Promulgated* on December 20, 2023 and currently undergoing regulation in Congress, the Tax reform still generates a lot of uncertainty regarding the impacts on the electricity sector, especially in the photovoltaic segment.
To clarify the possible effects of this change in taxation, the Canal Solar spoke with Ricardo Ferreira da Costa, Senior Manager of Indirect Taxes at Ernst & Young.
He was one of the speakers at the first Masterclass organized by ABSOLAR, held on August 21, at the headquarters of FIESP (Federation of Industries of the State of São Paulo).
Tax Reform, which has been discussed for decades, aims to simplify tax collection in Brazil. The new taxation system will consist of the following taxes:
- PIS/Cofins will be replaced by CBS (Contribution on Goods and Services), which will apply to transactions involving material and immaterial goods and services, and is the responsibility of the Union.
- ICMS/ISS will be replaced by IBS (Tax on Goods and Services), which will also apply to operations involving material and immaterial goods and services, but will be managed by states and municipalities.
- IPI will be replaced by IS, a Selective Tax under the jurisdiction of the Union, which will be levied on the extraction, production, import and sale of goods and services that are harmful to health and the environment.
The transition period of the Tax Reform will begin in 2026 and will be completed in 2033. There will be no changes in tax collection in 2024 and 2025. From 2026 onwards, Brazil will enter a transitional regime with two tax systems. In 2027, PIS/Cofins will be eliminated, and between 2029 and 2033, ICMS and ISS will end.
Check out the main excerpts from Ricardo Ferreira’s interview below.
What are the impacts of the reform on Centralized Generation?
The Centralized Generation (GC) sector is accustomed to several tax benefits, such as exemptions in the capex and assembly phases, and taxation of just 3,65% of PIS/Cofins in the operational phase.
With the new tax structure, developers will continue to enjoy benefits in the pre-operational phase, possibly even greater from a tax perspective. However, in the operational phase, the tax rate will migrate from 3,65% (PIS/Cofins) to a new incidence by IBS and CBS. Although the tax rate has not yet been defined, the current reference is 26,5%, but this is still subject to discussions in the Senate.
Does this mean that there will be an increase in the tax burden for GC?
It is important to distinguish two aspects: the invoice will include more taxes, but this does not necessarily mean that the energy sold will be more expensive. The value of the invoice may increase, but the effective cost of the energy may not. This is because, in some cases, the tax was not recoverable. With the Reform, the tax paid on the purchase of energy, even with a higher rate, may become recoverable. This may even result in a lower cost for the buyer, compared to the previous regime of 3,65% without recovery.
What are the repercussions of the reform on Distributed Generation?
Distributed Generation (DG) operates differently, with land, machinery and equipment lease contracts, each with its own specific taxation. Now, all will be taxed uniformly, with a reference rate of 26,5%.
For clients operating as legal entities, the tax will be recoverable. However, for contracts involving individuals, there may be an increase in the cost of DG contracts.
Furthermore, REIDI (Special Incentive Regime for Infrastructure Development) may continue to offer tax breaks in the capex phase.
What would be the impacts for companies installing solar plants?
If the REIDI benefit is extended to services contracted in the pre-operational phase, it is likely that companies in the sector will be able to offer these services with less tax impact.
Today, ISS represents a significant cost for projects, but this may change. Suppose you charge 10, and part of this amount is made up of ISS. With the Reform, the client will be able to recover these taxes, causing the effective cost to fall, removing the effect of the tax that is not recoverable by the contractor.
This may open up a new commercial strategy for companies when pricing their services, taking advantage of tax recovery. For both Distributed Generation (GD) and Centralized Generation (GC), as long as they benefit from REIDI, the logic is the same.
Thus, the ISS, which is currently a cost, will be replaced by the IBS, which is recoverable. The final price may even be higher, but the effective cost for the customer will be lower.
What is the tax situation for companies that distribute photovoltaic equipment?
This is a significant challenge for distributors, especially those operating on presumed profit, as the tax burden can increase from 3,65% PIS/Cofins to a rate of approximately 9% CBS.
The challenge will be to find ways to make sales viable for different types of customers, especially individuals, without ing on the price increase. For corporate customers, the impact may be less, as the buyer will be able to recover the tax credit, optimizing the cost, even with a higher nominal price.
What will be the impact of tax reform on residential, commercial and industrial DG projects (microgeneration)?
First of all, it is important to mention that the tax reform, by eliminating ICMS and PIS/COFINS from the tax system, will also end up eliminating important regulations in the sector, such as: ICMS Agreement 16/15 and Law No. 13.169/15 (which establish the non-collection of ICMS and PIS/COFINS in energy compensation transactions), as well as ICMS Agreement 101/97, which guarantees exemption from ICMS. Therefore, the current legislation will no longer be applicable and the parameters will be changed.
There is no confirmation in the device approved within the scope of the Tax Reform that the energy compensation mechanism will remain with the current benefits, however it could be argued that the essence of the new system would be incompatible with the collection of IBS and CBS, as there is no onerousness (free loan) which could ensure that the generating fact does not occur.
If this argument is successful, the discussion about which limit would be encouraged (many states restricted it to 1MW according to the old generation limit) could be resolved, as well as not restricting it only to remote self-consumption.
Regarding the tax benefits of the pre-operational phase, the REIDI benefit – recently extended to DG projects – applies only to distributed mini-generation projects. Therefore, microgeneration would not be encouraged at this time. Therefore, it is possible that projects with this configuration will end up assuming additional burden, since in addition to not being eligible for REIDI, the benefits of ICMS Agreement 101/97 will no longer be applicable. We emphasize that in cases where the plant owner is a Legal Entity, it may – if it does not opt for Simples Nacional – deduct credit from the new taxes.
*It is the instrument that declares the existence of the law and orders its execution. Constitutional amendments are promulgated by the Boards of the Chamber of Deputies and the Senate, in a solemn session of Congress.
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