Federative Republic of Brazil BR Intergovernmental Finance...
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1 Report No: ACS5885 Federative Republic of Brazil BR Intergovernmental Finance (DLW) IMPACT AND IMPLICATIONS OF RECENT AND POTENTIAL CHANGES TO BRAZIL’S SUBNATIONAL FISCAL FRAMEWORK September 27 th , 2013 LCSPE LATIN AMERICA AND CARIBBEAN Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript of Federative Republic of Brazil BR Intergovernmental Finance...
1
Report No: ACS5885
Federative Republic of Brazil
BR Intergovernmental Finance (DLW)
IMPACT AND IMPLICATIONS OF RECENT AND POTENTIAL CHANGES TO BRAZIL’S
SUBNATIONAL FISCAL FRAMEWORK
September 27th
, 2013
LCSPE
LATIN AMERICA AND CARIBBEAN
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3
BRAZIL INTERGOVERNMENTAL FINANCES NLTA (P132347)
IMPACT AND IMPLICATIONS OF RECENT AND POTENTIAL CHANGES
TO BRAZIL’S SUBNATIONAL FISCAL FRAMEWORK1
A SYNTHESIS REPORT
1 This synthesis report was prepared Rafael Chelles Barroso and Jorge Thompson Araujo, on the basis of
backgrounds papers prepared by a team of consultants: José Roberto Afonso (coordinator), Kleber Castro, Julia
Morais and Celia Carvalho for ICMS; Fabiana Rocha (coordinator), Ana Giuberti, Enlinson Mattos, Ricardo Politi,
Fernando Postali e Eric Brasil for intergovernmental transfers; and Mônica Mora for subnational debt. Teresa Ter-
Minassian (former Director, Fiscal Affairs Department, IMF) and Lili Liu (Lead Economist, ECSPE, World Bank)
kindly peer reviewed this report.
4
ABBREVATIONS AND ACRONYMS
API American Petroleum Institute Instituto de Petróleo Americano
BNB Northeast Bank Banco do Nordeste do Brasil
BNDES National Bank for Social and Economic
Development
Banco Nacional de Desenvolvimento
Econômico e Social
CAE Economics Affair Commission Comissão de Assuntos Econômicos
CFEM Mining royalties Contribuição Financeira pela
Exploração de Recursos Minerais
CMN National Monetary Council Conselho Monetário Nacional
COFINS Social Security Financing Contribution Contribuição para Financiamento da
Seguridade Social
CONFAZ National Council of Fiscal Policy Conselho Nacional de Política
Fazendária
FCR Revenue Compensation Fund Fundo de Compensação de Receitas
FDR Regional Development Fund Fundo de Desenvolvimento Regional
FPE State Participation Fund Fundo de Participação dos Estados
FPM Municipal Participation Fund Fundo de Participação dos Municípios
FUNDEB Fund for Maintenance, Development of
Basic Education and Valuation of
Educational Personnel
Fundo de Manutenção e
Desenvolvimento da Educação Básica e
de Valorização dos Profissionais da
Educação
GDP Gross Domestic Product Produto Interno Bruto
ICMS Tax on Goods Circulation,
Communication and Inter-municipal
and Inter-state Transportation Services
Imposto sobre Operações Relativas à
Circulação de Mercadorias e Serviços
de Transporte Intermunicipal e
Interestadual e de Comunicação
IGP-DI General Price Index Índice Geral de Preços –
Disponibilidade Interna
IPCA Broad Consumer Price Index Índice de Preços ao Consumidor
Amplo
IPVA Motor Vehicle Property Tax Imposto sobre Propriedade de Veículos
Automotores
IR Income Tax Imposto de Renda
ISS Tax over Services Imposto sobre Serviços
LRF Fiscal Responsibility Law Lei de Responsabilidade Fiscal
MCTI Ministry of Science, Technology and
Innovation
Ministério da Ciência, Tecnologia e
Inovação
MDIC Ministries of Trade, Commerce and
Industry
Ministério do Desenvolvimento,
Indústria e Comércio
MP Executive Order Medida Provisória
NCR Net Current Revenues Receita Corrente Líquida
NRR Net Real Revenues Receita Líquida Real
OECD Organization for Economic
Cooperation and Development
Organização para Cooperação
Econômica e Desenvolvimento
PIS Social Integration Program Programa de Integração Social
5
PPB Basic Productive Process Processo Produtivo Básico
SELIC Benchmark Interest Rate Serviço Especial de Liquidação e
Custódia
SIMPLES Unified Tax Regime for Small and
Medium Entrerprises
Regime Especial Unificado de
Arrecadação de Tributos e
Contribuições devidos pelas
Microempresas e Empresas de Pequeno
Porte
SME Small and Medium Enterprise Pequenas e Médias Empresas
SNG Subnational Government Governos Subnacionais
STF Supreme Court Supremo Tribunal Federal
STN National Treasury Secretariat Secretaria do Tesouro Nacional
TJLP Long-Term Interest Rate Taxa de Juros de Longo Prazo
VAT Value Added Tax Imposto sobre Valor Adicionado
WEO World Economic Outlook Panorama Econômico Mundial
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TABLE OF CONTENTS I. Introduction ............................................................................................................................. 7
II. Brazil’s Subnational Fiscal Framework: A Brief Overview of the Key Issues ...................... 8
A. The ICMS ....................................................................................................................... 10
B. Intergovernmental Transfers: FPE and Royalties .......................................................... 12
C. Subnational Debt ............................................................................................................ 15
III. Reforming the Subnational Fiscal Framework .................................................................. 18
A. The Case for Coordinated Reform ................................................................................. 18
B. The Realpolitik of subnational reforms .......................................................................... 19
i. Currently proposed changes to ICMS framework ......................................................... 20
ii. Currently proposed changes to intergovernmental transfers’ framework .................. 23
iii. Currently proposed changes to subnational borrowing framework............................ 25
iv. Most probable reform scenario ................................................................................... 26
v. Key issues left unaddressed by current reform proposals .......................................... 28
IV. The Expected Fiscal Impact of Alternative Reform Scenarios .......................................... 30
A. Results and discussion of simulations of changes to intergovernmental transfers ........ 30
B. Results and discussion of simulations of changes to ICMS regime ............................... 37
C. Results and discussion of simulations of changes to subnational borrowing framework
40
D. The net result: Potential gainers and losers .................................................................... 42
V. Conclusions: Whither Brazil’s Subnational Fiscal Framework? .......................................... 47
VI. References .......................................................................................................................... 50
7
I. Introduction
1. Brazil’s subnational fiscal framework has remained a source of unabated controversy
despite its relative stability over the past decade. The current fiscal framework for Brazilian
subnational governments (SNG) was largely put in place with the promulgation of the present
Federal Constitution in 1988, the subnational debt renegotiation law in 1997 and with the
approval of the Fiscal Responsibility Law (Lei de Responsabilidade Fiscal – LRF) in 2000.
2. In contrast to most Latin American countries, the extent of revenue decentralization
in Brazil is comparable to OECD levels.2 The intergovernmental fiscal system in Brazil
features greater reliance of subnational governments – especially states – on own-revenues, than
in other LAC countries. States’ own-revenues account for about 9 percent of GDP, as opposed to
about 0.8 percent for LAC as whole, excluding Argentina and Brazil.3 Municipalities, on the
other hand, rely more on transfers, and their own revenues account for about 2 percent of GDP.
3. However, Brazil’s subnational finances are fraught with complexity, inefficiency, and
intra-federative conflicts, leading to several reform attempts over the years. Those include
an overly complex state-level VAT that favors a “race to the bottom” in the granting of tax
incentives by states; a rigid intergovernmental transfers system; and political pressures to revisit
the subnational borrowing framework that has helped sustain the country’s fiscal sustainability
prospects.4 While calls for reform have been frequent, particularly with respect to subnational
taxes and intergovernmental transfers, only relatively minor changes to the subnational fiscal
framework have taken place.
4. Such subnational finance weaknesses – especially those related to ICMS – have been a
deterrent to the country’s long-term growth prospects. The importance of ICMS reform to
unleash Brazil’s growth potential is reinforced by the macroeconomic outlook, in which the
current environment of historically low interest rates is not expected to endure much longer. In
2 Ter-Minassian, T. (2012b). “More than Revenue: Main Challenges for Taxation in Latin America and the
Caribbean”. Inter-American Development Bank Policy Brief IDB-PB-175. 3 Corbacho, A.; V.F. Cibils; and E. Lora (eds). (2013). Recaudar no Basta. Los Impuestos como Instrumento de
Desarrollo. Washington, D.C.: Inter-American Development Bank 4 The detailed workings of Brazil’s subnational fiscal framework are discussed in Section II of this report.
Box 1 – Structure of States’ revenues in Brazil
Brazilian states – the mid-tier government level in Brazil – can collect three taxes: a Value
Added Tax (VAT), known as ICMS (Imposto sobre Operações Relativas à Circulação de
Mercadorias e Serviços de Transporte Intermunicipal e Interestadual e de Comunicação), the
motor vehicle property tax (IPVA), and a tax on inheritance and donations. The main transfer
benefiting states is the States’ Participation Fund or FPE (Fundo de Participação dos Estados),
but they also receive transfers earmarked to health, education and social protection. In addition,
states also collect revenues from other miscellaneous sources such as rents, fees, social
contributions for the civil servant’s pensions, tax arrears, and private sector payments for
concessions. In 2011, these three taxes accounted for 64 percent of state revenues, while
transfers accounted for 17 percent of the consolidated current revenues for all states.
Source: BRASIL (2012). Transfers excluding FUNDEB
8
addition, the external environment is hitting headwinds, particularly as China’s annual growth
rate is anticipated to softly land from a 10 percent threshold to a 6 percent level, putting
downward pressure on commodity prices. Since it would be harder for Brazil to sustain growth
based on commodity exports going forward, behind-the-border reforms aimed at increasing the
country’s cost-competitiveness become even more pressing.
5. External factors are forcing changes in the current subnational fiscal framework.
Recent Supreme Court (Supremo Tribunal Federal – STF) rulings affected both
intergovernmental transfers and ICMS, prompting Congress and states to respond. The debate on
the new oil exploration regime has also prompted the legislative to change the oil royalties
sharing scheme. Finally, states and certain municipalities have continuously lobbied for a
renegotiation of the terms of the debt they owe to the Federal Government.
6. The objective of this study is to evaluate the nature and impact of recent and expected
changes to Brazil’s subnational fiscal framework in light of these debates. More specifically,
this work has focused on recent and proposed changes to (i) the ICMS; (ii) the FPE as well as
the transfers from oil and mining (CFEM5) royalties; and (iii) the subnational debt and borrowing
framework. These three broad areas are precisely the ones that are the center of the current
debate on Brazil’s subnational fiscal framework. In order to achieve the proposed objective,
three background papers were commissioned, each covering one of the issues outlined above.6
The main value-added of this study is an examination – and an attempt at a quantification – of
the impacts of the changes underway in these three dimensions of Brazil’s intergovernmental
fiscal framework.
7. The remainder of this synthesis report is organized as follows. Section II provides a
brief overview of how Brazil’s subnational fiscal framework currently works. Section III
describes the ongoing efforts to reform Brazil’s subnational fiscal framework and points to the
advantages of a more coordinated approach over a piecemeal one. Section IV discusses the
expected fiscal impact on subnational governments of the most likely reform scenarios. Section
V concludes.
II. Brazil’s Subnational Fiscal Framework: A Brief Overview of the Key
Issues
8. Although the 1988 Constitution is a decentralization landmark in Brazil,
decentralization measures have been taking place since mid-1970. For instance, the share of
central government taxes shared through FPE was increased almost yearly from 1975 to 1987,
going from 5 percent to 14 percent of the income tax (Imposto de Renda – IR) and industrialized
products tax (Imposto Sobre Produtos Industrializados – IPI). In 1988, the constitution
extinguished five selective federal taxes, incorporating them to the ICMS tax base.
Decentralization was not a decision from the central government within a well-thought national
decentralization plan, but rather a political movement associated with the return of democracy
5 Contribuição Financeira pela Exploração de Recursos Minerais, which is also usually referred as mining
royalties. 6 The Bank produced a report in 2008 (World Bank [2008]. Brazil: Topics in Fiscal Federalism) which covered a
similar spectrum of issues. Not only does the present study update the results of this previous work, but it also has a
sharper focus on the presumed impacts of recent and expected changes to Brazil’s fiscal federalism framework.
9
and the end of the military regime. Decentralization was thus associated with re-democratization
and devolution of power to subnational governments.
9. This process was accompanied by an increasing participation of subnationals in total
tax revenues and public spending, as well as by larger federal transfers to states and
municipalities. In particular, the decentralization process also led to a marked
“municipalization”, whereby municipalities were made members of the federation on par with
the states in the framework of the 1988 Constitution.7 The current revenue sharing framework is
clearly tilted towards providing municipalities with a revenue share that far exceeds their tax
collections, as shown in Figure 1.
Figure 1 - Tax collection vs. Tax Revenue Sharing by Levels of Government, 20128
10. Notwithstanding the enhanced autonomy of subnational governments since the late
1980s, significant distortions remain. Greater autonomy did not address major regional
inequalities, nor did it address the large degree of heterogeneity across subnationals in terms of
fiscal capacity. Furthermore, the debate between decentralization of the power to tax and
decentralization of the resources from taxation was solved in favor of the latter: Municipalities,
in particular, have preferred to augment their participation in federal revenues than to increase
their own-revenue sources.9 Another by-product of this process was that the decentralization of
revenues was not accompanied by a clear decentralization of the responsibilities for public
service provision, matching the resources needed with revenue sources.10
11. These “structural” issues with the Brazilian fiscal federalism framework manifest in
different forms under each modality of intergovernmental fiscal relation. They can take the
7 As Giambiagi and Além put it, “an important peculiarity of the Brazilian case is its municipalist tendency”. (p.
326). 8 From Afonso, J.R. (2013b). Presentation made at the discussion Forum on “Toward Science of Delivery: Fiscal
Federalism and Sub-Sovereign Finance”, Washington, D.C., World Bank, May 28, 2013. 9 See F. Rezende (1995). “Federalismo Fiscal no Brasil”. Revista de Economia Política, Vol. 15, No. 3 (59), July-
September. 10
Mendes, M., R.B. Miranda and F. B. Cosio (2008). “Transferências Intergovernamentais no Brasil: Diagnóstico e
Proposta de Reforma. Consultoria Legislativa do Senado Federal, Textos para Discussão, No. 40, April.
68.857.6
25.5
24.4
5.718
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Tax collections Available Revenue from Taxes
Federal States Municipalities
10
form of “fiscal war” 11
among states in the Federation; ample heterogeneity in terms of vertical
imbalances at the subnational level; and the tensions in establishing limits to and controls on
subnational borrowing in view of a legacy of subnational debt bail-outs. These particular
manifestations, among others, will be briefly discussed in the following subsections.
A. The ICMS
12. ICMS is a VAT-like tax, but it differs from similar taxes in other countries since its
revenues are collected and administered by state governments. The ICMS legislative
framework is set by a federal law, but states have ability to issue local regulations within the
broad federal rules, including issues such as internal tax rates and bases as well as collection
regimes. Its tax base includes only transaction in goods, not services except for communication
and transport services. Exported goods as well as books, magazines and newspapers are exempt.
Small and Medium Enterprises (SME) are subject to a special tax regime, called SIMPLES, in
which the tax due is calculated and paid as a share of the SMEs’ gross revenues. In addition, tax
credits are generated only from inputs used in the actual productive process, excluding for
instance administrative costs. Credits from capital good acquisitions can only be claimed on 1/48
monthly basis12
.
