Revenue sharing: The case of Brazil's ICMS

The ICMS represents the most important source of revenue for the Brazilian states and one of the most important taxes in Brazil. Unlike other VATs in the world, the ICMS is not collected by the central government. The ICMS is collected by the states (the intermediate level of government), which are able to fix the internal rates; a situation that reflects the fiscal autonomy of the different levels of government in Brazil. Similarly, the direct and unconditional transfers of 25% of the ICMS collection to the municipalities (the local level) show the high degree of autonomy at the sub–national level. However, fiscal autonomy is also a source of problems, particularly the “fiscal wars” that result from the different tax rates fixed by the states and its corresponding effects on transfers. To solve this and other problems related to Brazil’s tax system various proposals have been made, but none of them has actually materialized.

The objective of this paper is to characterize Brazil’s fiscal federalism and tax system, with an emphasis in the ICMS and its revenue–sharing rules. We also provide some concluding remarks regarding ICMS and its revenue sharing.