Tax reform under discussion in Brazil and its impacts on the health sector

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Tax reform has been a constant theme of the Brazilian political and economic debate, and reveals the dysfunctionality of the current tax system, marked by a lack of transparency, complexity, inefficiency, and uncertainty[1]. In addition to directly impacting the country’s growth, these defects in the national tax system are reinforced by the significant tax litigation, which value exceeds 75% of Brazil’s GDP[2].

There are three projects highlighted in the National Congress on the matter: the Constitutional Amendment Proposals (“PEC”) No. 45/2019 and No. 110/2019[3] and Bill (“PL”) No. 3,887/2020, all having as a common element the reform of the taxation on goods and services through the extinction of existent taxes and the creation of a value added tax (“VAT”).

One of the factors that justifies the choice of this economic base as a starting point for a tax reform is the contrast between the problems presented by Brazilian taxes on goods and services[4] and the already consolidated debate on VAT in the world[5]. This is the model adopted by most countries, which, in recent decades, have been able to face their problems, test solutions and reach a consensus on the essential characteristics for its good application.

Another relevant element for this choice is the fact that the taxes levied on goods and services correspond to a large part of the Brazilian tax collection, reaching almost 50% of the total[6], indicating the positive potential of this reform in the country’s growth[7].

Much is discussed about the impact of the intended reforms on the service sector and, especially, on healthcare service providers and on health insurance plans. These reflections on the health sector are the subject of this brief article.

PEC 45/2019 – Tax on Goods and Services

This PEC was presented with the objective of creating a national VAT, levied on operations involving goods and services, called Tax on Goods and Services (“GST” or, in Portuguese, “IBS”[8]). According to the Proposal, the tax will be non-cumulative and will replace the current taxes PIS/Cofins[9], ICMS[10], IPI[11] and ISSQN[12].

Two of the main attributes of IBS, as provided by PEC 45/2019, are the full non cumulativity and its consequent neutrality: the tax will be collected at all stages of the production, commercialization and service rendering processes, ensuring, in each stage, the credit corresponding to the tax paid in the previous stage[13].

That mechanism of allowing a business to credit the VAT paid by its supplier gives VAT an intrinsically advantage over other tax species. As De la Feria and Schoeman explain, this collection process ensures that: (i) buyers of intermediate goods have opposing interests to the sellers, thus reducing the scope for evasion; and (ii) the risk of evasion is spread across the different elements of the production chain. The characteristics of VAT ensure therefore that it falls, by nature, into the framework of what is designated as situational crime prevention: designing the tax in a manner that, in itself, designs out and deters fraud from occurring[14].

In this system, the tax impact is independent of the way the activity is organized, avoiding the various allocative distortions that exist in the Brazilian reality, and the tax paid by the final consumer corresponds exactly to the sum of the tax that was collected in each of the production stages and commercialization of the good or service purchased[15].

The other fundamental characteristics of PEC No. 45/2019 are inspired by the international experience: the adoption (i) of a broad tax base, which seeks to reach all goods and services; (ii) the destination principle, avoiding production taxation, and (iii) a single rate[16], removing distortions in our system caused by differentiated regimes that result in complexity, legal uncertainty and litigation, and that, in the end, harm the country’s competitiveness and growth.

Regarding the health sector, the most debated aspects of PEC 45/2019 are linked to the absence of a different treatment applicable to these activities and to the prohibition provided by the article 152-A, item IV, that bans the concession of tax exemptions to any activity.

The institution of IBS will imply a significant increase in the nominal rate levied as a tax on consumption in the sector: healthcare services and the health insurance plans are currently subject to the maximum taxation of 8.65% and 9.65%[17], respectively, under PIS/Cofins and ISSQN, while the projected rate for the new tax may reach 26.9%, according to the Institute of Applied Economic Research (“Ipea”)[18].

It is important to highlight, however, that the taxes currently collected by the sector are cumulative, implying the accumulation of tax residues along the service supply chain, since taxation supported in one stage does not create a tax credit in the next one. Thus, the effective rate on consumption in the sector is higher than the nominal percentages indicated above.

Even so, representatives of the health sector have expressed their support for the tax reform, but stressed that these activities have labor as the main input, which will not generate tax credits in the new system, so that, despite the non-cumulative positive impact, the institution of IBS at the rate of 26.9% will result in an increase in the tax burden and, consequently, in the prices of these services. In other words, although the sector considers the reform necessary to simplify consumption taxation, the application of the so-called standard rate to these activities has been questioned[19].