13. Responsibility for setting ICMS rates is shared between the states and the Federal
Senate, leading to a multiplicity of rates. While states have autonomy to set internal ICMS
rates, the Senate is responsible for setting interstate tax rates. The ICMS operates under a mixed
origin-destination system in which the interstate tax rate is used to split the revenues in interstate
transactions between the producing (origin) state and the consuming (destination) state. The
interstate tax rate is 12 percent for the origin state if the good is sent to a state in the Southern or
Southeastern regions and also if the trade is carried out within states in the same region.
However, it is set at 7 percent for the origin state if the good is sent to a state in the Northern,
Northeastern and Center-Western regions. The destination state collects the difference between
the internal tax rate and the interstate one13
, while the origin state collects the full interstate rate.
For instance, if a good is sent from São Paulo to Pernambuco and this good is taxed at 18
percent, then the state of São Paulo will receive revenues worth of the 7 percent tax rate and
Pernambuco will get the remaining 11 percent. Exceptions to the general rule occur in air
transportation in which the interstate tax rate is set at 4 percent, communication in which the
origin state receives all the revenues and in energy, oil and fuels in which the destination state
gets all the ICMS revenues.14
14. The ICMS is the main revenue source of the Brazilian fiscal system and thus the
largest subnational own-revenue source, but its relative importance has declined.15
11
The “fiscal war” is defined as “the competition among states of the federation for the installation of enterprises in
their territories”. See Afonso (2013a), background paper. See also Varsano, R. (1997). “A Guerra Fiscal do ICMS:
Quem Ganha e Quem Perde”. Texto para Discussão No. 500, Instituto de Pesquisa Econômica Aplicada (IPEA). 12
For example, if a company purchases a new machinery for its factory with a price of 48 million, the company
would only be able to use 1 million per month as tax credit from this acquisition to reduce its tax payments. 13
By law, states are prohibited to set internal rates lower than the interstate rate. 14
. See Friedmann, R. (2011). “O que é a Guerra Fiscal”, site “Brasil Economia e Governo” (). See also Varsano, R.
(1997). “A Guerra Fiscal do ICMS: Quem Ganha e Quem Perde”. Texto para Discussão No. 500, Instituto de
Pesquisa Econômica Aplicada (IPEA). 15
J.R. Afonso (2013a), background paper for this study.
11
Originally established in 1968 as ICM16
, a subnational value-added tax levied on goods, this tax
collected at its inception 7.28 percent of GDP or 31 percent of the overall tax burden in the
country. As a share of GDP, the ICMS remained fairly stable at around 7 percent, but its share of
the overall tax burden had declined to about 19 percent as of 2012 (Figure 2). This has happened
despite the increased ICMS tax base and tax rates, reflecting a loss of “productivity” of the
ICMS and a more rapid increase in the overall tax burden17
, especially in non-shared federal
taxes such a (Programa de Integração Social – PIS) and (Contribuição para Financiamento da
Seguridade Social – COFINS).
Figure 2 - Evolution of the ICMS (% of GDP and as a share of overall tax burden)
15. As a result of the numerous distortions introduced over time, the ICMS lost many of
the advantages associated with a well-designed VAT. These distortions include:18
the high
flexibility of states to set norms and tax rates, leading to excessive dispersion of effective tax
rates; the introduction of special tax collection regimes taxing revenues, abandoning the value-
added principle, an accumulation of ICMS credits that are not honored by the states, the mixed
origin-destination principle adopted for ICMS taxation of interstate transactions; and the
concentration of ICMS revenues on sectors with high “fiscal productivity”, that is, which can
generate large revenues with less tax collection effort. As a result, according to Rezende (2012),
the ICMS today is characterized by (i) significant economic inefficiency; (ii) unfair tax burden
sharing among sectors; (iii) lack of transparency with respect to the tax burden; and (iv)
federative conflicts.19
16. Partly, the shortcomings of the ICMS reflect the so-called “principle of convenience”,
or policymakers’ preference for tax regimes that make tax collection easier.20
A clear
symptom has been the increasing participation – at least until the mid-2000s – of “blue chip”
16
Originally levied only on goods, until the broadening of its base as a result of the 1988 Constitution. 17
In 1968, the overall tax burden was around 23 percent of GDP while recent figures for 2011 show a tax burden of
36 percent of GDP. 18
See e.g. T. Ter-Minassian (2012a). “Reform Priorities for Subnational Revenues in Brazil”. Inter-American
Development Bank Policy Brief IDB-PB-157. 19
F. Rezende (2012). “O ICMS: Gênese, mutações, atualidade e caminhos para recuperação”. Inter-American
Development Bank Policy Brief IDB-DP-231. 20 In Portuguese, “princípio da comodidade”. See Rezende (2012), p. 11.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
ICMS/CTB ICMS
12
segments such as fuels, petroleum products, electricity and communications in ICMS revenues,
and the decreasing participation of the manufacturing sector. For example, while ICMS revenues
from the manufacturing sector fell from 38 percent in 1997 to 28 percent of the total in 201121
,
the share of ICMS revenues from the “blue chips” rose from 26 percent to 36 percent during the
same period. 22
17. The sizable differences in the origin-related interstate tax rates provide ample space
for poorer states to implement tax incentives to attract investors, fueling the so-called
“fiscal war.” These fiscal incentives are irregularly awarded tax breaks for firms to choose to
operate in the conceding state – without the approval of the collegiate body the National Council
of Fiscal Policy (Conselho Nacional de Política Fazendária – CONFAZ), as required by law.
Because of the mixed origin-destination principle, tax incentives given by the producing state
have to be honored by the consuming state, diminishing therefore its revenues. The fact that such
incentives are uncoordinated at the central level, the enforcement of the rules to grant tax breaks
is poor and the absence of a regional development strategy are conducive to the current “race-to-
the-bottom” situation. As a result, spatial allocation of resources is distorted23
, competitiveness
of richer states is reduced, and ICMS revenues from manufacturing (the most affected sector) are
diminished. The efforts to attract manufacturing companies are known as the first wave of the
fiscal war, which was later extended to retail and wholesale companies (second wave of the
fiscal war). More recently, Brazil experienced the third wave of the fiscal war with tax
incentives being granted to imported goods.
18. Most analysts have called for a comprehensive reform of the ICMS, although political
realities have favored a piecemeal approach. Several attempts at reforming the ICMS have
been made over the past couple of decades, and are summarized in the ICMS background paper
prepared for this study. Some of the main elements of the typical ICMS reform proposal include
the creation of a “unified” ICMS underpinned by a single national legislative framework, as well
as the adoption of the principle of destination in interstate transactions.24
However, as noted by
Rezende (2012), “(…) changes to the ICMS confront two severe constraints: the prevailing
climate of lack of trust and antagonism as well as resistance by the states to let go of the
possibility of adopting tax policies that contribute to their development”.25
This issue will be
taken up again in more detail in section III.
B. Intergovernmental Transfers: FPE and Royalties
19. FPE is the main revenue sharing-related unconditional transfer from the federal
government to the states. It totaled about R$64 billion in 2011 or 1.5 percent of GDP. The FPE
is funded by 21.5 percent of the total revenue collections from two federal taxes, the Income Tax
21
Another factor for the decline in industrial sector share in ICMS revenue is the diminishing role of that sector in
the national economy. 22
From Afonso (2013a), background paper. 23
Misallocation at the microeconomic level occurs insofar as “the allocation of resources is based on tax costs, and
not on relative prices of the production factors, creating unfair advantages for the firms benefitting from fiscal
incentives.” In J.M. Arroyo, J.P. Jiménez, and C. Mussi (2012). “Revenue Sharing: The Case of Brazil’s ICMS”.
Serie Macroeconomía del Desarollo, United Nations ECLAC, Economic Development Division, June, p. 12. 24
See Giambiagi and Além, op. cit., p. 273. 25
Rezende (2012), p. 56.
13
and the Tax on Industrialized Products. . The FPE has a regional redistributive goal. The amount
received by each state thus depends on the federal tax collection and on each state’s coefficient,
which were stipulated in 1989, and have remained fixed since then. These coefficients were
defined on ad hoc manner, loosely inspired by the rules prevailing before 1989. Furthermore, the
FPE coefficients are calibrated so as that three regions – North, Northeast, and Center-West –
receive 85 percent of the FPE resources, with the remaining 15 percent being allocated to the
richer South and Southeast regions.
20. The coefficients adopted in 1989 were supposed to be only temporary, as Law 62/1989
envisaged their replacement by new coefficients through a new law to be enacted in 1992. This new law was never brought to vote in Congress and the fixed coefficients remain in place.
The current FPE sharing criteria were ruled unconstitutional by the STF on February 24, 2010,
based on the view that they “do not meet the constitutional principle of promoting social and
economic balance between the states and therefore compromised the federative pact.”26
New
rules were then asked to be put in place by end June of 2013.
21. While the FPE remains broadly redistributive, the use of fixed coefficients overlooks
significant changes in regional development in the past two decades. As shown in Figure 3,
the negative correlation between states’ share in FPE resources and their per capita GDP
indicates that a redistributive mechanism is operating. At the same time, the current calibration
does not take into account the fact that the Center-West region and some northeastern states
underwent considerable development over the past decades, on the back of the agribusiness
boom and regional manufacturing diffusion. Therefore, those states are likely over-represented in
the sharing of FPE resources. It has also been argued that the FPE “over-finances” its four main
beneficiaries: the states of Roraima, Amapá, Acre and Tocantins.27
Figure 4 ranks states in
accordance with the share of FPE resources in total revenues.28
This share exceeds 50 percent in
these four cases. From a redistributive need perspective, these states have Human Development
Indices which are relatively high for the amount of FPE transfers they receive.29
22. Calls for FPE reform have also focused on two key additional features of the fund:
Pro-cyclicality and limited accountability. Given that FPE transfers are based on fixed
percentages of IR and IPI revenues, they are by nature pro-cyclical. Although it is not advocated
here that FPE should act as a stabilizing mechanism, its current design may reinforce a pro-
cyclical characteristic of state’s own revenues, in an environment which rainy days funds are not
common. Preliminary research, however, showed that there is no difference in FPE and current
expenditure volatility.30
The unconditional nature of FPE transfers also limits states’
accountability in the use of these resources, thus adversely affecting incentives for efficient
public expenditure management and fiscal responsibility. In particular, unconditional access to
26
Accioli, op.cit., p. 22. 27
Mendes et al, op. cit. 28
From Rocha, op. cit., background paper for this study. 29
Mendes et al, op. cit.. While the HDI is not a FPE sharing criterion, it is nevertheless a plausible proxy for relative
needs. Ter-Minassian (2012a) also notes that “the six largest recipients of FPE transfers (mostly in the sparsely
populated northern region) are not among the poorest in terms of either per capita GDP or revenues before the
transfers; rather they lie in the middle of the distribution.”(p. 15). 30
. See Box 2 in Rocha, op. cit., background paper for this study.
14
FPE grant resources may increase the states’ incentives to use surplus resources in projects with
lower rates of return.31
Figure 3 - Correlation Between States’ FPE Shares and Per Capita GDP
Figure 4 - Share of FPE in Total Revenues by State (%) –1990-2011 Average
23. Another type of transfer to states undergoing reform is the oil and mining royalties.
Until recently, two taxes were imposed on oil production: royalties and the so-called special
participation. The royalties rate varies from 5 to 10 percent on gross production value, although
the upper bound is by far the most prevalent rate in practice. The special participation has a
31
Mendes et al, op. cit.
0
10000
20000
30000
40000
50000
60000
70000
0 500 1000 1500 2000 2500 3000 3500 4000
GD
P p
er
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ita
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e 1
99
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01
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FPE Revenue (R$ - average value 1995-2010)
0%
10%
20%
30%
40%
50%
60%
15
progressive rate up to 40 percent, but is charged over net production value and only on highly
productive or profitable oil fields. Revenues from royalties and special participation are shared
with states and municipalities. The sharing scheme depends on the location of the field, but in
most cases producing states are entitled to 26.25 percent of the royalties and 40 percent of the
special participation. Non-producing states receive collectively only 1.75 percent of the royalties
collected. Mining royalties rate are set to 2 or 3 percent on the most common mining products in
Brazil, but are levied over net production value. Producing states receive 23 percent of the
revenue, while producing municipalities get 65 percent.
24. The distribution of resources from petroleum – especially royalties – also suffers from
significant asymmetry, but of a different kind: high concentration in producing states. The
states of Rio de Janeiro and Espírito Santo – and its producing and affected municipalities –
have received the lion’s share of petroleum royalties. On average, the state of Rio de Janeiro has
received about 80 percent of the petroleum royalties envelope in the period between 1999 and
2012. When examined from the point of view of beneficiary municipalities, those in the state of
Rio de Janeiro have accounted on average for 73 percent of the total in the same period.
C. Subnational Debt
25. The current subnational borrowing framework is formed by three mutually
reinforcing rules. The first is the debt renegotiation law, which was established in 1997 for the
states and 1999 for the municipalities. The second piece is the LRF, which was established in
2000 and is complemented by two main Federal Senate Resolutions, which were put in effect in
2001. The third piece is the resolution from the National Monetary Council (CMN, Conselho
Monetário Nacional), which has put a cap on overall lending from the banking sector to public
sector institutions. The main borrowing rules are comprised or referenced in these regulations,
which are so intertwined that they cannot be analyzed in isolation.
26. Subnational debt distress in the late 1980s and 1990s led to three rounds of
renegotiations between states and the Federal Government to restore subnational debt
sustainability.32
The first two rounds took place in 1989 and 1993, but were not successful in
addressing the problem, for two main reasons: (i) they did not refinance the majority of debt
outstanding - for example, subnational bonds were not included; and (ii) they did not deal with
the structural causes of the debt crisis, namely, the underlying fiscal imbalances in subnational
governments. In addition, the then prevailing high inflation environment made it easier for states
to hide their imbalances by postponing payments.
27. The largest renegotiation for states took place from 1997 to 1999, leading to the
restructuring of nearly R$200 billion, or about 12 percent of the national stock of debt. The
restructuring was the most comprehensive one, including subnational bonds, and was
conditioned upon states’ compliance with medium-term fiscal adjustment and structural reform
programs agreed upon with the National Treasury Secretariat (Secretaria do Tesouro Nacional,
STN). This process was of critical importance for subnational debt sustainability as the Federal
Government was (and continues to be) the main holder of subnational debt. Box 2 describes the
32
For a fuller history of the changes to Brazil’s subnational debt framework, see Mora, M. (2002). “Federalismo e
Dívida Estadual no Brasil”. Texto para Discussão 866, Instituto de Pesquisa Econômica Aplicada (IPEA), Brasília,
as well as Mora, M. (2013), background paper prepared for this study.
16
main features of such programs. Furthermore, a subsequent restructuring round, on similar
grounds, was concluded for municipalities in 2001. As a result, subnational debt declined
significantly between 2001 and 2012, as shown in Figure 5.
Figure 5 - Net Subnational Debt as a Share of GDP (%)
Box 2 - Main Features of Debt Restructuring Programs Agreed between States and the Federal
Government
• Addressing the structural causes of fiscal imbalances in subnational government, through the
institution of binding rolling three-year fiscal plans with targets and supervision from STN:
– The fiscal plans consisted of fiscal and state reforms, monitored by six indicators
which included targets on variables such as (a) debt-to-revenues ratio; (b) public sector
wage bill; and (c) primary fiscal balance.
