Taxation in Brazil and the social policy goals

Luciana Prates Caldas Cordeiro
Mattos Filho, Veiga Filho, Marrey Jr and Quiroga Advogados, São Paulo
luciana.cordeiro@mattosfilho.com.br

Pâmela Larissa Miguel Gottardini
Mattos Filho, Veiga Filho, Marrey Jr and Quiroga Advogados, São Paulo
pamela.gottardini@mattosfilho.com.br

Introduction

When looking to deepen the analysis of the social policy goals, especially within the Brazilian tax system as an instrument for its implementation, there are discussions on how taxation may have a relevant impact on the consumption of essential goods and services, energy, telecommunication, public transportation, and basic food.

Although the Brazilian Federal Constitution provides guidelines to avoid the application of higher taxation to sectors that are relevant to social development, such guidelines are not always reflected in the applicable tax legislation, which contradicts one of its many purposes.

This is because, besides being the most important tool to keep the government structure working and to subsidise the community, access to public hospitals, schools, sewage treatment, among others, taxation also has the indirect power to ensure that essential products are available to every individual.

The Brazilian tax system comprises an excessive number of tax systematics, which involves corporate taxes and value added taxes. When referring to essential products (goods and services), valued added taxes play the most significant role.

In addition, the Brazilian tax system, especially for value added taxes, is set up in a way that disregards the economic capacity of individuals to absorb the tax burden, meaning that value added taxes are not charged in proportion to the social economic position of individuals, as a result, the lower their economic capacity, the greater their allocated portion of income will be to pay taxes.[1]

Recent developments

Considering this scenario, over the years several Brazilian public policies have tried to restrict the taxation of essential sectors, however, they have failed to overcome the social inequalities for this purpose. In addition, disputes before Brazil’s Superior Courts, related to the matter, also reflect the concerns regarding the negative taxation impact on the consumption of goods and services that are considered essential for the population.

This is because, essential products are usually, as expected, the most consumed products and therefore, they are one of the main sources of the Brazilian Government’s revenue, which makes it quite challenging to exercise the obligation to guarantee access to such products for the population, by reducing the tax burden and, at the same time, ensuring that the tax collected will sufficiently provide governing financial stability.

During the Covid-19 pandemic, the need to review the taxation of essential sectors became more critical, which has brought about new debates on how taxes are an important tool to balance the economy during times of adversity.

Although the pandemic triggered new taxation policies to overcome the economic downturn, these policies had a time-limited enforcement period. However, the discussions on protecting essential products from higher taxation has been maintained as a hot topic in debates on the implementation of a potential tax reform.

In this sense, both the courts and certain legislative projects were driven by the need to enhance social policies, especially in respect of access to essential goods.

As an example, in 2022, the Supreme Court[2] ruled that essential products should not support the higher tax burden for state VAT purposes (ICMS). In this trial, the economic sectors affected were energy and telecommunication sectors. The Supreme Court expressly recognised the essentiality of both sectors, stating that both sectors should not be subject to state VAT rates higher than the general rate applied within the states.

Consequently, after this decision, the ruling was enacted in Supplementary Law No. 194/2022, which established that the state VAT rates for essential goods and services (fuel, natural gas, power, communication services and public transportation) should not be higher than the general applicable state VAT rates.

The state VAT has the greatest impact on consumption, therefore this Supplementary Law aimed to equalise the taxation of essential and not essential products.

The social policy implemented is an effective mechanism to guarantee that essential sectors do not support higher taxation in comparison to other economic sectors. However, because the state VAT represents the states’ main source of tax income, the review of the rate applicable to  essential sectors raised financial concerns related to the states’ tax collection.

As a result, in 2023, to overcome the financial side effects of these developments, the states started reviewing their legislation and increasing the general rates of the state VAT, which has not only affected the essential sectors, but also the other sectors that are subject to general VAT rates.

This scenario illustrates that striking a balance between the tax system and the achievement of essential social rights is a challenging task, particularly when these two elements are not always as interconnected as they should be in practice.

On the other hand, in the past, the Brazilian tax system has succeeded in reviewing the taxation on basic food, by protecting the sector from higher taxation. Thus, it is not an impossible mission to combine taxation and essential rights but requires accurate financial planning and structuring, and great effort  to implement effective social policies. 

Assuming that it is a government obligation to secure the access to basic rights for all individuals, whether through public tax policies or otherwise, such matters will continue to be an intense target of debate, once social progress also depends on the protection of essential rights, especially for developing countries like Brazil.

Currently, the expectations on the promotion and implementation of effective social policies are intense and are directly connected to the principles that will guide the potential tax reform under debate in Brazil. This is a matter to be monitored, since eventual tax reform may also affect the consumption of essential goods and services and thus, is an important matter for developing countries. As such social policies will be the key to guarantying the access to basic rights for all individuals.