This is not a purely sectorial discussion, but rather of public interest, as the increase in relative prices could result in loss of life in health plans and the transfer of patients to the public system (known in Brazil as “SUS”), which is already overloaded.

That is why PEC 45/2019 received several amendments aiming to allow a differentiated tax treatment applicable to the health sector.

The main amendments[20] in this sense are grounded on i) the consequences of the increase in the tax burden for a sector that provides essential services to the population, ii) the principle of isonomy, which requires different treatment for these sort of activities, iii) in guaranteeing the universalization and promotion of health services and iv) in the intention of discharging such services by expanding the right to tax credits.

In a comparative research[21] covering 117 jurisdictions, it was possible to identify that in only 18% of the analyzed countries the standard rate of VAT is applied to medical services, as intended in Brazil.

In other words, in most countries that adopt the value added taxation model, differentiated treatment is applied to health services, such as Australia, where a zero rate was established to i) maintain competitive neutrality between public and private health sectors and ii) preventing the form of taxation from influencing Australians’ choice in health care.

In the European Union, the research showed that the application of differentiated treatment has been related to public interest of health services. The results identified in the research can be summarized in the following table:

Taxation of health servicesNumber of countries%
Exemption (*)8573%
Zero rate43%
Reduced rate (*)54%
Standard rate2118%

* Austria was considered in both classifications, as there is an exemption for public health services and a reduced rate of 10% for health services rendered by private hospitals and charitable organizations.

PEC 110/2019 – Tax on Goods and Services

PEC 110/2019 was proposed in the Federal Senate and, like PEC 45/2019, is based on the guidelines of the Organization for Economic Cooperation and Development (“OECD”) on the taxation of consumption. The intention is to create the IBS to replace IPI[22], PIS/Cofins, IOF[23], education salary[24], ICMS and ISS.

This new tax has the characteristics of a VAT, ensuring full and general non cumulativity, in addition to the adoption of a broad base of incidence.

One of the striking differences between the projects, however, concerns the adoption of a standard rate for the tax: diverse from PEC 45/2019, PEC 110 allows the infraconstitutional legislation to provide different rates for some activities. The health production chain was included among the sectors that can receive a differentiated treatment.

PL nº 3,887/20 – Contribution on Goods and Services

The main challenges faced by PEC 45/2019 and PEC 110/2019 arise from (i) the economic sectors, such as services, which allege an increase in the tax burden in the event of the institution of IBS with a single rate and the prohibition on granting tax incentives, and (ii) federative conflicts between the Federal Government, States and Municipalities regarding the unification of its taxes, currently fragmented among these Brazilian entities.

Aiming to avoid some of these conflicts and anticipate the positive effects of tax reform for the country’s economy, even if partially, the Ministry of Economy proposed the institution of the contribution on goods and services (“CBS”), replacing only the federal taxes PIS/Cofins.

CBS also follows the model of taxation on added value, that is, it would be non-cumulative, meets the principle of destination and observe a uniform rate on all goods and services, 12%, and the granting of tax incentives is prohibited.

Some economic activities, however, were excluded from this general regime, such as health plans, which will collect the CBS at a 5.8% cumulative rate. According to the project’s justification, these exceptions were foreseen due to specificities that make it difficult to tax the value added in each operation.

With regard to the CBS tax basis, the project allows health plans to exclude the amount referring to the indemnities corresponding to the events occurred, effectively paid, less the amounts received as a result of assisting beneficiaries of another operator as a transfer of responsibility. Thus, only the commission received by the health plan will be taxed.

Despite this different treatment, there are economic papers suggesting an increase in the tax burden on such economic activities and the consequent increase in health insurance prices: as reported by Valor Econômico, Brazilian largest financial newspaper, CBS would cause a 7.4% increase in the cost of diagnostic medicine hospitals and laboratories and a 5.2% increase for medical plans, according to the National Health Confederation (“CNSaúde”).

The consequences of this increase, according to the abovementioned paper, correspond to a reduction of R$ 4.3 billion in spending on private health and the number of approximately 500 thousand people losing individual health plans, overloading SUS[25].

Final considerations

Despite the risks of increasing the burden on the consumption of health services, which must be carefully treated in the public debate, the gains for the country’s economy and for the health sector itself cannot be ignored.