– In addition, state owned banks were extinct, privatized or capitalized.
• Subsidized refinancing to subnational governments debt, including bonds:
– Refinancing was done with a 30-year maturity, with fixed real interest rates of 6%,
7.5% or 9% p.a., depending on, respectively, whether 20%, 10% or no part of the
initial debt stock was amortized up to end of 2000. The debt was indexed to the
general price index (IGP-DI) and a debt service ceiling was established.
– The debt service ceiling was set at 12 to 15 % of Net Real Revenues (NRR). Every
time debt service exceeds this limit, the difference – called “the residual” – is
capitalized together with the debt principal. If SNG still holds a residual after 30 years,
it will be refinanced for 10 years in the same conditions, but without any debt service
ceiling.
– The subsidy was represented by the freeze in debt amounts between the cut-off date and
the contract signature and between the interest rate paid by the government on its debt
proxied by SELIC33
and the debt cost charged to subnational governments.
33
Selic stands for Special Settlement and Custody System, and represents the benchmark interest rate. See Manoel,
A.; S. Garson, and M. Mora (2013). “Brazil: The Subnational Debt Restructuring of the 1990s – Origins,
0.0
5.0
10.0
15.0
20.0
6.96.3 6.8
5.6 6.2
8.97.5
9.5 9.3 9.5 10.411.9
13.014.3
16.116.2
18.318.419.8
18.9
16.315.3
13.6 13.712.5
12.011.5 11.8
External Debt Internal Debt Total Debt
17
– During several years, SELIC was set much higher than the debt cost to SNGs, however,
the declining trend of the SELIC itself meant that the interest rate subsidy has declined
over the years, as shown in the chart below.
Figure 6 - Comparison between Selic and SNG rates, accumulated basis (base year: 1995)34
28. Following the restructuring process, Brazil’s subnational borrowing framework was
enshrined in the 2000 Fiscal Responsibility Law. The LRF helped institutionalize fiscal
discipline at all levels of government, through a series of novel features, including: (i) the
incorporation of hard budget constraints into a single unifying framework; (ii) the ban on further
debt refinancing operations between different levels of government to avoid moral hazard; (iii)
the introduction of more stringent requirements on fiscal targets in the preparation of the Budget
Guidelines Law. It is also complemented by a Fiscal Crimes Law applicable to cases of non-
compliance with the FRL. The third piece of the subnational fiscal framework is a resolution
from the National Monetary Council which set limits for outstanding loans from the banking
sector to the public sector. Brazil’s reformed subnational borrowing framework includes a
number of additional important features, namely: (i) the use of administrative rather than market-
based mechanisms for control of subnational indebtedness; (ii) the absence of competitive
domestic capital markets for subnational debt, combined with the prevalence of public banks in
credit operations to subnationals; and (iii) the ban on subnational issuance of bonds until 2020.
29. A new cycle of subnational borrowing started in 2008, in line with the renewed
emphasis on infrastructure investments as a driver of growth and later as part of the
Government’s response to the global crisis.35
This new cycle was enabled by the post-crisis
creation of a new financing line by the National Bank for Social and Economic Development
Conditions, and Results”. In Canuto, O. and L. Liu (eds.) Until Debt Do Us Part: Subnational Debt, Insolvency, and
Markets. Washington, D.C.: World Bank. 34
Reproduced from Mendes (2012a). 35
See Mora, M. (2013), background paper to this study.
0
500
1000
1500
2000
2500Ja
n-9
5
Oct
-95
Jul-
96
Ap
r-9
7
Jan
-98
Oct
-98
Jul-
99
Ap
r-0
0
Jan
-01
Oct
-01
Jul-
02
Ap
r-0
3
Jan
-04
Oct
-04
Jul-
05
Ap
r-0
6
Jan
-07
Oct
-07
Jul-
08
Ap
r-0
9
Jan
-10
Oct
-10
Jul-
11
Ap
r-1
2
Jan
-13
IGP-DI + 6% IGP-DI+9% SELIC IPCA +6%
18
(BNDES) for subnationals36
; increasing subnational lending by major public banks Banco do
Brasil and Caixa Econômica; and greater reliance on multilateral sources for infrastructure
financing at the state and municipal levels. Furthermore, with the goal of expanding subnational
investment financing capacity, STN has also raised borrowing limits for states through the PAF
annual revision cycles37
. From January, 2008 to April of 2013, credit to public sector grew on
average 3 per cent per month while total credit expanded at 1.5 percent on the same basis. This
expansion was concentrated in state-owned banks, since credit to public sector from privately-
owned domestic banks contracted, while credit to public sector from foreign-owned banks
remained stable.
30. Subnational solvency is again in the spotlight as the interest subsidy is plummeting
and the debt service cap together with the evolution of macro conditions has led to
significant accumulation of unpaid “residual” by major subnational governments.38
First,
significant and consecutive declines in the Selic benchmark rate all but erased the interest
subsidy. Second, the accumulation of the “residual” has put in question the ability of some states
- Rio Grande do Sul, Minas Gerais, São Paulo and Alagoas – and the Municipality of São Paulo
to be able to fully repay their debts to the Federal Government within the agreed timeframe. Both
factors have contributed to the ongoing pressure by some subnationals to renegotiate the terms of
their debt with the Federal Government. Sections III and IV will look in more detail into the
current debates on reforming Brazil’s subnational borrowing.
III. Reforming the Subnational Fiscal Framework
A. The Case for Coordinated Reform
31. Given the deep-rooted issues with Brazil’s fiscal federalism framework, there have
been calls for fundamental reform. For example, drawing on the notion that Brazil’s
subnational fiscal framework is outdated, Rezende (2009) proposes a “new model of fiscal
federalism” that includes modernizing the tax system, revamping intergovernmental transfers,
and developing a new strategy for greater regional and federative equality. Other authors such as
Miranda, Mendes & Cosio (2008) proposed comprehensive changes to the transfer system while
Werneck (2008) looks at comprehensive tax reforms.
32. If ever implemented, such fundamental reform would include a major revamping of
the ICMS as one of its key components. A shift to greater federal responsibility in the ICMS
collection process has been a central idea.39
In one formulation, the ICMS would be replaced by
a national VAT, with well-defined rules for the sharing of revenues with the states. Another
formulation envisaged the adoption of a dual VAT, whereby its base would be shared between
the Federal Government and the states. In this version, the Federal Government and the States
would separately administer their respective shares of the tax base. A dual VAT is often viewed
36
Canuto, O. and L. Liu (2010). “Subnational Debt Finance and the Global Financial Crisis”. Economic Premise,
The World Bank, No. 13, May. 37
The limits foreseen in the Senate resolutions remained unchanged. 38
See Mora, M. (2013), background paper to this study, as well as Mendes, M. (2012a). “Por Que Renegociar a
Dívida Estadual e Municipal?”. site “Brasil Economia e Governo” (www.brasil-economia-governo.org.br) 39
Rezende, F. (2012), op. cit.
19
as a superior alternative to a national VAT in the Brazilian case, in order to preserve states’ fiscal
autonomy and political accountability.40
33. While many analysts agree that a “new model of fiscal federalism” would be
politically infeasible, the debate has focused on a coordinated- if less ambitious – set of
reforms. In this reasoning, Brazil’s subnational fiscal issues would be addressed in a multi-
pronged fashion, through politically-acceptable changes to the ICMS to end the fiscal war; to the
FPE and royalties sharing rules, to address fairness concerns and satisfy the STF ruling; and to
the subnational borrowing framework, to allay concerns about states’ debt sustainability
prospects.41
34. In a coordinated reform process, the synergies among the different components of
Brazil’s subnational fiscal framework could set the stage for “cross compensations” among
states. For example, revenue losses in some states due to changes to the ICMS could be
compensated for by gains stemming from adjustments to the FPE sharing criteria.42
These
potential synergies also motivated the Federal Senate’s Commission of Experts to propose to
simultaneously tackle changes to ICMS tax rates in interstate transactions, FPE sharing criteria
and the indexation rules for subnational debt to the Federal Government.43
In addition, the STF
rulings on the FPE and on the ICMS fiscal benefits could be seen as opening a “window of
opportunity” for coordinated subnational fiscal reforms. 44
35. However, political resistance to even limited reforms has proven to be formidable. The
greatest obstacle seems to be reaching a consensus on ways to addressing net gainers and losers
from different reform proposals.45
Furthermore, reform proposals often confront deep-rooted
federative issues, as in the case of royalties sharing rules. The realpolitik of subnational fiscal
reforms will be discussed in more detail in subsection III.B.
B. The Realpolitik of subnational reforms
36. Brazil is a federative country with some important peculiarities, starting with the role
of municipalities. Besides the central level of government and the 27 states, the 5,570
municipalities are considered members of the federation. Unlike in the US in which they are
creature of the states and are regulated by the states, in Brazil they do not have any hierarchical
relation with state governments. Thus, municipalities are an important political actor and can
strongly oppose projects that can harm their interests. This is one explanation as to why attempts
to incorporate the tax over services (Imposto sobre Serviços – ISS) under the ICMS tax base
have failed.
40
See Ter-Minassian (2012), op. cit., p. 28. 41
As noted by Ter-Minassian: “A comprehensive and simultaneous approach to the reforms would promote their
mutual consistency and facilitate trade-offs that might increase their political viability”. Op. cit., p. 33. 42
See e.g. Rezende, F. (2012), op. cit, p. 57. 43
See Partial Report by the Federal Senate’s Commission of Experts, October 2012. 44
See Ter-Minassian (2012), op. cit., p. 3. 45
For example, none of the various FPE reform proposals being discussed in Congress as of early 2012 were found
to be able to garner enough consensus to ensure approval. See Rocha, C.A.A. (2012). “Rateio do FPE: Avaliação de
Impacto e de Viabilidade Legislativa das Novas Propostas”. Núcleo de Estudos e Pesquisas do Senado, Texto para
Discussão No. 111, Março.
20
37. These peculiarities are reflected in the Municipalities’ share of intergovernmental
fiscal transfers, as well as in the weight of the ICMS for states’ revenues. As previously
noted, the federal government accounts for the bulk of revenue collection, while states collect
one quarter of the revenues. Municipalities in turn collect only 5.7 percent of the total revenues.
However, the municipalities are the biggest winner of the transfer system in place ending up with
18 percent of the total resources available. States, on the other hand, end up with a neutral
position from the standpoint of intergovernmental transfers: Incoming transfers roughly equals
out states’ transfers to municipalities – states account for 25.5 percent of the revenues collected
while keeping 24.4 percent of the available resources after accounting for transfers. This balance
just reinforces the importance of ICMS for the states, especially for the most developed ones
which receive less transfers proportionately speaking. The relevance of ICMS hence makes any
reform attempt more difficult since states do not have other sources of funds of similar
magnitude.
38. Furthermore, smaller states tend to be overrepresented in Congress. This is a result of
the 1988 Constitution, which has defined a minimum of 8 representatives for each state and a
ceiling of 70 representatives. Thus, in principle, one representative in São Paulo represents
nearly 600,000 inhabitants while a representative in Roraima represents around 60,000 people.
In addition, representatives are not elected by district, but rather by the whole state population.
Lastly, states are represented on equal standing at the Senate – 3 senators for each state.
39. These features of Brazil’s fiscal federalism provide the politico-institutional context in
which the country operates and in which the reforms are being attempted. The federal
government has submitted reform proposals for ICMS and subnational debt, while the proposals
to change intergovernmental transfers were originated from the legislative or by the subnational
governments. The following three subsections describe the proposed reforms, while the last two
subsections discuss the most likely reform outcome and the key issues left unaddressed.
i. Currently proposed changes to ICMS framework
40. The Federal Government has submitted to Congress a proposal to reform ICMS. The
cornerstone of the proposal is the gradual unification of the ICMS interstate tax rate from 7
percent and 12 percent to 4 percent in all transactions, except from goods originated from the
Manaus Free Zone and interstate natural gas trade46
(See Figure 8). The rationale is to end the
original cause of the fiscal war which is the differential in tax rates between regions for the
interstate trade. This was already implemented for ICMS over imported goods47
, and would be
implemented in four years according to the original government proposal. However, due to
pressures by the affected states, the unification period was extended to 12 years.
46
The initial government proposal was even bolder since it aimed to unify all interstate transactions into the 4% rate.
In addition, to the rates showed in Figure 8. The other exceptions to the general rule which are air transport and
electrical energy, oil and fuels, which have interstate tax rate of 4% and zero respectively would be maintained.
Also, there are some exceptions defined by agreement at CONFAZ such as capital goods, which have an interstate
tax rate of 8.8% and 5.14%. 47
Federal Senate Resolution 13/2012 became effective in January 1st, 2013.
21
Figure 7 – ICMS Current Interstate Tax Rate
Scheme48
Figure 8 – ICMS Interstate Tax Rate Unification
Schedule Proposed by the Federal Government
41. The gradual unification of the interstate tax rate would solve the problem going
forward, yet it would not in itself resolve the issue of past tax incentives. These incentives are
in jeopardy due to judicial decisions. In order to resolve this problem, the Federal Government
proposal aims to validate all tax incentives granted in the past, with their future effect being
phased out. The past unpaid taxes would also be forgiven. This would be achieved with the
replacement of the unanimous approval requirement for all states for tax incentives by a softer
rule requiring simultaneously the approval of 3/5 of all states and 1/3 of the states in each region.
42. Lastly, in order to persuade the states to cease the fiscal war, the Federal Government
proposed the institution of two special funds. The aim of these funds would be to compensate
reform losers and to allow states to implement regional development and business attraction
policies
43. The first fund – the Revenue Compensation Fund (FCR – Fundo de Compensação de
Receitas) - would financially compensate the states for the losses incurred with the
reduction in the interstate tax rate. The amount of the losses would be calculated every year in
the month of June by the federal government revenue service (Secretaria da Receita Federal do
Brasil – SRFB) based on the electronic fiscal invoice national database of the previous year.
Thus compensations paid in any given year would be based on the losses occurred in the two
previous years. Payments would be made monthly during 20 years. The government estimate
total losses in the first year to be R$ 2.1 billion (or 0.05 percent of GDP) and the total loss over
the transitioning years to amount to R$ 63.5 billion. However, the cap for this transfer was set
much higher at R$ 8 billion in the draft law proposal.
44. The second fund – the Regional Development Fund (FDR – Fundo de Desenvolvimento
Regional) - aims to provide a flexible tool for state governments to promote regional
development. It is also expected to last for 20 years. The FDR would be constituted by federal
budgetary resources and proceeds from federal debt issuance. Budget resources would amount to
R$ 74 billion starting with R$ 1 billion yearly and reaching R$ 4 billion in year 4 remaining
48
The advanced states group comprises all states in the South and Southeast region, except for Espírito Santo. The
emerging states group comprises the remaining states. Intraregional refers to interstate transactions done inside each
group.
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12
0
2
4
6
8
10
12
14
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Advanced → Emerging Emerging → Advanced Intra-regional
76
54 4 4 4 4 4 4 4 4 4 4 4 4
1211
109
87 7 7 7 7
65
4 4 4 4
12
9
6
4 4 4 4 4 4 4 4 4 4 4 4 4
12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12
0
2
4
6
8
10
12
14
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Advanced → Emerging Emerging → Advanced
Intra-regional Manaus + Gas
22
constant until the end of the fund, while the debt issuance part is expected to sum up to R$ 148
billion, starting with R$ 2 billion in the first year and growing to R$ 8 billion yearly from year 4
onwards. Thus, the total fund size would amount to R$ 222 billion.
