*Per Aristotle Moreira Filho
After approval of the base text in the Chamber of Deputies, the consumption tax reform appears to be headed for approval by the Legislative Branch. What remains of the process still opens up possibilities regarding the final design of this axial aspect of the Brazilian tax system; and there are controversies regarding aspects of the project. Little has been heard so far, however, about the effects of the PEC on the innovative capacity of the Brazilian economy. The impact of the tax system on the propensity of economic agents to invest in new technologies, products and processes implies the need to also address the issue from this perspective, given the urgency of innovation and productive sophistication as a means of raising the economy to higher levels competitiveness, income and well-being.
The general function of the tax system is to provide the State with resources without causing distortions in the decisions of private agents. With regard to the innovative dimension of the economic system, taxation must not only refrain from inhibiting investments in technology and innovation, but also promote an encumbrance of the innovative process that is compatible with the strategic function that technology and innovation play. for the performance and competitiveness of the economy. In this context, certain aspects of the tax regime for innovative activities stand out, including: deductibility of R&D expenses; compensation for losses; fiscal cost of financing via equity compared to debt capital.
When it comes to consumption taxation, it is cumulativeness that represents the main source of distortions for the economic system, which also affects the economy's innovative capacity. The multi-phase nature of taxation on consumption, via successive charges throughout the chain of circulation of the good or service, predisposes the tax to a cascading incidence that exponentially increases the cost of the imposition, affecting not only the immediate price of the burdened item and the propensity for its use by agents, but the entire economic market balance, causing a loss of allocative efficiency and a reduction in the economy's level of well-being. Only the non-cumulative technique, via crediting the tax incurred in previous operations, is capable of inhibiting such distortions.
Taxation on consumption in Brazil is made up of ICMS, IPI, PIS, Cofins and ISS; All of these present problems of cumulativeness. And this is because such taxes (i) do not apply broadly across the value chain, but rather in a segmented manner on certain production phases or business functions; and (ii) present restrictions on the right to credit that must ensure non-cumulative taxation. Such problems are revealed in the treatment received by typical innovative expenditures.
The ICMS is levied on the circulation of goods and adopts, with few exceptions, the physical credit criterion for non-cumulative nature, which means that only purchases that are physically integrated with the merchandise sold generate tax credit. The result is the exclusion of credit related to the acquisition of inputs dedicated to innovative efforts, which do not directly result in output operations. Even regarding machines and equipment used in R&D, the States' understanding is that, because they are not used in commercialization or industrialization, they are considered unrelated to the establishment's activity and, therefore, do not generate credit under the terms of art. 20, §1 of LC 87/96.
The IPI applies only to industrialized products and adopts, like ICMS, the physical credit criterion, which, in relation to industrial production, covers the trinomial raw materials, intermediate products and packaging materials. The narrow scope of non-cumulative IPI, linked to the production function, does not coincide with the company's innovative function. In this way, neither inputs nor machines and equipment used in R&D generate IPI credit.
PIS and Cofins are required on gross revenue and thus exhibit a wide materiality of incidence, but present, regarding the right to credit, different limitations, even when collected under the non-cumulative regime. After having the non-cumulative subject to the criteria of relevance and essentiality by the jurisprudence of the STJ, PIS and Cofins received in Normative Instruction No. 2,121/2022 specific rules on the concept of input for the purpose of credit rights. As for acquisitions intended for the company's innovative activities, inputs used in development projects that result in intangible assets in the form of inputs, goods intended for sale or services provided to third parties, generate credit rights. Demonstrating the anachronism of our tax system, there is no right to credit on inputs when the project fails or is interrupted, this being a circumstance inherent to the risk and uncertainty typical of the innovative process. As for machines, equipment and other assets incorporated into fixed assets, they generate credit only when used in rental, production of goods or provision of services, which excludes those employed in R&D activities.
The ISS, finally, is a cumulative tax, which excludes the right to credit under any circumstances, including technical services used as inputs in R&D activities.
As can be seen, the scope of the right to credit in our consumption taxation tends to be restricted to expenses belonging to the core of the company's productive function, so that expenses with innovative activities are taxed and subject to cumulative activity. As an example, taxpayers who purchase laboratory equipment used in R&D activities will not be entitled to IPI, ICMS or PIS/Cofins credit, bearing the burden of each of these impositions in percentages estimated, respectively, at 4.17% , 18% and 9,25%; which results in an additional cost of 31,42% before research activities even begin, something that has no parallel in the world. Taking as a basis a price elasticity of investment in R&D of -0.4, measured in research by French economists Mulkay and Mairesse (MULKAY, Benoît; MAIRESSE, Jacques. The R&D tax credit in France: assessment and ex ante evaluation of the 2008 reform. Oxford Economic Papers 2013, p. 2), it can be said that the tax reform has the potential to increase investments in R&D in Brazil by around 12%, which means around R＄10 billion in additional investments, double the corresponding R＄5.86 billion annually to the exemption from the Good Law.
The text of PEC nº 45/2019, by adopting the broad non-cumulative nature of CBS and IBS, has the potential to neutralize the problems highlighted above. A point of attention also deserves the contribution on primary and semi-finished products, which will perpetuate the distortions of cumulativeness regarding the inputs that fall under its influence. No less important is to attribute, finally, to technology-intensive segments and, therefore, strategic for the productivity and competitiveness of the economy as a whole, a treatment compatible with their structuring function in the production system, which means assigning a tax cost competitive vis-à-vis that practiced by our competitors in the international market.
It is essential that policymakers wake up to the destructive effect that indirect taxation, with its systemic cumulative nature, imposes on the innovative potential of the Brazilian economy. And that these premises are maintained in the tax reform approved in the National Congress, as a paradigm of taxation on consumption in the era of the knowledge-based economy.
*Aristotle Moreira Filho is a researcher at Think Tank ABES, Lawyer, PhD in Law from USP and author of the book “Innovation Law: Taxation, Technology and Development”, published by Quartier Latin (2023).
Notice: The opinion presented in this article is the responsibility of its author and not of ABES - Brazilian Association of Software Companies
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