According to the text approved by the deputies, even games of chance will be included in the Selective Tax when they are legalised by the National Congress, because they are gambling.

PLP 68/24 regulates various aspects of the collection of the Goods and Services Tax (IBS), the Social Contribution on Goods and Services (CBS) and the Selective Tax (IS), which will replace the PIS, the Cofins, the ICMS, the ISS and partially the IPI.

The regulation of the Tax Reform, approved yesterday in the Chamber of Deputies, which maintained the Selective Tax (IS) for a number of sectors, means that their products may pay more tax than the standard rate of 26.5%. The Selective Tax, also known as the ‘Sin Tax’, will tax products that are harmful to health and the rate will be defined in the future and will vary according to the product and service.

But the draft tax reform regulation still has a long way to go. After its approval in the House of Representatives, the text will pass to the Senate, where it can still be amended. For consumers, nothing will change in the short term. The tax reform will be implemented gradually. A test rate will be applied in 2026, but the changes will not really take effect for consumers until 2027, in a process that will last until 2033.

Since it was announced that the sector would be included in the Selective Tax, industry representatives and organisations have been working in Brasilia to try to reverse this choice by parliamentarians, but without success. There is a misconception among political actors about gambling, betting and lotteries and this image deficit will take years to reverse.

Gambling' in the ’Sin tax

The extraordinary secretary for tax reform, Bernard Appy, said on Wednesday 17 that the additional taxation on sports betting, dubbed ‘wagering’, should be done with caution. He estimated that if gambling remains under the selective tax, it will have a total tax rate of more than 40%, since the standard rate of 26.5% will be added to the selective tax, as well as the 12% rate established in the law regulating gambling, on the service margin of the companies.

‘We have to be careful not to miss the mark; that's our concern,’ Appy told to a local Broadcast in an interview. ‘It's not that we are against Selective Tax ‘gambling’, it's not that we are against taxation; but we have to be careful in levying this tax so that the final effect is not the opposite of what we imagine: instead of legalising and taxing the sector, it induces a migration to illegality.

Members of the working group that has drafted the report on the tax reform regulation, approved in the Congress of Deputies last week, have included ‘betting’ in the Selective Tax on the grounds that gambling addiction is a public health problem.
They then argued that the tax could help offset the effect of the entry of tax-exempt meat from the basic food basket - which will have the effect of putting upward pressure on the reference rate of the new Value Added Tax (VAT), composed of the CBS (Contribution on Goods and Services, from the federal government) and the IBS (Tax on Goods and Services), from the states and municipalities.

The secretary also said that electronic gambling is a new activity that will be taxed at the full rate of the new VAT - levied on the difference between the value of bets and the prizes paid to bettors - plus a 12% contribution levied on the same basis, in accordance with the proposal to regulate sports betting, approved by Congress in December last year.

‘We will not advocate removing betting from the Selective Tax. Our only concern is not to make a mistake. In a process in which we are trying to formalise the sector, not encourage it to migrate to informality,’ he said.

There were more factors to increase than to lower the VAT rate'

Appy believes that deputies made more changes to the text that increase the average VAT rate of 26.5 percent, as estimated in the proposal sent by the Treasury, than changes that reduce it. During discussions on the reform's regulations in recent weeks, deputies went so far as to consider a scenario in which the inclusion of new items in the Selective Tax could offset new benefits, such as the exemption of meat.

‘There are more factors that increase the rate than reduce it, but there are some factors that contribute to reducing the rate,’ the secretary said. ‘I don't have a deadline for the new calculations yet, although the team is working on them. But there have been a lot of changes and that influences the recalculation,’ he added.

The biggest impacts on the tax rate, according to Appy, are the inclusion of animal proteins in the basic food basket with zero tax - calculated at 0.53 percentage points - the reduction of rates on medicines and the recovery of credit for broadcasting entities and free books.

The secretary also mentioned the extension of the cashback (refund of taxes paid to low-income people) from 50% to 100% on services such as electricity, water and sewerage, as well as the reduction of the differentiated rate for the real estate sector, which went from a reduction of 20% to 40% in relation to the standard rate.

‘What has certainly helped reduce (the rate) is the Selective Tax on games, although we don't know the rate. But the impact, if any, is positive. I don't know if it reduces it, but it (also) increases the likelihood that the instalment payment will be closer to the minimum rate,’ he said (see below).

Manaus Free Trade Zone: Treasury would prefer another solution

Appy said he expected the benefits of the Manaus Free Trade Zone to be the subject of further debate when the tax reform regulation is discussed in the Senate. The rapporteur will be Senator Eduardo Braga (MDB-AM), former governor of Amazonas, so there is an expectation that the benefits for the region will be extended.