45. The fund’s resources would be used to finance new business ventures in the states
territories and infrastructure projects as well as subsidies for private companies or
infrastructure users. In the first case, resources would come from the debt issuance proceeds.
The use of these resources would be regulated by the CMN and operationalized by a federal
financial institution such as BNDES or the Northeast Bank (BNB). The cost of the debt to the
fund would be the long-term interest rate (TJLP). In case the final cost to private borrowers is
lower than TJLP, the subsidy would have to be covered by the budgetary resources in the fund.
46. The FDR resources would be distributed among states according to their share of
population to the total of all states and in inverse relation to GDP per capita (see Table 1).
In addition, the states would be divided in two groups, being the first one formed by states with
per capita GDP above the national average and the second one with the remaining states. The
resource partition between these two groups would be done in accordance to the inverse of each
state’s GDP per capita. The implementation of both funds is conditioned on the unification of the
interstate tax rate as laid out in the government proposal sent to Congress, the submission of
information on tax incentives to the Federal Government and the renouncement of any new tax
incentives in disagreement with the legislation. The state of Maranhão would receive the largest
share of the FDR (6.7 percent), while the Federal District would receive the smallest share (0.9
percent), according to calculations made by the Ministry of Finance.
47. Lastly, a concurrent change in the ICMS on distant sales (electronic commerce and
catalogue sales for example) is being discussed at Congress. Currently, the ICMS paid on
such transactions is sent entirely to the originating state, thus not being divided between origin
and destination states according to the interstate tax rate rule. For instance, if a fridge is produced
in São Paulo and purchased by a resident of Recife, then the states of São Paulo would get 7%
and Pernambuco would receive 11%. However, if the same fridge is purchased by a inhabitant of
Recife through the internet from a website whose warehouse is located in São Paulo, then the
state of São Paulo would receive 18%, or the total ICMS paid in this transaction. This has
become an issue of greater concern due to the increase in e-commerce transactions, posing a risk
of revenue loss to poorer states, since the majority of the e-commerce companies’ warehouses
are located in the south and southeastern part of the country, where consumption value is higher.
23
Table 1 – Regional Development Fund (FDR) Distribution Quotas49
Source: Ministry of Finance
ii. Currently proposed changes to intergovernmental transfers’ framework
48. Unlike with the ICMS and the subnational debt, the Federal Government abstained
from proposing reforms in the intergovernmental transfer framework. Thus, the proposed
reforms in this area are a mix of legislative and subnational government initiatives, responding
both to Supreme Court decisions and incentives to obtain more resources.
49. Congress has approved and the President has sanctioned the reform proposal for the
FPE. The proposal establishes that until 2015 the current FPE shares will remain unchanged.
From 2016 onward, each state will receive the same value as per the previous year adjusted for
inflation (IPCA) plus 75 percent of Brazil’s GDP growth rate. If the total amount of the FPE
envelope is higher than the sum of the adjusted FPE values, then the surplus would be distributed
in direct proportion to the share of population of each state and in inverse proportion to their per
capita household income. The population shares have a lower bound of 1.2 percent and an upper
bound of 7 percent, benefiting the least populated states such as Roraima, which is the least
populated state with 0.24 percent of the national population. A provision to limit the effects of
tax breaks given by the federal government on FPE was included, but was vetoed by the
President. The veto was then maintained by Congress.
50. Figure 9 shows in a simplified way the steps needed to calculate the FPE coefficients
according to new rules.
49
The shares sum up to 100.1% due to rounding.
North (N) 25.70% Center-West (CW) 9.90%
Acre 3.90% Distrito Federal 0.90%
Amapá 3.70% Goiás 3.40%
Amazonas 3.00% Mato Grosso 2.70%
Pará 4.90% Mato Grosso do Sul 2.90%
Rondônia 3.20% Southeast (SE) 10.30%
Roraima 3.30% Espírito Santo 1.90%
Tocantins 3.70% Minas Gerais 4.30%
Northeast (NE) 48.10% Rio de Janeiro 2.00%
Alagoas 5.70% São Paulo 2.10%
Bahia 5.20% South (S) 6.10%
Ceará 5.40% Paraná 2.20%
Maranhão 6.70% Rio Grande do Sul 2.00%
Paraíba 5.40% Santa Catarina 1.90%
Pernambuco 4.80%
Piauí 6.30%
Rio Grande do Norte 4.60% N + NE +CW 83.70%
Sergipe 4.00% S + SE 16.40%
24
Figure 9 – Revised procedure to calculate FPE coefficients under the new proposed rule
51. In turn, while the current proposal to change the distribution of oil royalties has been
under discussion for a few years, it remains mired in controversy. Initially, the
Government’s intention was not to change the royalties distribution rule when it proposed a
change in the oil exploration regime in 2009. However, Congress amended the law to include a
provision to redistribute all royalties: old and new contracts, concession and production sharing
regime, accruing to states and municipalities, according to the FPE and FPM coefficients. Under
this amendment, the Federal Government would compensate the losing states with its share of
the royalties. These changes were vetoed by the President and the original rules set in 1997 were
maintained. In 2012, Congress approved another law (Lei 12.734/12) that set the royalties rate at
15 percent for the oil sharing regime instead of the current 5 to 10 percent rate, but no special
participation payment is foreseen and also changed the royalties and special participation
distribution in favor of non-producing states in both new and old contracts. These changes in the
royalties distribution were again vetoed by the President, and an Executive Order (Medida
Provisória – MP) was put in place to establish new royalties distribution rules for contracts
signed after December 3, 2012. The presidential vetoes, however, were overturned by Congress
and the MP expired. After that, the state of Rio de Janeiro appealed to the Supreme Court to
declare both the law and the MP unconstitutional. Currently, the changes are suspended due to an
Step 1 Define the total amount of FPE for year t
IR Tax Revenue 288,394.6 Cell 1
IPI Tax Revenue 50,143.1 72,785.61 Population Share Factor
AC 758,786 0.003912 0.012000
AL 3,165,472 0.016321 0.016321
BA 14,175,341 0.073089 0.070000
FPE (t-1) IPCA GDP FPE 1 TO 1,417,694 0.0073097 0.01000
AC 2,119.5 5.84% 0.90% 2,244.3 SUM 193,946,886 0.5
Step 5
TO 2,688.8 5.84% 0.90% 2,846.8 HH Income p.c. Inverse Factor
SUM Cell 2 65,868.3 AC 663.29 0.001508 0.0269
AL 378.01 0.002645 0.0472
If Cell 1 > Cell 2 → Move to Step 3
If Cell 1 = Cell 2 → Use FPE values from Step 2
If Cell 1 < Cell 2 → TO 571.98 0.00174831 0.0312
SUM 705.72 0.056 0.5
Step 6 Sum the two FPE components
FPE 1 FPE 2 Total
AC 2,244.3 269.2 2,513.5
Cell 1 Cell 2
72,786 65,868 TO 2,846.8 285.1 3,132.0
Step 4Estimate the representative factors for
population (sum of factors must add to 0.5)
Estimate the representative factors for
income (sum of factors must add to 0.5)
Value to be distributed
6,917
Multiply each state FPE value in year t-1 by
inflation and 75% of GDP growth and then
sum up all values
Step 2
Reduce FPE values proportionably
until total value of FPE (cell 2) is
equal to the value obtained in
step 1 (cell 1)
Distribute the difference between cell 1 and
cell 2 according to coefficients calculated in
steps 4 to 6
Step 3
21.5%
25
injunction given by the Supreme Court to the appeal sponsored by the oil-producing states of Rio
de Janeiro, São Paulo and Espírito Santo.
52. Controversy is fueled mostly by the distributional implications for producing and
non-producing subnationals. Regarding the royalties distribution, the law envisages that
producing municipalities will have their share reduced gradually to 15 percent in the first year up
to 4 percent in the eighth year and beyond. Taking into account the royalties rate, the share of oil
revenue accruing to the producing municipalities would be reduced from 2.625 percent to 0.6
percent in 2020. For the producing states, the share of oil royalties was fixed at a steady 20
percent. For the non-producing states and municipalities, the royalties share was set at 21 percent
for the first year of the new law, increasing to 27 percent until 2020. These royalties are to be
distributed among states and municipalities following the same rules as the FPE and FPM. In
addition, producing states cannot receive royalties through both the FPE rule and for being a
producer. Lastly, the amount of royalties received by each producing municipality is capped at
the 2011 level or an amount equal to twice the FPM.
53. Lastly, the Federal Government has sent to Congress a draft law to institute a new
regulatory landmark on mining activities in Brazil. In relation to the mining royalties, or
CFEM, the Government’s proposal envisages a change in the tax base from net revenues to a
concept of gross revenues, in which only taxes paid on sales, can be deducted from the gross
sales revenues. The tax rates will be set by decree for each mining product, respecting the
maximum tax rate of 4 percent. The revenue sharing scheme between government levels was
maintained.
iii. Currently proposed changes to subnational borrowing framework
54. The current debate on subnational debt has focused primarily on changes to the
indexation rules and concerns about debt sustainability for some subnationals. The
prevailing view is that the IGP-DI should be replaced by the more stable IPCA (the broad
consumer price index), accompanied by a reduction in the “real” interest rate.50
However, this
change in itself may not necessarily guarantee a return to debt sustainability in the most affected
subnationals51
. This has led to proposals to change indexation rules retroactively to the year that
debt contracts were negotiated. Such scenario looks rather implausible, since it would probably
be considered as a breach of the LRF and some subnationals would become creditors, instead of
debtors, of the Federal Government, and the Treasury’s net debt would increase considerably.52
55. The centerpiece of the Federal Government’s proposal is a change in the interest rates
accrued to the renegotiated debt of the states and municipalities. Currently, subnational
governments pay interest rates of 6 percent, 7.5 percent or 9 percent on top of the adjustment by
the General Price Index (IGP-DI, Índice Geral de Preços – Disponibilidade Interna).
56. This proposal aims to reduce this interest rate from January 2013 onwards to 4
percent on top of IPCA or simple SELIC interest rate accrual, whichever is lower.
50
See Mora, M. (2013), background paper to this study, as well as Mendes, M. (2012b). “Como Renegociar a
Dívida Estadual e Municipal?”. Site “Brasil Economia e Governo” (www.brasil-economia-governo.org.br). 51
Mendes, M. (2012a), op. cit. 52
Mendes, M. (2012b), op. cit. A version of this scenario is simulated in subsection IV.C.
26
However, it does not change the debt service ceiling, which varies from jurisdictions, going from
12 percent to 15 percent of Net Real Revenues.
iv. Most probable reform scenario
57. Of the three reforms discussed above the FPE reform is the only one completed.
Agreement was facilitated due to the fact that the proposed new FPE sharing rule will start
producing effects only in 2016 and in a very gradual manner, thus drastically reducing
opposition to the reform. Nonetheless, the first law approved by Senate was overturned by the
lower House on June 12. Consequently, a new proposal was drafted by Senate changing the
floors and caps on the population and income representative factors to benefit small states and
the transition became even more gradual than the initial Senate proposal, since 75 percent of the
GDP growth, rather than 50 percent is to be applied on previous year FPE in order to calculate
the amount of the FPE shared by the former fixed coefficients. This proposal was approved by
Senate on the June 18 and by the House of Representatives on June 26 and again by the Senate
on the same day, since some amendments were introduced by the Lower House.
58. The Federal Senate has amended the Government proposal on the unification of the
ICMS interstate tax rate, creating a stalemate. An amended version was approved at the
Economics Affair Commission (CAE – Comissão de Assuntos Econômicos) and is now pending
a vote at the Senate. 53
59. The amended version of the proposal did not keep the gradual unification of the
ICMS interstate tax rate and has created several exceptions, resulting in a more complex
tax regime. For instance, products originating from the North, Northeast and Center-West
regions plus the state of Espírito Santo would pay a tax rate of 7 percent. In addition, goods from
the Manaus free zone and other 12 free trade zones in the North of Brazil would keep the 12
percent rate54
. Lastly, the old interstate tax rate of 12 and 7 percent would still apply to natural
gas, both imported and produced in Brazil. The Senate amended proposal also conditioned the
change in ICMS tax rate to the creation of the compensatory funds in a complementary law,
rather than an ordinary one. The complementary law requires approval from the absolute
majority of congressmen, while a simple majority suffices to approve an ordinary law55
. In
addition, ordinary laws can be changed by the Executive through Executive Orders, which take
effect immediately and are voted by Congress only after it is already in place. Thus, the rationale
53
The ICMS reform is embodied in three pieces of legislation. The interstate tax rate is dealt in a Federal Senate
Resolution, while the change in procedures to validate past tax incentives is foreseen in a complementary law. The
changes to the subnational debt interest rates are included in the same complementary draft law. Lastly, the
compensation and developmental funds are dealt in a Provisional Measure, which is an ordinary law proposal sent
by the Federal Government to Congress that produces immediate effects. It is valid for 60 days and renewable for
another 60 days. Beyond that, if Congress does not approve it, the law loses its effect. 54
Goods produced in these areas would have to follow the so called Basic Productive Process (Processo Produtivo
Básico – PPB), which is established by the Ministries of Trade, Commerce and Industry (MDIC) and Science,
Technology and Innovation (MCTI), adding another layer of complexity. 55
In numbers, an ordinary law can be approved by 129 votes out of 513 representatives, provided 257
representatives are present. A complementary law requires approval by 257 representatives. In the Senate, which is
composed of 81 senators, 21 votes are needed to approve an ordinary law, with a quorum of 41 senators, which is
the same number needed to approve a complementary law.
27
for having the funds in a complementary law is to ensure its longevity, by preventing the Federal
Government from changing the funds through a MP.
60. The ICMS reform approved at CAE reduces, but does not eliminate the room for the
fiscal war since the interstate tax rate magnitude and regional differentials are reduced. On
the other hand, the maintenance of a tax rate differential for wholesale and retail still allows for
the so-called “fiscal invoice tour”56
. Moreover, it increases the size of the tax rate differential in
the case of the free zones, boosting the incentive for the fiscal war. Finally, it has increased the
compliance cost of the tax, due to greater exceptions in tax rates.
61. In contrast, the Senate amendments did not change the essence of the Federal
Government’s proposal on the compensation and development funds. Overall, the Senate
changes aimed at strengthening the guarantee for the fund resources and give transparency and
participation to the states on the revenue loss calculation process. Two changes, however,
indicate a departure from the original government proposal. The first one increases the share of
budgetary resources in the FDR fund from 25 to 50 percent, maintaining the total value of the
fund unchanged. The second one creates four free trade zones that would benefit from the
privileged status granted to the existing eight ones.
62. Finally, the amended proposal also kept the original provisions regarding the
validation of past tax incentives unchanged. It included a mandate for past tax incentives to be
approved by state legislative and to be disclosed at the official Gazette. The main change was the
creation of a provision to safeguard the existing tax incentives until their expiration or 2033,
whichever comes first.
63. An impasse has also been reached in the subnational debt discussion in Congress as
an element of retroactivity was introduced in the amended version. Major changes were
made with respect to the proposed Complementary Law regarding the renegotiated debt
conditions. The proposed new interest rate and index (IPCA plus 4 percent capped at SELIC)
were maintained. However the Federal Government would in addition give a 40 to 45 percent
discount in the amount owed by the subnational government. This discount would promote a
similar effect to the retroactivity of the new debt conditions. In addition, the Federal Government
would refinance the outstanding amount in 25 years and municipalities with population larger
than one million inhabitants would be allowed to sign fiscal adjustment plans with the Federal
Government and contract loans if the agreed targets are fulfilled in a similar manner as the states.
