Pis and Cofins are two complex taxes which became a polemic debate in Brazil when the Taxation Reform proposed the unification of both as a only tax. Here you will find a few information about this unification and the repercussions of this debate in the country.
What are PIS and Cofins?
PIS is the Social Integration Program, also know as Programa de Integração Social. It is the social tax contribution paid by companies in order to finance the payment of unemployment insurance and abandonment to the employees who earn up to two minimum salaries. PIS was instituted to promote the employee integration on the life and on the development of the company, enabling better distribution of national income.
COFINS is the abbreviation of the Contribuição para o Financiamento da Seguraridade Social, or Contribution for Social Security Financing. It is a federal contribution also paid by tax destined to social security that covers retirement and health care.
Both contributions have similarity rules, varying according to their taxpayers (private entities, public entities or special contributors).
What is the Brazilian Government Reform Proposal?
PIS and Cofins are the most complex taxes in the Brazilian taxation system: they are responsible for almost 90% of the legislative and judicial demands. “It comes to a time that the simplification [of the taxation system] is positive for the private sector as well as for the Federal Internal Revenue”, said the executive secretary of the Ministry of Finance, Nelson Barbosa.
The reform consists in solving three main problems of the Brazilian taxation system: the cumulativity of portions of the taxes and contributions, tax competition among states and their complexity. Named as Aproveitamento Integral de Créditos, also known as Credits Full Exploitation, this proposal is the continuation of the taxation reform.
The proposal also defends that all companies will be transferred to the non cumulative regime. After the reform, a 9,25% aliquot will be the maximum value that the incorporation of both taxes will achieve. Nowadays the sum of PIS and Cofins aliquots results in 9,25% in average.
“It is not a punctual reform (...). It's a general reform and the intention is that all purchases of inputs will generate tax credits,” said Barbosa. “[The reform] will simplify the administration of this tax and will also represent a tax relief, especially from the industry, which is the sector that generates more credit.”
What was Already Achieved by the Reform?
Part of this proposal was approved through the Constitutional Amendment in 2003 and through the ordinary legislation, although other parts of the reform still in discussion. Among the approved measures of the taxation reform, a few will reduce distortions produced by the taxation based on the billing.
The PIS and Cofins cumulativity was already eliminated from some sectors and, since May 2004, reductions on distortions were already perceptible. This happened because both of the taxes started to be charged over the imports, which means that imports started to be charged in the same way that national production.
Criticisms About the PIS-Cofins Reform
PIS-Cofins presumes that only the inputs used directly in the production generate credit. However, there is not clearance about this concept. The inputs elected as credit generators end up being the object of interpretation. Companies have to make a declaration with all purchases that were made and with all that the company evaluated that has generated credits as well. This declaration is sent to the Federal Internal Revenue, which will reevaluate the request in a process of immense bureaucracy for the companies, of high cost to the Treasury and a lot of disputes on the justice.
“In the proposal, we are following the same logic as ICMS and IPI. All of them generate credits and will come to the nota fiscal. If the company bought a pencil and paid 10 cents of PIS-Cofins, it will automatically have the credit of 10 cents,” explained Barbosa.
This is not the only problem. With the last reform of these taxes, a group of companies, which account for 21% of the collection of the PIS-Cofins, opted for the cumulative regime. Of these, the government estimates, 5% would pay more taxes (a 9,25% aliquot) if the migration to non-cumulative regime occurs.
“They are few but, in politics, they are organized groups with voice,” admits Barbosa, without underestimating the difficulty he may have ahead. To overcome the resistance of these companies and the Congress, which will have to approve the measure, he said the government should negotiate a transitional period to make the change. “Technically, everything is ready, but not politically,” he said.
Another aspect that must be overcome, during the negotiations of the reform, is the destruction of the distrust that was created at the last change. In 2003, under the assurance that the changes that were being made in PIS-Cofins would be "neutral" to the tax burden, the Ministry of Finance hosted a spectacular increase in revenue. The collection of the contribution, which was 3.5% of Gross Domestic Product (GDP) in 2003, with such measures, jumped to 4,1% of GDP in 2004. Currently PIS earns the equivalent of 1% of GDP and Cofins, 3,8% of GDP.
Expectations Regarding the PIS-Cofins Unification
Since 2011, the Federal Government wants to unify PIS and Cofins taxes. Studies have being made by economic teams in order to predict if the unification is possible or not. The measure is a government strategy, since it can not afford right now to make a great and unique taxation reform. Beyond the unification of the two taxes, that currently have the same rules of calculation and are charged on the same people, these amendments are intended, in principle, to establish a simpler taxation system, especially regarding to non-cumulative regime.
The proposal to recast and simplify the PIS-Cofins was included in the range of measures to reduce production costs and encourage investment in the country. If successful, the government hopes to have the measure approved by mid-2014.