As Estadão shows, a change in the wording made by the Chamber of Deputies in the final stretch of the vote on the tax reform regulations last week guaranteed alleged SII credit benefits for companies located in the Free Trade Zone.

The original Treasury text proposed that these benefits would be calculated on a product-by-product basis, using a methodology yet to be developed with the TCU and benchmarked against benefits offered by other states. The incentive would also have to be approved by the SII Management Committee, made up of the other states.

This section, however, was not accepted by the Amazon bench, which proposed the change. ‘The ideal, from my point of view, was to keep (the original text) and do it later. But there was a lot of pressure and there was a last-minute decision, in political negotiations,’ Appy said.

‘It was not the finance ministry that proposed this exit, it was a decision of the congressional working group. I think it's a question that will certainly be discussed with rapporteur Eduardo Braga,’ he said.

The secretary said he did not know for sure whether the way the benefit was inserted extended the benefits of the Free Trade Zone, claiming that Amazonas MPs themselves felt it fell short.

‘We are going to have to go into more detail (on the benefits of the Free Trade Zone). We even tried, but it's difficult because the benefits granted by other states are not an easy number to calculate. I think we are going to have to be very transparent on this issue,’ he said.

In case of litigation, taxpayers will be able to choose the best option

The division of tax dispute adjudication (litigation) bodies in the new tax system - one for the federal level and one for the state and municipal levels - does not worry Appy. The secretary said the tendency is for decisions to be made unanimously, despite the possibility of tied rulings.

There will be a harmonisation committee to arbitrate between what is decided by the Goods and Services Tax (GST) Management Committee - a tax levied by states and municipalities - and the Fiscal Resources Management Board (FRB), which will be in charge of the Goods and Services Tax (GST) at the federal level.

In a hypothetical scenario of a tie in the harmonisation commission, the taxpayer will be able to choose which thesis to adhere to: the one defined by the Carf or the one determined by the SII's management commission.

‘If there is no unanimity, there will be two decisions: one from the IBS litigation and one from the CBS litigation. The taxpayer will be able to say ‘look, I have two interpretations, I am going to use the one that is more favourable to me’, and that is what the courts will end up defining. But I don't think that's going to happen. I really believe that, at the end of the day, there will be a joint position on these issues. I'm not too worried about it,’ Appy said.

Appy argues for finalising regulations in 2024

The secretary believes it would be ideal to pass the regulation on excise tax changes by the end of 2024 in the Senate. According to him, it is still necessary to adapt the collection systems of Receita Federal, at the federal level, and of the new Management Committee.

‘The president of the Senate, Rodrigo Pacheco, when we delivered the project to the House and the Senate, said he would work to pass it this year, but we have to respect the Parliament's timelines. From a technical point of view, the ideal would be to approve it at the end of this year, because there are a lot of regulations and a lot of system work to be done,’ he said.

Appy pointed out, however, that not necessarily all the adaptations to the new tax system have to be completed by 2025. There will also be 2026, which will serve as a test year for the new taxes to start being collected.

‘We are already working on the system, both the Treasury and the states and municipalities. But the system has to be compatible with the legal design of the tax. If, by chance, this changes, it affects the design of the system. All this has to be taken into account, the regulation itself depends on the complementary law,’ the secretary said.

Taxation out of touch with reality

The problem is that by including the gaming, betting and lotteries sector in the Selective Tax (IS), the rate will be higher than the standard 26.5% and will end up harming society and the implementation of public policies, as operators operating illegally in the country will not be subject to this type of taxation and will therefore encourage players to migrate to the illegal market because the prizes will be more attractive.

Parliamentarians included gambling, betting, lotteries and fantasy games in the Selective Tax rates to compensate for concessions made in the reform text, such as the inclusion of more items in the basic food basket, the health and education sectors and self-employed professionals, for example.

There are variables that have not been assessed, such as the publication of the ordinances by the Ministry of Finance on the regulation of fixed-odds betting, especially online, which will be key to defining the number of operators that will apply for the federal licence and the rate of channelling bettors. In addition, executives interested in a federal licence are assessing other risks, such as competition with unregulated operations, offshore operators and state and municipal operations.

A tax that falls short of global best practice could be disappointing for the government, which is working to channel more than 85% of current gamblers.

The big problem with including betting contests (lotteries, betting, gambling and fantasy games) in the Selective or ‘Sin Tax’ is that no one is in a position to state clearly how much tax this sector could generate for the public coffers because it is neither regulated (betting) nor legalised (gambling). In fact, the ‘Sin Tax’ could become the ‘Dream Tax’.

By Alvaro Gribel, Mariana Carneiro, Iander Porcella e Fernanda Trisotto