In exchange, the fiscal space created would have to be spent in public investments or PPP
payments and there would be no more debt service ceilings.
64. In light of the changes proposed by the Senate, the Federal Government is debating
whether it is worth to go ahead with or abandon the reforms. Despite the changes promoted
by Congress, none of them are permanent yet since they need at least one more vote to be put
56
The “fiscal invoice tour” (passeio de nota fiscal) refers to a situation in which companies send only the fiscal
invoice and not the actual goods to a state where the interstate tax rate is 12 percent. In this state, the company
normally has a tax incentive wherein it pays only 3 percent, but receives tax credit worth of 12 percent. The
company then sells the product back to its original state, where the good is claiming a tax credit of 12 percent
against a tax debit of 6 percent (the difference between the interstate and the state tax rate), ending up with a net tax
credit of 3 percent.
28
into effect. Moreover, the President also holds a line veto power over them after approval by
Congress. In addition, the MP 599 that changes the interest rate on the subnational debt has
expired on June 6th57
.The recent wave of protests also blurred the picture, since reform of the
intergovernmental arrangements was not included in the five “pacts” proposed by the Federal
Government. Nonetheless, these reforms were included in the priority list of the Senate, whose
President vowed to put them to vote shortly.
v. Key issues left unaddressed by current reform proposals
65. Even though the government intention was never to promote the intergovernmental
reforms in a “big bang” approach, some key issues were left unaddressed. Such issues
include the difficulties faced by companies to claim their tax credits and some loopholes in the
subnational debt framework. The issues discussed here do not necessary represent the changes
that would yield the largest benefits to the economy, but rather those that would yield positive
benefits while at the same time not representing great disruptions to the current state of affairs.
66. The three main ICMS-related unaddressed issues are: (i) the difficulty of export
companies to realize the benefits of their tax exemption; (ii) the taxation of investment; and
(iii) restrictions to tax credits. These issues, if addressed, would not require introducing new
provisions in the ICMS, but rather deal with existing provisions that are not working properly.58
Export exemptions. Exported goods are exempt from ICMS since 1988 for manufactured
goods and since 1996 for primary products. However, due to the value added nature of ICMS
this has meant that exporting companies have accumulated tax credits, gained from the
purchase of inputs that cannot be compensated and should thus be returned in cash to these
firms. Since these returns would represent an actual cash outflow for the states and also
because the compensations from the Federal Government has fallen short of the actual losses,
states have not honored fully and timely the credits accumulated by exporting companies.
Thus, in fact exports continue to be taxed by ICMS. More importantly, now the taxation on
export companies can vary depending on the share of the production exported and also on the
company location. With the implementation of the national electronic fiscal invoice, the
Federal Government can now know the amount of credits accumulated by these companies.
This would allow the Government to try a new approach in which it can better control the use
of the compensatory resources sent to the states.
Taxation of investment. The acquisition of capital goods by companies is taxed by ICMS and
the credit can only be recovered in 48 months, with no inflation or interest rate adjustment,
thus increasing the cost of investment in Brazil. An immediate compensation of credits
would not cause a permanent revenue loss for the states, but rather a change in their revenue
flow which could be compensated by the Federal Government. Although it can be claimed
57
According to the Brazilian constitution, Provisional Measures are valid only for 120 days, period in which it has
to be voted by both the House of Representatives and the Senate in order to become an ordinary law and takes effect
permanently. 58
In this sense, the curtailment of the state governments’ power to issue regulations on ICMS in favor of the
creation of a single national rule (which would simplify tax compliance), as well as the merger of the ISS and ICMS
tax base, are not dealt with here because they would deviate from the piecemeal approach sought by the
Government.
29
that promoting investment should be as much in the interest of the state as of the Federal
Government, the current low investment rate of the Brazilian economy, which is a bottleneck
for sustainable higher long-term growth, make a compelling case for the Federal Government
to at least share the cost temporarily.
Tax credit restrictions. Relatedly, ICMS rules restrict tax credits to the inputs employed in
the industrialization process. Thus, companies have to separate their inputs between those
used for administrative purposes such as the company headquarters, making compliance
burdensome and giving a lot of discretion to the tax administration authority59
. The provision
to allow for all inputs to generate credits to the ICMS taxpayer is foreseen in the legislation
since 1996 to be implemented in 2007, which was postponed to 2011 and later postponed to
2020, reflecting both the unwillingness of the states to give up on revenues and its inability to
adjust its expenditures to lower revenues. Thus, any financial help from the Federal
Government would help the states prepare for the transition and avoid new delays in
implementation.
67. Lastly, one issue relating to the phasing out of the fiscal war is being overlooked in the
ongoing reform debate in Congress. The prevailing idea as can be seen by the Congress
amendments is to preserve the current tax incentives. However, the mere maintenance of these
tax incentives would create a wedge in the tax treatment between incumbent companies and new
entrants and even among old facilities and new facilities from existing companies, since the new
ones would not have the tax incentives that the old ones enjoy. This issue will have to be dealt by
CONFAZ since it has a potential to halt economic growth in the near future. A possible solution
discussed at CONFAZ would be to allow new entrants to receive the same tax incentives as
incumbents during the same period of time.
68. The FPE and royalties reforms underway do not envisage a major overhaul of the
intergovernmental transfers’ framework scheme. Key issues left unaddressed thus include the
framework’s fragmentation, its excessive devolving characteristic and insufficient transparency,
as pointed out by Ter-Minassian, (2012). The economic literature on this theme seems to lean
towards the position that equalizing transfers, either by fiscal capacity or expenditure needs, are
preferable than devolving or simple parametric rules60, 61
. Ter-Minassian (2012) also showed that
a distribution formula based on actual revenues would be more equalizing than the proposed
parametric ones. Nonetheless, there is some consensus in the literature on Brazil in that the
informational requirements needed for such transfers to work are not met presently. Thus, it
59
For instance, in order to obtain tax credit for the energy used in its factory plants, a company has to hire an
independent engineer to produce a technical report quantifying the share of the energy consumed by the company in
its industrialization process. 60
See Shah A. (2006). “A Practicioner’s Guide to Intergovernmental Fiscal Transfers”. Policy Research Working
Paper 4039, World Bank, Washington, DC.; and Wilson L.S, (2007). “Macro Formulas for Equalization”, In
Intergovernmental Fiscal Transfers: Principles and Practice, edited by Robin Boadway and Anwar Shah, chapter 8.
Washington, DC: World Bank 61
Equalizing transfers aim at reducing the disparity between jurisdictions in the amount of available resources to
fund public services, in which case they are named as fiscal capacity equalization or in bridging the gap between the
available resources and the expenditures needs of each jurisdiction. Devolving transfers simply channels the
resources to the jurisdiction in which they were collected, in this sense they reinforce the inequality between
jurisdictions. Lastly, the division of transfers between jurisdictions can be made based on revenues and expenditures
calculations or based in parameters, thus called parametric formula, such as population and income.
30
would seem wise to put in place a plan to generate the information needed for calculate and
implement these equalization transfers in the future.
69. The current subnational debt and fiscal framework was pivotal in the reduction of the
subnational indebtedness, helping the country to produce positive primary balances and
supporting macroeconomic stabilization. Moreover, it proved to be flexible enough to
accommodate an increase in the amount of debt contracted by subnational governments in
response to its sounder fiscal situation and the need to boost growth by addressing the
infrastructure gaps in Brazil.
70. However, a broader approach to subnational debt reform would have helped secure
resources to finance investment while safeguarding fiscal and debt sustainability. This is
particularly relevant in light of the increase in subnational demand for loans vis-à-vis the limited
resources from multilateral lenders and the increased exposure to public sector borrowers in the
public banks. Such reforms would not have required major changes in laws, but mainly in
resolutions and decrees as well as increasing transparency and some capacity building at the
subnational level coordinated by the Federal Government.
IV. The Expected Fiscal Impact of Alternative Reform Scenarios62
A. Results and discussion of simulations of changes to intergovernmental
transfers
71. This section presents the results of the simulation of the changes being promoted at
the intergovernmental transfers in Brazil, namely FPE, royalties and CFEM63
. The
simulations were carried out for an eight year period since they tend to be implemented in a
gradual pace and as such major changes are not expected from one year to another. Regarding
the uncertainty of the changes, since most of them are still under discussion, we opt to simulate
the changes with the highest likelihood of being effected at the moment in which this report was
being produced. In addition, depending on the transfer more than one possibility was simulated
and will be presented. The simulations then are consolidated to obtain a net result of the changes
being promoted. Lastly, some scenarios are constructed for this final net result based on different
reform assumptions.
72. The first result from the reform simulations to be presented is on FPE. Although the
FPE reform has been concluded, we opted to maintain two simulations and consolidate them
with the other concurrent changes in the subnational fiscal framework in order to assess a
different approach to FPE reforms. The first one reflects the proposal approved in Congress, and
recently converted into law (Lei Complementar 143/2013). The second proposal is a revenue
equalization one proposed by (Mendes, 2011). Both proposals are also compared against the
baseline case which is the fixed FPE coefficients in place today. In addition, a third proposal laid
62
The scenarios discussed in this section focus on the static distribution of gains and losses and, as a result, do not
provide an estimate of secondary effects from the simulated changes (e.g., on how they could affect incentives or
behavior of economic agents). 63
Royalties are grouped here under the transfers group, for a mere analytical purpose following the lines of (Ter-
Minassian, 2012). It should not be seen as an endorsement to any specific revenue classification of the royalties.
31
out in Ter-Minassian (2012c) was also simulated, but was not consolidated with the other
changes.
73. The reform approved in Congress maintains the current FPE shares until 2015 and
gradually introduces some parametric formulas starting in 2016. The parametric formula
will, however, be applied only to the amount of the FPE exceeding the previous year amount in
real terms, plus 75 percent of GDP growth. Therefore, in the long run, the FPE coefficients will
converge to the ones dictated by the parametric formula, which takes into account population and
per capita household income64
. However, the convergence will be very slow. It is estimated that
the full convergence would take between 300 and 400 years, depending on the scenario adopted.
The approved version differs from previous ones, since it envisages a slower transition, and more
rigid upper and lower bounds on the components of the formula to benefit less populated and low
income states. In addition, the approved law does not call for a new rule after 2018.
74. The new coefficients set by the parametric formula, after the transition is completed,
will spread the loss among more states and in a more equal manner, while the gain is
concentrated in fewer states. That is there are no big losers among loosing states, but there are
some states that stand out between the winners. This can be seen by looking at the descriptive
statistics. The number of states that will have their coefficient reduced is 15, while 12 states will
have their share increased. Among the losing states, the average loss represents a reduction of
10.5 percent in their coefficient, with a standard deviation of 0.06. The same figures for the
winning states show an average gain of 22.7 percent in their coefficient and a standard deviation
of 0.36.
75. The largest increase in absolute terms would be in the State of Amazonas, while São
Paulo would have the largest increase in relative terms. Amazonas share will go from 2.79%
to 4.25% - a 52.5 percent increase in relative terms. The state of São Paulo, would show a 67
percent increase, going from a 1% coefficient to 1.67%. On the losing side, Bahia would be the
state with the largest reduction in absolute terms – reduction of 0.98 percentage points, going
from 9.40% to 8.42%. The largest reduction in proportional terms would be the state of Roraima
(25.7 percent), which will see its share be reduced from 2.48% to 1.84%.
76. The changes, however, would not be very drastic, because the transition rule put in
place is extremely gradual. For example, in 2020 the state that would have lost the most –
Bahia - will have seen its FPE share reduced by 0.14 percentage points, i.e. its FPE share would
have been reduced from 9.40% to 9.25%. On the other hand, the state that would have gained the
most – Amazonas – will see its share goes from 2.79% to 3.01%. That’s to say that in 5 years less
than 15 percent of the convergence would have been made. This helps to explain why states and
legislators have agreed to this proposal.
77. The impact of the changes also depends on the relevance of FPE to the state’s total
revenues. That is to say the impact of the change will be bigger the larger is the proportion of
FPE in the state’s revenues, all other things equal. Thus, São Paulo which is the largest gainer in
relative terms would have seen its Net Real Revenue increase by a mere 0.1% due to the change
64
The introduction of the per capita household income instead of the more traditional GDP per capita criteria does
not change much the ranking among states. The biggest change is felt by Amazonas which displays the 10th
largest
GDP per capita, but ranks only in 19th
place in terms of per capita household income.
32
in FPE in 2020. On the other hand, Roraima would have seen its NRR decrease by 3.1 percent in
2020. Table 2 shows the estimated impact in terms of NRR for each state in 2020 under the two
proposals.
78. In regional terms, the Senate proposal would not represent a major change even after
the transition is completed. Currently, 85 percent of the FPE must be transferred to states in the
North, Northeast and Center-West. This share will be reduced slightly to 82.9 percent. The
Southeast region is the only one that will see its share increased overall, going from 8.48 percent
to 10.78 percent of total resources.
79. The second exercise simulated a revenue equalization mechanism. In this exercise, a
parametric formula proposed by Mendes (2011) that takes into consideration the per capita Net
Current Revenues (NCR) excluding FPE revenues is employed. Since it is an equalizing
mechanism, states share would be defined based on the inverse of their per capita NCR. In 2012,
the state with the highest per capita NCR was the Federal District with R$ 5,065.21 and the
lowest per capita NCR was registered in the state of Maranhão – R$ 677.72. It is important to
note that since this is not an absolute equalization, every state, would receive some transfer.
80. The revenue equalization proposal would yield more gainers than losers. In addition,
the average gain and the average loss would be higher than in the first proposal, evidencing a
greater change to the current coefficients in the equalizing proposal. For example, Bahia and
Pernambuco, the major losers would have their FPE coefficient reduced by 45.3 and 37.7
percent respectively. On the other hand, the main winners in absolute terms would be Alagoas
(from 4.16% to 7.07%) and Piauí (from 4.31% to 5.98%). However, the largest gains in relative
terms would accrue to São Paulo and Santa Catarina, whose coefficients would grow 100 and
95.3 percent respectively. Once again, since these two states are not heavily reliant on FPE the
change would represent an increase of 0.7 and 6.3 percent in their NRR. The biggest increase in
overall revenues would occur in Alagoas (38.9 percent).
81. Regionally, an increase is seen in the share of FPE in the South, Southeast and
Center-West regions and a decline in the other two. Overall, the three poorest regions would
receive 82.8 percent of the FPE instead of the 85 they receive today as mandated by law.
Interestingly also is to see that the interests within regions are not aligned. For example, the
Northeast has at the same time the two states with the largest losses and gains. That means that
opposed to conventional wisdom, if this proposal would be taken to a vote northeastern states
would not tend to vote together.
82. The third simulation is also focused on a revenue equalization model. It was proposed
by (Ter-Minassian, 2013c) and instead of the NCR, it takes the per capita NRR, excluding the
FPE revenues as well. This proposal takes as a reference value 105 percent of the per capita NRR
of the Federal District, the higher in the country. It then distributes 2/3 of FPE according to the
maximum redistribution criteria and 1/3 according to the maximum coverage criteria. It also
foresees a transition mechanism in which the nominal value of last year FPE is guaranteed to all
states. The main winners of such approach, after the transition is completed, would be the states
of Bahia, Ceará and Maranhão, while the biggest losers would be Tocantins and Sergipe.
33
Table 2 – FPE current proposed coefficients65
and impact of changes
83. Simulating royalties payments is more difficult than FPE. Firstly because the rules are
being questioned at the highest court. Therefore, we opted to simulate only the rule embodied in
Law 12.734/12. We take as the baseline the royalties’ distribution set by the previous oil law
(Law 9.790/97) ,
65
The coefficients presented under the Law 143 row are the ones that will prevail after the transition rule.
