to attract investments, the ones that cause the tax war. The funds would come from the National Bank for Economic and Social Development (BNDES) and the general budget of the federal government.
The states of South and Southeast are supportive to the standardization of rates throughout the country. However, as expected, governors of the North, Northeast and Center-West regions oppose to the unified rate as it as proposed by the Federal government. For them, the best alternative would be to reduce the ICMS tax rates within a period of ten years, higher than suggested by the government, and maintain two different rates: 7% for poorer states and 4% for richer states. This way, the asymmetry of the rates will ensure the competitiveness of the North, Northeast and Center-West regions.
Even without consensus among states, the government decided to carry forward its proposal for unification of the ICMS rates. The project was forwarded to the House of Representatives where it is currently in discussion.