The Senate approved this Monday (13) the project that limits the rates of the Tax on the Circulation of Goods and Services (ICMS, a state tax) levied on fuels, natural gas, electricity, communications, and public transport. The basic text of the proposal was approved by 65 votes to 12.

The proposal originates in the Chamber, where it was approved last month to reduce prices, mainly for fuel and electricity bills in an election year. Successive adjustments to these items contribute to rising inflation, which negatively affects the government’s popularity.

Therefore, parliamentarians who support President Jair Bolsonaro mobilized for the approval of the proposal on a holiday week and Monday – when, generally, there are no sessions in the Senate.

The text was approved with modifications proposed by the rapporteur Fernando Bezerra (MDB-PE), former government leader in the Senate, and by senators. The senators also approved a highlight (suggestion to change the content of the project), presented by the MDB, which guarantees the constitutional floors of health and education and the Fund for Maintenance and Development of Basic Education (Fundeb) (see below). Therefore, the proposal will return for analysis by the deputies.

Before preparing the report, Bezerra held meetings with the president of the Senate, Rodrigo Pacheco (PSD-MG), governors, and finance secretaries in search of consensus. The states’ main claims, however, were not addressed in the final version of the opinion.

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Understand the federal government’s proposal to reduce the ICMS on fuels and compensate states.

The project

In general terms, the project establishes that fuels, electricity, communications, and public transport will be considered essential goods and services.

This definition prohibits states from charging a rate higher than the general ICMS rate, which varies between 17% and 18%, on these items. Currently, these goods and services are classified as superfluous – and the ICMS levied in some states exceeds 30%.

According to Bezerra, the project that limits the ICMS on fuels, added to a PEC that transfers resources to states that reduce the ICMS rate to zero, could lead to the writing of R$ 0.76 per liter of diesel and R$ 1 .65 in a liter of gasoline. There is still no timetable for voting on this PEC.

Governors and state finance secretaries claim that the reduction in percentages will result in a loss of revenue of up to R$ 83 billion, with the potential to compromise public policies and services in areas such as health and education.

They also say that the text will harm the municipalities since 25% of the amount collected with ICMS is destined for the coffers of the municipalities.

Fernando Bezerra admits that there will be a financial impact, but he presented different data. He attached to the opinion a technical note prepared by the Consultancy on Budgets, Inspection and Control of the Senate (Conorf) that points to a loss of R$ 53 billion to the states.

The states demanded, among other things, the creation of an account for compensation with the transfer of resources equivalent to the losses they will have. This equalization fund would be irrigated, among other sources, with a portion of Petrobras’ profits destined for the Union.

Another idea proposed by state representatives was the suspension of state debts for two years. Fernando Bezerra, however, did not respond to these requests from the governors and finance secretaries.

The rapporteur also did not accept the request of the states to create a schedule for the reduction of ICMS on some items, such as gasoline. Under the proposal, the rates on goods and services will be reduced as soon as the bill goes into effect.

Other Points

In the text, Senator Fernando Bezerra included the government’s idea of zeroing the rates of Cide-Combustíveis, PIS/Paseo, and Coffins, which are federal taxes, levied on gasoline, until December 31 of this year.

The rapporteur also proposed zeroing the PIS/Pasep, Cofins, and Cide rates on alcohol by the end of this year. In the previous version, the exemption of federal taxes levied on ethanol would run until June 2027, but Bezerra reduced the period.

“We changed our understanding about the taxation of ethanol. We will make the exemption only until December 31, 2022, depositing, in PEC 15/2022, confidence in a definitive solution for the sector”, says Bezerra.

Rejected suggestions

Bezerra rejected a series of amendments that provided for the use of Petrobras dividends owed to the Federal Government to compensate for the states’ losses.

He also rejected amendments that provided for the expansion of the gas allowance, proposed by Eduardo Braga (MDB-AM), Alessandro Vieira (Citizenship-SE), and Macias de Jesus (Republicans-RR).

Bezerra also rejected the suggestion made by Eduardo Braga, which provided for aid for the purchase of gasoline of R$ 3 billion aimed at autonomous individual transport drivers, including taxi drivers and app drivers, drivers or pilots of small boats and app motorcyclists, and for low-income motorcyclists.

Compensation

ICMS is a state tax and makes up the price of most products sold in the country, including fuel, and is responsible for the largest portion of taxes collected by states.

Among the changes he promoted in the proposal that was approved in the Chamber, Fernando Bezerra changed the mechanism for offsetting the resources that states will no longer collect by setting the ICMS ceiling on goods and services included in the proposal.

The text approved by the Chamber provided compensation only for states that have debts with the Union. In general, the compensation would occur through rebates in the amounts of the installments of the debt contracts of the states.

The mechanism would be activated when the loss of collection in 2022 with the ICMS ceiling for the items exceeds 5% of the total collected with the tax by the state in 2021.

In the opinion, Bezerra established that the trigger for compensation will be activated when the loss of collection in 2022 with the ICMS ceiling exceeds 5% of the collection in 2021 with goods and services (fuels, natural gas, electricity, communications, and public transport) provided for in the project. This was a claim by the states because the change makes it easier to pull the trigger.

This Monday, Bezerra welcomed a suggestion to include inflation (IPCA index) in the calculation of the 5% trigger for triggering compensation to the states.

The report also allowed states’ debts with other creditors to be used for compensation, as long as they are guaranteed by the Union.

Fernando Bezerra also included the provision of compensation for states that do not have debts with the Union. According to Bezerra, five entities are in this situation.

In the case of these entities, compensation will take place in 2023, with the transfer of Union revenues from the Financial Compensation for the Exploration of Mineral Resources (CFEM). These states, according to the proposal, will also have priority in contracting loans in 2022 as a way to mitigate revenue losses.

Lawmakers opposed to the text criticize the fact that the proposal does not provide for compensation for indebted states in the coming years. Furthermore, they claim that the effectiveness of the proposal is not guaranteed.

“States and municipalities continue to bear a high tax impact, harming public services. There is no compensation for losses from 2023 – except for the CFEM. The effects on the final consumer are not guaranteed, either because any adjustment by Petrobras will eliminate the effect, or because the tax reduction may not reach the bomb”, declared the minority leader, Jean-Paul Prates (PT-RN).

FUNBEB

The senators approved, by 45 votes to 26, a highlight presented by the MDB, which provides that, in case of loss of revenue by the states caused by the ICMS ceiling, the Union must compensate the states and municipalities so that the constitutional health floors, of Education and the Fund for Maintenance and Development of Basic Education (Fundeb), have the same levels of resources that they had before the law resulting from the project came into force.

“The Union must compensate the other levels of government to prevent such a loss of resources from reaching the areas of health and education, including Fundeb”, said the author of the amendment Eduardo Braga (MDB-AM).

Diesel

The proposal also amends the provision of a law passed by Congress earlier this year that created a new formula for calculating ICMS on fuel.

On the occasion, for the project to allow faster reflexes on diesel prices, the parliamentarians defined that, while the states did not define uniform ICMS rates for this fuel to be charged on the liter, the basis for calculating the tax would be, until December 31, 2022, the average price charged to the consumer in the last five years.

Governors considered that the average would represent a greater loss of collection than the establishment of a single rate and sped up the regulation of the uniform rate. The established value was R$ 1.006 per liter of S10 diesel oil, the most used in the country.

However, the project approved on Monday obliges states and the Federal District to adopt as the basis for calculating ICMS on diesel operations, until December 2022, the moving average of prices charged to final consumers in the previous 5 years.