Law
143/2013
Marcos
Mendes
Acre 3.4210 3.3538 3.4787 -0.2% 1.3%
Alagoas 4.1601 5.1017 7.0745 1.9% 38.9%
Amapá 3.4120 3.8445 3.0983 1.5% -7.5%
Amazonas 2.7904 4.2548 2.4922 1.6% -2.2%
Bahia 9.3962 8.4196 5.1441 -0.5% -14.6%
Ceará 7.3369 6.8268 6.3644 -0.4% -5.8%
Distrito Federal 0.6902 0.6623 1.1228 0.0% 2.3%
Espírito Santo 1.5000 2.1704 1.9455 0.6% 2.9%
Goiás 2.8431 2.9746 2.7649 0.1% -0.5%
Maranhão 7.2182 6.4864 8.0148 -0.8% 6.2%
Mato Grosso 2.3079 2.0341 2.3292 -0.3% 0.2%
Mato Grosso do Sul 1.3320 1.1946 2.2905 -0.2% 11.2%
Minas Gerais 4.4545 4.7834 2.9571 0.1% -2.9%
Pará 6.1120 6.2050 4.8171 0.1% -7.5%
Paraíba 4.7889 4.3146 6.2113 -0.8% 16.3%
Paraná 2.8832 2.9869 2.9531 0.1% 0.2%
Pernambuco 6.9002 6.9155 4.2963 0.0% -13.0%
Piauí 4.3214 4.9372 5.9776 1.2% 22.0%
Rio de Janeiro 1.5277 2.1542 2.2313 0.2% 1.3%
Rio Grande do Norte 4.1779 3.9345 4.1987 -0.4% 0.2%
Rio Grande do Sul 2.3548 2.1907 2.6432 -0.1% 0.9%
Rondônia 2.8156 2.5853 2.6935 -0.5% -1.9%
Roraima 2.4807 1.8421 3.0232 -3.1% 18.0%
Santa Catarina 1.2798 1.1425 2.5036 -0.1% 6.3%
São Paulo 1.0000 1.6701 1.9996 0.1% 0.7%
Sergipe 4.1553 3.5050 4.2650 -1.3% 1.4%
Tocantins 4.3400 3.5093 3.1096 -1.8% -18.4%
Impact of FPE changes in
2020 (as a % of NRR)Current
(fixed)
Law
143/2013
Marcos
Mendes
34
84. In addition, forecasting the oil royalties values is a complex exercise due to the
variables involved. A detailed projection needs inputs not only on oil production, oil price and
exchange rate, but also on the distribution of this production by oil field and state, location
(onshore or offshore), production distribution between oil and gas and the oil price for each oil
well, which depends on their API (American Petroleum Institute) degree. Thus, as a first
approximation the simulations show the results of the new legal regime holding constant all of
these variables and assuming oil production to grow in line with government plans and GDP
growth, inflation and exchange rate to grow according to Bank projections.
85. The new royalties sharing rule, set forth by Law 12.734/12, if maintained, will
generate a major redistribution of these resources in favor of non-producing states and
municipalities. Currently, producing states and municipalities receive respectively 26.3 percent
and 35 percent of the royalties66
. In addition, states and municipalities receive 40 and 10 percent
of the special participation fee, which is an additional form of government take that is charged
only over high production and high profit oil wells. Non-producing states and municipalities
receive only 8.8 percent of the royalties, in the so-called special fund divided according to the
FPE and FPM rules, and no revenue from the special participation fee.
86. In the oil-sharing regime, there will be no special participation fee, but the royalties
rate was increased from 10 percent to 15 percent of the gross oil revenue. The share of non-
producing states and municipalities was augmented to 49 percent, while producing states share
was reduced to 22 percent and the municipalities to 7 percent. In addition, the new law also
changed the royalties’ distribution rules for existing and new oil fields in the concession regime,
favoring once again non-producing states and municipalities, which share will increase to 54
percent in royalties and 30 percent in the special participation fee. The criteria to distribute the
resources among non-producing states and municipalities remained the FPE and FPM, which
reinforces the effect of the changes in the FPE.
87. Two other significant changes were introduced. The first one determines that
subnational governments cannot receive royalties both as producer and from the special fund,
having to choose between these two alternatives. If the state gives up its share as producer, the
amount is redistributed to all states receiving royalties from the special fund. If the state retains
its producer quota, the renounced special fund share is redistributed to all states, except the
renouncing state. This rule not only turns the decision into a dynamic wherein one state decision
affects other states decisions, but also makes forecasting rather problematic. The second change
applies only to municipalities and determines that the total government take received by a
municipality cannot exceed twice the value of the FPM.
88. The application of the new royalties distribution rules is currently suspended. Due to
the major loss inflicted to the producing states and municipalities not only on the prospective oil
fields, but also on the producing ones, three states filed injunction claims at the Supreme Court
against the changes. The court has not decided on the merit of the changes, but has suspended its
effect due to the devastating effects it would cause in some subnational government’s finances.
Therefore, the prevailing rules for royalties and special participation fee are still the ones from
66
The shares differ between the first and the second half of the royalties rate. Thus, the number presented is the
average.
35
the original law (Law 9.478/97). The Federal Government has tried to change the royalties
sharing rules for oil exploration contracts signed after December 3rd
, 2012 through the Executive
Order – MP 592/2012, but this MP expired on May, 12th
2013.
89. Despite the uncertainty regarding the new rules, the losers and winners from this
possible change are clear. The major losers would be the two largest oil producing states in
Brazil, namely Rio de Janeiro and Espírito Santo. These two states accounted in 2012 for 89.4
percent of oil production in Brazil. Rio de Janeiro, the largest producer, would lose in 2020
revenues worth of R$ 12.3 billion or 18.8 percent of its NRR, with little variation in both
scenarios. By the same token, Espírito Santo would suffer a loss of R$ 2.2 billion, which is
equivalent to 11.5 percent of NRR, again with little difference between scenarios 1 and 267
. Only
two other states would lose resources: Amazonas and Rio Grande do Norte. However, their loss
would be small. The first one would lose 1.1 and 1.7 percent of its NRR in scenario 1 and
scenario 2 respectively, while the second state would face a loss only under scenario 1 and of
small magnitude – 1.7 percent of NRR.
90. The major winners on the royalties redistribution are small and less developed states
such as Acre, Amapá and Roraima. Acre would see an increase of revenue of 12.5 percent of
NRR under scenario 1 and 15.9 percent of NRR under scenario 2. Amapá’s revenues would
increase by 15 and 10.7 percent of NRR under scenarios 1 and 2 respectively and the same
figures for Roraima would be 9.8 and 16.4 percent. These states share some characteristics that
have benefitted them in the policy change scenario. They currently do not produce any oil or gas,
they have low GDP and household income per capita and as such they are being benefited by the
FPE change as well.
91. The other producing states such as Bahia, Ceará, Sergipe and São Paulo would not
incur losses. These would happen due to their small oil production and by the fact that they have
a large FPE coefficient. São Paulo is a sui generis case. In the portrayed scenario, it would
benefit from the changes because its current production is very low and also due to the projected
increase in its FPE quota in both scenarios, despite its absolute small value. However, the state of
São Paulo is probably the subnational jurisdiction with the highest perspective of oil production
increase since a large share of the new discoveries was found in its territory. Lastly, there are few
differences between scenario 1 and 2, since the only change is in the mechanism to devise the
FPE quotas.
67
Please refer to Table 3 for explanation on the differences between scenario 1 and 2.
36
Figure 10 – Estimated royalties revenues losses by state in 2020 (% of NRR)
92. The last change in transfers under analysis is the change in mining royalties (CFEM). The draft law submitted to Congress will change not only the CFEM rate, but will replace the
whole legal framework governing mining exploration in Brazil. For instance, mining rights will
be auctioned and only companies will be able to participate. The winning company will have to
commit to minimum investment amounts and the new regulatory framework will be enforced by
a regulatory agency to be created. The CFEM maximum rate was set at 4 percent, however the
specific rate for each mineral will be set by the Executive power by decree. Lastly, the CFEM
base was changed from net to gross revenues. The revenue sharing rules was kept unchanged,
however nothing forbids the Congress to try to change these rules as it was done with the oil
royalties.
93. Once again, simulating the effect of the changes on the CFEM revenues is an
uncertain exercise. The uncertainty is reinforced by the fact that the new tax rates were not
disclosed and can be changed easily in the future due to the fact that an Executive Power decree
does not require legislative approval. In order to forecast the revenues from CFEM, it was
assumed that mining production will grow in line with government plans and that the average
effective tax rate will double due to a combined effect of higher tax rates and the change in the
base from net revenues to gross revenues.
94. Due to the small aggregate collection of the mining royalties, only the two major
mining states would be relevantly affected by changes in CFEM. Minas Gerais would see an
increase of R$ 392 million in 2014 up to R$ 536 million in 2020, while Pará would see an
increase ranging from R$ 379 million to R$ 510 million in the same period. By 2020, these gains
would represent an increase of 0.8 percent of NRR in Minas Gerais and 2.4 percent in Pará.
12.5%10.0%
15.0%
-1.1%
2.3%
6.4%
0.6%
-11.5%
2.8%
8.1%
2.6%2.3%1.5%
5.8%8.0%
1.6%
5.6%
10.8%
-18.8%
-1.7%
1.2%
6.3%
9.8%
0.9%0.0%
5.5%8.3%
15.9%16.1%
10.7%
-1.7%
0.5%
6.5%
1.1%
-11.5%
2.9%
12.0%
4.1%5.1%
0.7%
5.5%
12.9%
2.5%
5.3%
8.1%
-18.7%
0.4%1.6%
7.0%
16.4%
2.4%0.4%
2.9%
8.4%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Scenario 1 Scenario 2
37
B. Results and discussion of simulations of changes to ICMS regime
95. This section presents the simulations for the changes in ICMS under two scenarios.
The first is the final government proposal as submitted to Congress and the second is based on
the latest version approved by the Senate Committee, which kept the interstate rate differential
between Brazilian states and created some exceptions to the general rule. Additionally, the effect
of the change in ICMS on distance sales transactions (e-commerce, catalogue sales, etc) is not
included in the simulations for both scenarios.
96. The methodology for the simulation exercises uses the electronic fiscal invoice
database as a starting point. The database is supplemented with data on transport services,
rural production and administrative supplies68
purchases provided by each state. The database
was checked for consistency by the states and distorting figures were eliminated resulting in a
more refined database than the one used by Khair (2011). In addition, the database is also more
recent since the aforementioned work used data from June, 2010 to May, 2011, while this study
draws upon invoices from the year 2011.
97. Despite the advantages of having a national and refined database, the methodology
has some limitations imposed by the data69
. First of all, it does not capture the changes in
ICMS revenues brought about the Senate Resolution that unified the interstate tax rate on
imported goods, since it became effective only in 201370
. Therefore, it does not reflect so
accurately the current scenario. Secondly, it does not distinguish taxes that were effectively
collected from those that were just registered and not paid due to fiscal war benefits. This occurs
because most of these benefits are given not as a reduction in the tax rate, but as a presumed tax
credit. This is paramount since it tends to overestimate the loss of the most active states in the
fiscal war. It is also important since under the government proposal these losses would not be
compensated. Additionally, it is not possible to differentiate the origin of the goods traded in the
case of the Manaus Free Zone and other Free Trade Areas, as well as trade in natural gas.
Therefore some simplifying assumptions had to be made in order to simulate the exceptions
foreseen in the proposals. For example, all goods originating from Amazonas are supposed to
come from the Manaus Free Zone and the trade on natural gas was simulated through a tax rate
reduction. This last assumption tends to overestimate the loss to the state of Mato Grosso do Sul
(MS) since the pipeline through which natural gas is imported from Bolivia enters Brazil via MS.
Another important caveat is that the ICMS reform is not a zero-sum game, i.e. the amount of
losses not necessarily equals the amount of the gains since not all tax debts in one jurisdiction
translates into credits in another jurisdiction. Additional distortions may also arise from the
complementary data provided by the states on transport services, agricultural production and
administrative supplies purchases. Lastly, the estimates are done based on the interstate trade
structure prevailing in 2011. Thus an implied assumption is that this structure will not be
changed until 2020. The values obtained were adjusted according to the expected inflation and
GDP growth, assuming tax elasticity equal to 1, since they were in 2011 values.
68
“material de uso e consumo” 69
The Ministry of Finance has signaled that for the 2012 database some improvements will be made, which will
mitigate, at least partially the limitation in the current database. 70
For instance, the Rio de Janeiro Secretariat of Finance reported an increase of 38 percent on the value of the goods
imported through its ports in the first two months of 2013.
38
98. In the first scenario71
, the aggregate loss due to the unification of the interstate tax
rate amounts to R$ 5 billion in the first year, growing up to R$ 22.7 billion after the
transition is complete. 19 states would win ICMS revenues, while eight would lose revenues.
The average gain in 2020 would be equal to 4 percent of NRR, while the average loss would be
10.4 percent of the NRR, evidencing the concentration of the losses. It is important to note that
this is a static exercise and thus not take into account dynamic gains that would accrue from tax
evasion schemes (backed by fiscal war incentives) that would be no longer profitable in this new
scenario. Thus, states most affected by the fiscal war, usually the most developed ones, would
probably have larger benefits than the ones estimated here.
99. The main losers as expected would be the net exporting states. São Paulo would have a
loss of 2.6 percent of NRR in 2014, increasing to a loss of 4.5 percent in 2020. It also would
show the largest loss in absolute terms: R$ 8.3 billion, accounting for 37 percent of the total loss
in 2020. However, some states that have developed its industrial sector, largely to tax benefits
granted in the 1980s and 1990s, that have become net exporters in recent years such as Bahia and
Góias would also lose revenues. The first state would lose 2.3 percent of its NRR, while the
second one would lose 13.8 of NRR. Lastly, the states of Santa Catarina, Mato Grosso do Sul
and Espírito Santo, which appears as the main losers, with losses of 15, 20.6 and 21 percent of
NRR, have their losses overestimated due to the limitations of the methodology explained above.
Therefore, even though they are losers due to the proposed ICMS changes, it is hard to sustain
that they would be the major losers.
100. On the winning side, there are the less developed and net importers states such as
Maranhão, Rio Grande do Norte and Piauí. These three states would enjoy a revenue gain
worth of 8.3, 8 and 7.3 percent of their NRR in 2020. They do not have relevant industrial
production, especially sold outside their boundaries and most of the goods consumed come from
factories outside the state. For example, if a good was made in São Paulo and sold in Maranhão,
the latter would collect a tax rate of 11 percent, considering a total rate of 18 percent and now
will collect a tax rate of 14 percent. The gain would be even larger if the good was made in
Bahia, since Maranhão used to collect 6 percent and will collect 14 percent after the transition.
101. The revenue gains however would not be restricted to less developed states, as Minas
Gerais and Rio de Janeiro are among the main winners. These two states would enjoy
revenue gains equivalent to 5.6 and 10.4 percent of NRR in 2020. Although these states show
levels of high development within Brazil, their production is concentrated in items of which
revenues accrue to the destination state (energy) or are tax exempt such as exports, thus
explaining their net importer status.