Tax reform is necessary to adapt the national tax system to the best international practices and to the country’s economic recovery: according to Endeavor Brazil and EY, all the reform proposals under discussion, and especially those more extensive, will promote a reduction in the number of hours spent by companies to pay taxes in Brazil[26].

Furthermore, by unifying the currently fragmented system of taxation on consumption, the reform will reduce tax litigation. In the health sector, for example, (i) conflicts of jurisdiction between Municipalities regarding the ISS levied on the activities of health plans and laboratories will be eliminated, and (ii) there should be no further discussions on the tax basis applicable to health plans, that is, if the basis should be the gross price received from the beneficiaries or just the difference between that amount and the so-called medical transfers.

Still, in general, tax reform can act as a mechanism to overcome the crisis resulting from the pandemic caused by the new coronavirus. In this sense, Bráulio Borges, a researcher at the Brazilian Institute of Economics (“IBRE”), at FGV, estimated a 20% gain in potential GDP in 15 years, considering only the first order effects, and 24% in the long term[27].

[1] “Tax Uncertainty: Economic Evidence and Policy Responses”, European Comission, 2017. Available at <>. Access on 04/10/2021; “Tax Complexity Index”. Available at <>, access on 04/10/2021; Results based on data collected in 2016 – “Measuring corporation tax uncertainty across countries: Evidence from a cross-country survey”, available at <>, access on 4/10/2021.

[2] Tax litigation in Brazil – Report 2020 – Reference year 2019. Taxation Center of Insper. <>. Access on 4/10/2021.

[3] We will not deal with PEC 128/2019 in this article.

[4] Technical Note CCiF – Reform of the Brazilian Model for Taxing Goods and Services. Available at <>. Access on 4/10/2021. Pages 2 and 3.

[5] Available at <,receita-para-o-crescimento,70002912627>. Access on 4/10/2021.

[6] Available at <>. Access on 4/10/2021.

[7] The significant proportion of tax collection over consumption is not a national exclusivity, but a recurring practice in developing countries, which tend to tax consumption more and, consequently, face the worsening of the regressivity of the tax system.

[8] Imposto sobre Bens e Serviços, a translation to Portuguese from Goods and Services Tax.

[9] Social contributions levied on corporate revenues and collected by the Federal Government.

[10] Tax on the Sale of Goods and Services currently collected by Estates.

[11] Tax on manufactured products, collected by the Federal Government.

[12] Services tax currently collected by cities.

[13] Technical Note CCiF – Reform of the Brazilian Model for Taxing Goods and Services. Available at <>. Accessed on 4/10/2021.

[14] Addressing VAT Fraud in Developing Countries: The Tax Policy-Administration Symbiosis. Available at <>. Accessed on 04/12/2021.

[15] Justification of PEC No. 45/2019.

[16] Technical Note CCiF – Reform of the Brazilian Model for Taxing Goods and Services. Available at <>. Accessed on 4/10/2021.

[17] 3% (service providers) or 4% (health plan operators) of Cofins, 0.65% of PIS and ISS, which can vary from 2% to 5%, according to municipal legislation.

[18] Tax reform may result in tax at a rate of 26.9%. Available at <>. Accessed on 4/10/2021.

[19] For example, check out the article from Valor Econômico “Education and health can be exceptions to reform”. Available at Accessed on 4/10/2021.

[20] Amendments 50/2019, 12/2019, 101/2019, 51/2019 and 46/2019.

[21] Survey prepared by our firm in 2019, with the participation of Breno Vasconcelos, Thais Shingai and Letícia Sugahara, based on the local legislation and the following studies: EY’s Worldwide VAT, GST and Sales Tax Guide 2019, prepared by EY, available at <> and Worldwide Tax Summaries, prepared by PwC, available at <>. Access on 4/10/2021.

[22] Tax on manufactured products, collected by the federal government.

[23] Tax on financial transactions, collected by the federal government

[24] A social contribution collected by the federal government.

[25] Available at <>. Accessed on 4/10/2021.

[26] Tax Reform and Doing Business. Available at <>. Accessed on 4/10/2021.

[27] Replica of the text by José Roberto Afonso, Vagner Ardeo and Geraldo Biasoto Jr., who criticizes the technical note that sought to quantify the effects of PEC 45/2019. Available at <>. Accessed on 4/10/2021.

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