The Value Added Tax (or VAT according to ABBREVIATIONFINDER.ORG) is a project of the Brazilian government that aims to replace and unify the taxes charged to the consumer in a single tax. To be created a tax reform must take place.
The idea behind the implementation of this tax is to improve transparency in how products and services are taxed, in addition to facilitating the entire taxation process.
This same tax has been practiced for many years by the European Union bloc due to the ease of application and collection between countries. In Portugal it is known as Value Added Tax, under the same acronym VAT.
The project predicts that the same can happen in operations between Mercosur, since Argentina, Paraguay and Uruguay already have National VAT.
How VAT works
This tax system applies to goods and services a general purchase tax exactly proportional to the price offered, that is, a percentage applied to the price.
The added value, or “added value”, is the price that a product acquires from the beginning of its production, or also, the price that gives value to some service.
Until it reaches the final consumer, taxation only applies to the amount that has been added from one chain to another, and is not cumulative.
In the case of an industry, for example, there is the cost of production and the addition of value for sale to the retailer, which likewise adds value to the end customer.
For example, if a product is priced at R $ 100.00 for the end consumer and 20% VAT, then R $ 20.00 is passed on to the government in the form of a tax.
The same can be seen when considering the added value in each production chain until reaching the final consumer.
Continuing the example, see how the tax would be for each price level charged in the distribution chain for this product:
|Level||Sale price||Added value||Value added tax|
|Producer||R $ 40.00||R $ 40.00||R $ 8.00|
|Wholesaler||R $ 65.00||R $ 25.00||R $ 5.00|
|Distributor||R $ 85.00||R $ 20.00||R $ 4.00|
|Retailer||R $ 100.00||R $ 15.00||R $ 3.00|
|Total = $ 20.00|
VAT in Brazil
The list of taxes to be replaced may include some such as ICMS, IPI, IOS, Cofins, IOF, PIS / Pasep, ISS, among others. These are federal, state or municipal taxes, in exchange for VAT.
As it is the only country in Mercosur that does not have it, the project to apply VAT in Brazil is constantly debated in the federal government. A version of this tax is discussed under the name of Goods and Services Tax (IBS).
With the proposal, it is analyzed how easy it is to calculate this tax, in comparison to the ones it should replace, to improve the collection dynamics.
In addition, what is attempted is to mitigate the effects of tax evasion, as explained by the Laffer Curve.
What is a Tax?
The tax is an old method of compulsory provision charged by the State in the economy. In Brazil, it is assigned to the federal, state and municipal governments.
This raised capital is used to finance all public expenditures, mainly in investments where the free market does not reach.
In addition to raising part of the capital that comes from individuals and companies, the government aims to track and measure economic activity.
Taxes can be classified in different ways, considering economic science or according to its functionalities.
This classification can exist when taxes are applied directly or indirectly, or even through proportional, progressive or regressive rates.
In economic science, taxes are classified as unitary, lump sum or ad valorem.
Direct and Indirect Taxes
The Direct Taxes are those that focus in a direct way on income, such as income tax. Already Indirect Taxes are transmitted to third parties, especially on consumption, as in the case of ICMS or IPI.
In economic theory, indirect taxes are known to be less “perceptible” by consumers compared to direct taxes. Therefore, they are more applied.
Proportional, Progressive and Regressive Taxes
Taxes are proportional when they are applied at single rates to which they apply. In the case of 10%, for example, the amount of R $ 100 is charged when it is applied over R $ 1,000, or R $ 2 thousand when it is over R $ 20 thousand.
In the case of progressive taxes, rates increase for different classes of tax base. An example is the Income Tax, which applies higher rates for higher income.
Otherwise, taxes are regressive, as variable rates are higher for lower yields. The ICMS on a product is higher for consumers with less availability.
Unit Taxes, Lump Sum and Ad Valorem
Taxes are unitary when a fixed amount is added to the price charged. It can be, for example, a sum of R $ 0.30 at a charged price of R $ 3, which results in R $ 3.30 for the consumer.
The lump sum tax, or fixed sum, corresponds to a fixed amount that does not depend on the quantity produced or sold. This tax can be considered regressive, as it is higher for those who produce and sell less.
The ad valorem tax, on the other hand, is known to apply a percentage on the transaction value. This is the case, for example, with a 10% tax, which makes a R $ 1,000 product become R $ 1,100.00 with tax.
Main taxes in Brazil
Taxes charged in Brazil are divided between federal, state and municipal powers, which administer and define their rates.
Income Tax (IR) : this tax is based on income from salaries, profits, interest, dividends or rents. It is differentiated in IRPF for Individuals and IRPJ for Legal Entities.
Industrialized Products Tax (IPI) : paid for all industrialized products, at any stage of industrialization. The items presented in Decree No. 7,212 of 2010 have as immunity:
I – books, newspapers, periodicals and paper intended for printing;
II – industrialized products destined abroad;
III – gold, when defined by law as a financial asset or foreign exchange instrument;
IV – electric energy, oil products, fuels and minerals in the country.
Tax on Financial Operations (IOF) : levies on different operations that involve:
- Mobile values
Tax on Circulation of Goods and Services (ICMS) : levies on individuals or legal entities that carry out commercial operations or provide services.
Motor Vehicle Property Tax (IPVA) : regulated by each state and applied annually to automotive owners, such as:
Tax on Services of any kind (ISS) : tax on the labor used in services, after discounting the amounts for purchases of materials.
Property and Urban Territorial Property Tax (IPTU) : levies on individuals or companies that maintain immovable property within the limits of each municipality.
In addition to these, many other taxes are part of the tax burden of the Brazilian economy. This still counts on contributions, such as labor or billing. If you want to know more, see everything we have for you on taxes!