102. In terms of regional distribution, losers are concentrated among the emerging states
which have a higher interstate tax rate. In fact, the only state with a relevant loss that is from
an advanced region and thus receives less ICMS in the distribution is Santa Catarina. This
finding is very important since the initial tax reforms discussion in the 1990s always framed the
advanced states as the main losers and thus the major hindrances for the reform. However,
almost two decades after the beginning of the tax reform discussion the current numbers are
71
The reform simulated in the first scenario is the one submitted by the government to Congress as discussed before
(see paragraph 40).
39
showing that the economic geography of Brazil has changed and that the initial reform losers are
now winners and that the main losers are now the states that have initiated the fiscal war in the
1980s and 1990s. Once again as in the case of FPE, a clear cut division between regions cannot
be made since there are losers and gainers almost within every region.
103. The losses incurred in the second scenario72
are smaller than in the first one. The total
losses in 2014 would amount to R$ 2.7 billion escalating up to R$ 20.8 billion in 2020. The
number of losing states would also be reduced to 7 and consequently the number of states
gaining from the reform would be 20. Pernambuco would be the only state changing from a
losing position in scenario 1 (- 0.3 percent of NRR) to a winning position (+ 0.3 percent of
NRR). The beneficiaries states would be again Rio de Janeiro, Maranhão and Rio Grande do
Norte, while the losing states would remain to be Santa Catarina, Espírito Santo and Mato
Grosso do Sul. In fact, the winning and losing states are roughly the same with a few differences
in positions.
104. The smaller losses in the second scenario are explained by the maintenance of the
interstate rate differential and the inclusion of new exceptions. The difference in 2020
between the two proposals is not large. The main change is with Santa Catarina, whose loss
would be reduced by 1.8 percentage points of NRR in the second scenario. This small difference
however is misleading since in 2020 the transition in the interstate tax rates would not be
completed in both scenarios. By 2020, in scenario 2 there are three more steps to be fulfilled in
the transition trajectory while in scenario 1 there is only one. After the transition is completed the
larger size of the loss under the first scenario becomes clearer. For example, the loss of the state
of Góias is reduced from 25.9 percent of ICMS revenues to 14 percent.
Figure 11 – Impact of ICMS reform under scenario
1 in 2020 (as a % of NRR)
Figure 12 – Impact of ICMS reform under scenario
2 in 2020 (as a % of NRR)
105. Concerning the change in taxation of goods sold through distance sales, six states
would lose revenues. The main losers would be Amazonas and Santa Catarina, while in São
Paulo gains and losses would even out73
. The methodology pitfalls however seems to be at its
highest in this simulation. First of all, the database does not differentiate the distance sales
72
The reform simulated in the second scenario is the one embodied in the proposal approved in the first committee
of the Senate and is explained in paragraph 59. 73
The states of São Paulo and Rio Grande do Sul have informally acknowledged that according to their internal
estimate they would loose revenues.
10%
8% 8% 7%6% 5% 5% 4% 4% 4% 3% 3% 2% 2% 1% 1% 1% 1% 1%
0%
-2%
-5%-5%
-14%-15%
-21%-21%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Scenario 1
9%8% 7% 7%
5% 5% 4% 4% 3% 3% 3% 3% 2% 1% 1% 1% 1% 1% 1% 0%
-2%
-4%-5%
-13%-13%
-20%-20%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Scenario 2
40
transactions within the transactions to non ICMS taxpayers. Secondly, it does not take into
account the ICMS paid through Substituição Tributária in distance sales transaction. This not
only reduces the amount of the ICMS revenues that should be redistributed, but also impacts the
estimation of the outgoing effective ICMS tax rate which lowers the estimated loss and
consequently increases the gains for the whole exercise. Therefore, it was decided not to
incorporate such estimation in the consolidation of the intergovernmental finance reforms.
C. Results and discussion of simulations of changes to subnational borrowing
framework
106. Regarding debt payments, again two scenarios were simulated. The first one reflects
the federal government proposal which is a simple reduction in interest rates to 4 percent and the
change in the indexator from IGP-DI to IPCA. As a simplifying hypothesis, it was assumed that
IPCA + 4 percent is at least as advantageous as SELIC. The second scenario simulates the
changes proposed by the House representative in charge of appraising the Government’s
proposal. This proposal not only reduces the interest rate to 4 percent and changes the indexator
to IPCA, but also gives a 40 percent discount in the amount of the debt owed and extends the
maturity of the outstanding debt to 25 years.
107. The debt simulation incorporated some simplifying assumptions. To start with, only the
renegotiated debt under Law 9.496/97 was simulated74
. Thus, the reader must be aware that the
current debt and debt service are higher. However, in most states this debt represents more than
90 percent of the states’ debt stock. The debt simulation was carried out on annual basis, not on
monthly payments as in the original contract. All payments were assumed to have started in
1998, which would leave 15 years until maturity. Revenues are assumed to grow in tandem with
inflation and GDP growth. Lastly, IGP-DI variation was assumed to be equal to IPCA.
108. As opposed to the changes in the FPE and ICMS, the proposed changes in the debt
will benefit all states but Piauí and Tocantins. The first one has already paid out all its
renegotiated debt with the Federal Government, while the second one did not have any debt
renegotiated since it had been founded in 1988. This happens because on the debt the
redistribution is between federal and subnational level whereas in the former the redistribution
occurs between state governments. However, for some states, under scenario 1, the reduction in
the interest will represent an immediate relief in their cash flow while for others the gain will be
in the long run debt sustainability, since they will still pay a debt service that is lower than the
actual installment due to the debt service cap foreseen in the debt renegotiation contract. That is
to say that the states that have a debt residual, accumulated due to the rule that caps the debt
service to a percentage of the NRR will not experience a relief in their cash flow in the short
term. Four states – Minas Gerais, Rio de Janeiro, Rio Grande do Sul and São Paulo – are in this
situation. Thus, for these states the reduction in interest rate would translate in accelerated
amortization and smaller residuals at the end of the contract. In addition, states with larger debt
amounts would have a greater benefit in absolute terms. Lastly, three states – Alagoas, Pará and
Minas Gerais – have debt tranches with interest rates at 7.5 percent, thus the proposed reduction
74
Information was obtained from the credit operation cadastre form sent by all states to STN regarding the 2012
data.
41
would almost halve their interest bill. Under scenario 2, all states would have not only a debt
sustainability improvement, but also a short term cash flow relief.
109. The interest rate reduction from 6 to 4 percent would save R$ 8.1 billion over the
2013-2020 period for the states under scenario 1. In absolute terms, the main saving would be
at the state of Rio de Janeiro with R$ 1.3 billion. According to the simulations, São Paulo, Minas
Gerais and Rio Grande do Sul would still generate residual throughout the whole simulation
period and would thus not reap any budget saving in the study horizon. On the other hand,
Alagoas75
would start having cash flows gains already in 2013 with the change while Rio de
Janeiro would face the same situation in 2018.
110. The reduced interest rates and the extended maturity would allow the states to save
R$ 182.8 billion over the 2013-2020 period under scenario 2. Saving in year one would vary
from 0.2 percent of NRR in the state of Amapá to 8 percent of NRR in the state of Alagoas. The
main beneficiaries would be the states with the largest debt in proportional terms which would
see their debt service reduced, while still accruing gains on the sustainability front as well. For
example, the state of São Paulo in the baseline as well as in the first scenario would have to pay
the debt service by the cap: 13 percent of NRR, however under scenario 2 the debt service would
almost halve to 6.9 percent of NRR already in 2013.
111. Debt sustainability at the state level would be improved under both proposals,
however federal government balance sheet would worsen considerably in the second
scenario. Figure 14 shows that despite not reaping any budget gain until 2020, highly indebted
states such as São Paulo and Rio Grande do Sul would see a reduction in their debt-to-revenues
ratio under scenario 1. The improvement in debt sustainability under scenario 2 is more
remarkable as expected. For some states it would represent almost a 50 percent cut in their debt-
to-revenues ratio.
Figure 13 – Debt service payments reduction in
2020 (as % of NRR)
Figure 14 – Debt Stock in 2020 in highly indebted
states (as % of NRR)
75
The simulation for Alagoas was done under the assumption that the state pays interest rate of 7.5% and committed
15% of its NRR. However, due to an injunction from the Supreme Court, the interest rate was reduced to 6% and the
commitment to 11.5%. In this case, Alagoas savings would be reduced from R$ 968.9 million in the first scenario to
R$ 657. 4 million, and from R$ 4,239.2 million to R$ 3,927.7 million in the second scenario for the whole period.
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Pia
uí
Toca
nti
ns
Am
apá
Rio
Gra
nd
e d
o N
ort
e
Ro
raim
a
Am
azo
nas
Par
á
Cea
rá
Dis
trit
o F
ed
eral
Esp
írit
o S
anto
Acr
e
Par
aíb
a
Serg
ipe
Mar
anh
ão
Pe
rnam
bu
co
Mat
o G
ross
o
Bah
ia
Go
iás
Ro
nd
ôn
ia
Par
aná
San
ta C
atar
ina
Mat
o G
ross
o d
o S
ul
Ala
goas
Rio
Gra
nd
e d
o S
ul
São
Pau
lo
Min
as G
era
is
Rio
de
Jan
eiro
Scenario 1 Scenario 2
58%
112%
94%
147%
113%
57%
87%
74%
118%
89%
49%
67%62%
77%67%
0%
20%
40%
60%
80%
100%
120%
140%
160%
Alagoas Minas Gerais Rio de Janeiro Rio Grande do Sul São Paulo
Baseline Scenario 1 Scenario 2
42
D. The net result: Potential gainers and losers
112. In order to consolidate all changes in the subnational fiscal framework, two aggregate
scenarios were put together in addition to the baseline case (see Table 3). In the first
aggregate scenario, which is the most likely one, FPE is redistributed according to the proposal
approved by Congress. Royalties are distributed according to the new law, thus also following
the new FPE coefficients. The ICMS reform simulated is the original government proposal. In
the second aggregate scenario, FPE is distributed in accordance with the revenue equalization
proposal by Mendes (2011) without transition and so are the royalties. Finally, ICMS reform
takes the shape of the last version approved in Senate which is still provisional. In addition, both
scenarios share the same hypothesis for the mining royalties – doubling the tax rate. Lastly, for
the debt which the first scenario assumes an interest rate reduction to 4 percent and the change of
index to IPCA. The second scenario reflects the interim proposal by the lower chamber of
Congress, which includes a discount of 40 percent in the debt stock and a maturity extension of
10 years. The baseline scenario reflects the situation before any reform was implemented.
Table 3 – Outline of the Reform Scenarios
113. A few assumptions had to be made in order to project all scenarios until 2020.
Revenues were assumed to grow in line with GDP and inflation. These projections were obtained
from the April 2013 World Economic Outlook (WEO). Federal Government projections for oil
and mining royalties were used as well as exchange rate projection also from WEO was inputted
to calculate royalties revenues. The transfers and debt simulations was carried out by the authors
of this paper and its background papers resorting to public sources, while the ICMS simulations
due to its complexities were obtained directly from CONFAZ. Lastly, the results are presented in
net terms, which means that revenues were summed up and debt payments were subtracted from
that amount. Thus, reductions in debt payments are reflected in larger available revenues.
Baseline Scenario 1 Scenario 2
FPE fixed coeficientsProposal approved by
Congress (LC 143/13)
equalization transfer
(Marcos Mendes)
RoyaltiesLaw 9.790/97 (old
regulatory regime)
Law 12.734/12 for all
fields with FPE as in
the approved proposal
Law 12.734/12 for all
fields with FPE as an
equalizing transfer
CFEM current rules tax rate doubled tax rate doubled
Reforma
ICMS
Current interstate tax
ratesGovernment Proposal
Senate interim
version
PEC
197/12Not included Not included Not included
DebtInterest
rateIGP-DI + 6% to 9% IPCA + 4%
IPCA + 4%, 40%
discount on stock and
25 year maturity
Transfers
ICMS
43
114. Looking first only at the consolidated results from the changes in transfers a couple
interest conclusions emerge. The first one is that under scenario 1, the net result, specially the
losses, are dominated by the results in royalties. Thus, Rio de Janeiro and Espírito Santo are the
main losers, despite the gains obtained with the changes in FPE and CFEM. For example, Rio
would have a loss of 18.8 percent of NRR in 2020 from royalties, only partially compensated by
the 0.2 percent gain in FPE, resulting in a total loss of 18.6 percent of NRR.
115. Rio Grande do Norte is an interesting case. It is a net loser under scenario 1 since it
would lose revenue in both FPE reform (-0.4 percent of NRR) and in royalties (-1.7 percent of
NRR) since it is an oil producing state. However, its total losses would amount to 2.1 percent of
NRR in 2020, which is far from being unmanageable. Under scenario 2, however Rio Grande do
Norte turns from a net loser to a net gainer, adding to a total gain of 0,6 percent of NRR in 2020.
116. Under scenario 1, all other states profit from the changes. In this case, eventual losses
in FPE are compensated by gains on royalties and vice-versa. This is the case of Bahia and
Amazonas. The first one losses 0.5 percent of NRR in 2020 due to the changes in FPE, but gains
2.3 percent of NRR from the royalties reform, The second state faces an opposite situation, in
which it losses 1.1 percent of NRR since it is an oil producing state, but gains 1.6 percent of
NRR due to the FPE reform.
117. Under scenario 2, not all losses from FPE changes can be compensated by gains in
royalties. This happens due to the fact that in this scenario there are no transition rule in the FPE
change, In addition, the revenue equalization proposal promotes bigger changes in the
coefficients than the approved proposal by Congress, even after transition ends. This is the case
for instance of Pernambuco, which would lose 13 percent of NRR from change in FPE and
would gain only 5.3 percent of NRR from the royalties reform, ending up with a loss of 7.7
percent of NRR in 2020.
118. In scenario 1, the losses are dominated by the changes in oil royalties and ICMS
reform. Thus, the main loser in relative terms would be the state of Espírito Santo, which loses
revenues in both royalties and ICMS. In numerical terms, Espírito Santo loses 10.9 percent of
NRR due to the transfers’ reform and 21 percent of NRR because of ICMS. The savings from the
reduced interest rate on debt would only represent a gain of 0.1 percent of NRR The state loss is
attributable to the change in oil royalties distribution since the state is the second largest oil
producer in Brazil but also to the change in ICMS, which in some years is more severe than the
revenue loss caused by the change in royalties distribution. In addition, the state is facing another
loss which was not accounted here which is the unification of the interstate tax rate for imported
goods implemented in 2013. The usual caveat of overestimating the ICMS loss also applies here,
which may set the actual loss to be lesser than the forecast, however due to the magnitude of the
loss and the small gains obtained with FPE as well as with the debt leave the state in a worse-off
situation. On the other hand, Rio de Janeiro losses from transfers (-18.6 percent of NRR) is
strongly attenuated by a large gain in ICMS (10.4 percent of NRR) and debt payments (1.2
percent of NRR).
119. There is a second cohort of states, whose results are determined by the loss suffered in
the ICMS reform. This group is comprised of Santa Catarina, Góias and Mato Grosso do Sul.
This last state as an example, would see its transfers gains of 2.2 percent of NRR wiped out by a
44
loss of 20.6 percent of NRR in the ICMS reform. Once again, due to the limitations in the
methodology the uncertainty regarding the amount of their loss is bigger than for the other states.
Lastly, Santa Catarina is facing a concurrent loss from the reduction in interstate tax rate on
imported goods, to end the so-called Ports war, that it is not being taken into account here. .
120. In the case of São Paulo the driver of the loss is the ICMS reform. Even though in
relative terms the state would deal with an overall loss of only around 4.4 percent of its NRR (the
sole loss caused by the ICMS would be 4.5 percent of NRR), it would face the largest loss – R$ 8
billion in 2020 – in absolute terms due to the size of its ICMS revenues.
121. The main winners are non-oil producing small, less developed states with a moderate
debt level. This is the case of Alagoas. Amapá, Maranhão and Piauí. These four states presented
not only the largest gains, but were benefitted by all changes promoted. For example, Amapá
would see its transfers augmented by 16.6 percent of NRR in 2020 and its ICMS revenues
increased by 2.4 percent. The change in debt rules would represent a gain of less than 0.1 percent
due to its low debt level. Alagoas however would reap a 1,5 percent of NRR gain on the debt, to
sum up with gains of 11.8 and 3.6 percent of NRR in transfers and ICMS respectively, making
up for a 17.1 percent of NRR overall gain in 2020.
122. The second scenario shows changes with higher magnitude and different set of
winners and losers. For example, in the first scenario the main winners had gains of 19.3
percent of its NRR at most in 2020, while Alagoas would have increased its resources by 65
percent of its NRR in 2020 and Piauí would do so by 37 percent of NRR in the second scenario.
These differences can be attributed to three factors. The first one is that in the second scenario
the change in FPE coefficients is more marked and done without a transition rule. The second
factor is the ICMS reform that by maintaining the interstate tax rate differential and other
exception alleviated the loss for several states and reinforced the revenue position of small
northeastern states which have become the main winner in this scenario. The third one is the
debt, which is highlighted below.
123. Under scenario 2, there would be a major influence from the changes in debt in the
overall net result. This is due to the major haircut, namely, the interest reduction and maturity
extension that would be made in the renegotiated debt under this scenario. The best example of
this influence is in the state of Rio de Janeiro. The state would accrue a gain of 8.2 percent of
NRR, which together with the gains in the ICMS would counterbalance the losses arising from
the transfers reforms (-17.4 percent of NRR), leaving the state in a net gainer position with 0.2
percent of NRR. The same would happen to São Paulo, which would see its ICMS loss more
than compensated by the change in debt condition leaving the state better off with additional
resources worth of 4.8 percent of NRR. Another great beneficiary would be Rio Grande Sul
which would go from a bottom 19th
position to a top 8th
position in terms of net gains.
124. Despite some changes in ranking, the characteristics of the winners and losers are
roughly the same under both scenarios. States with the largest gains continue to be small states
with low development status, while losing states are the ones who suffer the largest loss on
ICMS and royalties.
45
125. As it can be seen by the numbers and figures, the changes do not cancel out each other
in the majority of states. That is the losses in one reform are not compensated by the gains in
other reforms. Therefore, in order to avoid losses that could jeopardize fiscal sustainability at the
subnational level an external source or funding, probably the Federal Government, must be used
in order to soften the losses and make the reform viable. That said, a few changes in the reforms
would increase the space for internal compensation and reduce the need for external resources.
The royalties redistribution imposes considerable losses on the two largest oil producing states.
A more balanced rule would help, especially since the slow transition rule of the FPE reduces the
requirements of windfall gains from the royalties to compensate them. The proposed changes in
the borrowing framework would not provide significant relief in the short term. However, further
changes in the framework must take into account not only the existing fiscal responsibility
framework but the moral hazard risk of easing conditions for worse performing states. Lastly, the
ICMS estimates would still benefit from further refining the database and methodology since the
major losers are states that rely heavily on tax incentives, thus impairing the accuracy of the
simulated results.
Figure 15 – Net results in 2020 under both scenarios (as % of NRR)
17% 19%
8% 8%
16% 15%
8%2%
8%5% 8% 6%
13%19%
3%
10%
-4%
-17%
-3%-7%
4%
-13%
6%8%
-10%
0%
-32%
65%
37% 36%31%
27%21%
11% 10% 9% 8% 8% 8% 6% 6% 5% 5% 5%1% 0% 0%
0% -1%-6% -8% -9%
-15%
-28%-40%
-20%
0%
20%
40%
60%
80%
Scenario 1 Scenario 2
46
Table 4 – Gains and losses in scenario 1 vis-à-vis baseline scenario in 2020
FPE Royalties CFEM Net Transfers ICMS Debt Net Results
Acre -0.2% 12.5% 0.0% 12.3% 3.0% -0.1% 15.5%
Alagoas 1.9% 10.0% 0.0% 11.8% 3.8% -1.5% 17.1%
Amapá 1.5% 15.0% 0.0% 16.6% 2.4% 0.0% 19.0%
Amazonas 1.6% -1.1% 0.0% 0.5% 3.5% -0.1% 4.1%
Bahia -0.5% 2.3% 0.1% 1.9% -2.3% -0.2% -0.2%
Ceará -0.4% 6.4% 0.0% 5.9% 3.8% -0.1% 9.9%
Distrito Federal 0.0% 0.6% 0.0% 0.6% 4.5% -0.1% 5.2%
Espírito Santo 0.6% -11.5% 0.0% -10.9% -21.0% -0.1% -31.8%
Goiás 0.1% 2.8% 0.2% 3.1% -13.8% -0.4% -10.4%
Maranhão -0.8% 8.1% 0.0% 7.2% 8.3% -0.2% 15.8%
Mato Grosso -0.3% 2.6% 0.0% 2.3% -5.3% -0.2% -2.8%
Mato Grosso do Sul -0.2% 2.3% 0.2% 2.2% -20.6% -1.0% -17.3%
Minas Gerais 0.1% 1.5% 0.8% 2.4% 5.6% 0.0% 8.0%
Pará 0.1% 5.8% 2.4% 8.3% 5.2% 0.0% 13.5%
Paraíba -0.8% 8.0% 0.0% 7.2% 0.8% -0.1% 8.1%
Paraná 0.1% 1.6% 0.0% 1.7% 0.6% -0.5% 2.7%
Pernambuco 0.0% 5.6% 0.0% 5.6% -0.3% -0.2% 5.6%
Piauí 1.2% 10.8% 0.0% 12.0% 7.3% 0.0% 19.3%
Rio de Janeiro 0.2% -18.8% 0.0% -18.6% 10.4% -1.2% -7.0%
Rio Grande do Norte -0.4% -1.7% 0.0% -2.1% 8.0% 0.0% 6.0%
Rio Grande do Sul -0.1% 1.2% 0.0% 1.1% 0.9% 0.0% 2.0%
Rondônia -0.5% 6.3% 0.0% 5.8% 1.4% -0.4% 7.5%
Roraima -3.1% 9.8% 0.0% 6.7% 1.1% -0.1% 7.8%
Santa Catarina -0.1% 0.9% 0.0% 0.8% -15.0% -0.6% -13.5%
São Paulo 0.1% 0.0% 0.0% 0.1% -4.5% 0.0% -4.4%
Sergipe -1.3% 5.5% 0.0% 4.3% 3.6% -0.2% 8.0%
Tocantins -1.8% 8.3% 0.0% 6.5% 1.6% 0.0% 8.1%
* For the debt column, negative numbers means savings in relation to the baseline
Scenario 1 (as a % of NRR)
47
Table 5 - Gains and losses in scenario 2 vis-à-vis baseline scenario in 2020
V. Conclusions: Whither Brazil’s Subnational Fiscal Framework?
126. This report reviewed, assessed and simulated the impact on states of possible reforms
to Brazil subnational fiscal framework. In so doing, it took into account the political
constraints to major changes to the country’s current fiscal federalist structure, while at the same
time highlighting the rationale for coordinated – if less ambitious and more pointed – reforms to
the ICMS, intergovernmental transfers, and the subnational borrowing framework.
127. The jury is still out as to whether the window of opportunity for subnational fiscal
reforms opened by the STF rulings has been missed. The unique chance of moving forward
with coordinated, multi-front reforms opened up by the STF decisions on both the FPE and the
FPE Royalties CFEM Net Transfers ICMS Debt Net Results
Acre 1.3% 15.9% 0.0% 17.2% 2.8% -0.6% 20.6%
Alagoas 38.9% 16.1% 0.0% 55.0% 3.4% -6.6% 65.0%
Amapá -7.5% 10.7% 0.0% 3.3% 2.2% -0.1% 5.6%
Amazonas -2.2% -1.7% 0.0% -3.8% 3.3% -0.3% -0.3%
Bahia -14.6% 0.5% 0.1% -14.0% -2.4% -1.2% -15.2%
Ceará -5.8% 6.5% 0.0% 0.8% 3.6% -0.4% 4.8%
Distrito Federal 2.3% 1.1% 0.0% 3.4% 4.5% -0.5% 8.4%
Espírito Santo 2.9% -11.5% 0.0% -8.6% -20.2% -0.6% -28.3%
Goiás -0.5% 2.9% 0.2% 2.5% -13.1% -1.8% -8.8%
Maranhão 6.2% 12.0% 0.0% 18.2% 7.7% -0.9% 26.8%
Mato Grosso 0.2% 4.1% 0.0% 4.3% -5.1% -1.1% 0.3%
Mato Grosso do Sul 11.2% 5.1% 0.2% 16.5% -20.3% -5.2% 1.3%
Minas Gerais -2.9% 0.7% 0.8% -1.3% 5.0% -7.7% 11.4%
Pará -7.5% 5.5% 2.4% 0.5% 5.0% -0.3% 5.8%
Paraíba 16.3% 12.9% 0.0% 29.2% 0.9% -0.6% 30.7%
Paraná 0.2% 2.5% 0.0% 2.7% 0.5% -2.2% 5.5%
Pernambuco -13.0% 5.3% 0.0% -7.7% 0.3% -1.0% -6.4%
Piauí 22.0% 8.1% 0.0% 30.2% 6.8% 0.0% 37.0%
Rio de Janeiro 1.3% -18.7% 0.0% -17.4% 9.5% -8.2% 0.2%
Rio Grande do Norte 0.2% 0.4% 0.0% 0.6% 7.3% -0.2% 8.1%
Rio Grande do Sul 0.9% 1.6% 0.0% 2.6% 0.7% -6.9% 10.2%
Rondônia -1.9% 7.0% 0.0% 5.2% 1.3% -1.8% 8.3%
Roraima 18.0% 16.4% 0.0% 34.4% 1.0% -0.3% 35.7%
Santa Catarina 6.3% 2.4% 0.0% 8.7% -13.2% -3.2% -1.4%
São Paulo 0.7% 0.4% 0.0% 1.0% -4.0% -7.7% 4.8%
Sergipe 1.4% 2.9% 0.0% 4.4% 3.4% -0.8% 8.6%
Tocantins -18.4% 8.4% 0.0% -9.9% 1.4% 0.0% -8.5%
* For the debt column, negative numbers means savings in relation to the baseline
Scenario 2 (as a % of NRR)
48
ICMS seems to be fading away with the stalling of key proposals in Congress. The realpolitik of
subnational fiscal reforms – fueled by concerns about the spatial distribution of gains and losses
from reforms – seems to have prevailed by now. However, it is still early to dismiss the
possibility that an agreement is reached on these reforms, since the status quo is far from being
satisfactory either. The discussion on net gainers and losers in this report indicate that the
implementation of coordinated reforms can help allay concerns of damaging shifts in the spatial
allocation of public resources.
128. Even under a policy of piecemeal reform attempts, a great deal of uncertainty
remains with respect to the future of the ICMS reforms currently under discussion.76
Resistance to ICMS reforms reflect a conservative behavior on the part of state-level fiscal
policymakers, given the uncertain fiscal impact of ICMS reforms (especially if taken in
isolation), their mistrust of the Federal Government’s compensatory schemes, and their
preference to increase fiscal space through renegotiation of subnational debts to the Federal
Government, particularly among the more developed states. The impasse on ICMS reforms
means inter alia that the incentives for the ongoing fiscal war would continue to be in place in
the foreseeable future.
129. The proposed parametric changes to the FPE could have a greater chance of being
enacted, since they do not fundamentally alter the existing “distributive equilibrium”
among states. The redistributive shifts would be rather moderate under the Senate FPE proposal,
because there would not be major changes to the coefficients applied to each state and the
transition rule put in place is extremely gradual.77
The redistributive shift under the equalization
proposals by Mendes (2011) and Ter-Minassian (2012) would be more significant, but there does
not seem to be enough political appetite in the Government or Congress to pursue that avenue,
even if it is cast within a more “gradualist” approach.
130. In the absence of coordinated reforms, intra-federative conflicts – as exemplified by
the controversy over the royalties sharing rules – are likely to go on. The ongoing attempts at
legislating reforms to the oil royalties sharing rules has pitted the oil producing states of Rio de
Janeiro, São Paulo and Espírito Santo against the rest of the Federation in an intense, bitter
political fight. The STF’s decision to put on hold the recently-passed and controversial royalties
bill testifies to the intensity of this particular manifestation of Brazil’s intra-federative conflicts.
131. Pressures to “flexibilize” the subnational borrowing framework are on the rise, with a
potential adverse impact on subnational fiscal discipline. In response to these pressures,
subnational borrowing limits have been increasing even for highly indebted states such as Rio
Grande do Sul, Minas Gerais, Rio de Janeiro, and São Paulo. In addition, as discussed, the
political class has also sought changes in the terms of subnational debt. This has created doubt
among some observers as to the consistency of these changes with the Fiscal Responsibility Law,
which prohibits new subnational debt refinancing initiatives.78
76
According to Afonso (2013a), “the only certainty is that nobody has the slightest idea about what may happen to
the ICMS”. 77
See Rocha (2013), background paper for this study. 78
In the understanding of the Federal Government, there is no inconsistency between such proposed changes and the
Fiscal Responsibility Law. See Mora (2013), op. cit., background paper for this study.
49
132. Yet Brazil’s hard-fought subnational borrowing framework is and should remain an
essential component of the fiscal “leg” of the country’s macroeconomic “tripod”.79
In fact, it
is a cornerstone of the country’s economic stabilization process. An actual or perceived
“flexibilization” could weaken subnational governments’ resolve to continue to operate under a
hard budget constraint and could give rise to free riding and moral hazard concerns. In extracting
the lessons from past experiences with national-government-led subnational debt restructuring,
Canuto and Liu (2013) concluded that “[d]ebt restructuring plans must pay attention to their
incentive effects. Rules-based debt restructuring reduces ad-hoc bargaining and adverse
incentives; hard budget constraint prevents moral hazard; and burden sharing provides proper
incentives and avoids free-riding behavior, while also recognizing the incentive role played by
higher levels of government to leverage reform.”80
It is paramount that these lessons continue to
guide the debate on Brazil’s subnational fiscal reform going forward.
133. Ultimately, even a policy of piecemeal reforms, although far from ideal, would
probably be better than the current stalemate. Maintenance of the status quo has already
proven to be highly counterproductive and with potentially deleterious impact on the country’s
competitiveness and fiscal sustainability prospects.
79
The other two being the flexible exchange rate arrangement and the inflation targeting mechanism, both of which
have also being subject to pressures over the past couple of years. 80
Canuto, O. and L. Liu (2013). “An Overview”. In Canuto and Liu (eds), Until Debt Do Us Part: Subnational
Debt, Insolvency, and Markets. Washington, D.C.: World Bank, p. 13.
50
VI. References
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Economy, IBRE-FGV, May.
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Afonso, J.R. (2013b). Presentation made at the discussion Forum on “Toward Science of
Delivery: Fiscal Federalism and Sub-Sovereign Finance”, Washington, D.C., World Bank, May
28, 2013
Arroyo, J.M., J.P. Jiménez, and C. Mussi (2012). “Revenue Sharing: The Case of Brazil’s
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World Bank [2008]. Brazil: Topics in Fiscal Federalism
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