1.3. Intergovernmental Transfers
To strengthen the administrative-political and financial autonomy of government levels, the Brazilian Constitution defines a system of "unconditional" transfers between the Union, the States and the Municipalities, which can be either direct or through creation of special funds (indirect). Regardless of their type, transfers always occur from higher to lower levels of government; that is, from the Union to the States and from the Union to the Municipalities or from States to their respective Municipalities.
Direct transfers, as constitutionally defined, are the following:
- States and municipalities are entitled to keep total collection of income tax they withhold at source on income payments they make or on payments made by their autarchies or foundations they constitute and maintain;
- Municipalities are entitled to 50% of the collection of tax on rural land property (ITR) levied on real estate within their territory;
- Municipalities are entitled to 50% of the collection of tax on motor vehicles (IPVA) registered in their territories;
- Municipalities are entitled to 25% of the collection of tax on the circulation of goods and transportation and communication services (ICMS) (3/4, at least, proportionally to the value added through operations carried out in their territories and up to 1/4 as provided in the State Law);
- States and Municipalities of origin receive by transfer respectively 30% and 70% of the collection of IOF – Gold (as a financial asset).
The following funds are used to carry out the indirect transfers:
- Export Compensation Fund (FPEx): composed of 10% of the total IPI collection. It is distributed proportionally to the amount of industrialized products exports. Individual State participation is limited to 20% of the total receipts of the fund.
- Federal District and States Participation Fund (FPE): composed of 21.5% of the total IPI and IR collection. It is distributed in direct proportion to State population and size, and in inverse proportion to per capita income.
- Municipalities Participation Fund (FPM): composed of 22.5% of the total IPI and IR collection. It its distributed proportionally to the population of each unit. 10% of the fund is set aside for the Municipalities of the capital cities.
- Regional Funds: composed of 3% of the total IPI and IR collection. This revenue is directed to development programs in North (FNO), Center-West (FCO) and Northeast (FNE) regions.
Thus, 47% of the income tax and 57% of the tax on industrialized products collected by the Union go to the States and the Municipalities as constitutional transfers through funds. The flow of direct and indirect constitutional transfers is represented in Chart 1. The same information is presented as a matrix in Table 6, which includes percentages, origin and purpose of taxes shared.
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CHART 1 |
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Flow of Constitutional Transfers |
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The criteria for sharing the FPE and the FPM is based on population and income, resulting in greater shares for the poorer States and Municipalities and smaller shares for Southern and Southeastern States.
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TABLE 6 |
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Sharing of Tax Revenue |
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(%) |
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Tax competence |
Taxes |
Shares |
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|
Union |
Regional Funds |
States |
Municipalities |
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|
UNION |
IR* |
53.0 |
3.0 |
21.5 |
22.5 |
|
IPI |
43.0 |
3.0 |
21.5 + 10.0 |
22.5 |
|
|
IOF-Gold |
----- |
----- |
30.0 |
70.0 |
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|
ITR |
50.0 |
----- |
----- |
50.0 |
|
|
STATES |
ITCD |
----- |
----- |
100.0 |
----- |
|
ICMS |
----- |
----- |
75.0 |
25.0 |
|
|
IPVA |
----- |
----- |
50.0 |
50.0 |
|
|
Note: States and municipalities keep 100% of the income tax withheld at source levied on its civil servants’ salaries. |
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The Federal Constitution establishes that distribution criteria must aim at promoting social and economic balance between States and Municipalities. According to these criteria, the FPE and FPM distribution by geographic region resulted in the percentage distribution shown in Table 7:
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TABLE 7 |
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Percentage Distribution of Participation Funds |
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Region |
FPE |
FPM |
Population |
Per capita Income |
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(%) |
(%) |
(%) |
(R$) |
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|
North |
25.37 |
8.53 |
7.6 |
3,447 |
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Northeast |
52.46 |
35.27 |
28.1 |
2,603 |
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Southeast |
8.48 |
31.18 |
42.6 |
7,706 |
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South |
6.52 |
17.55 |
14.8 |
6,611 |
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Center-West |
7.17 |
7.47 |
6.9 |
5,681 |
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Source : IBGE and STN/Ministry of Finance. |
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The percentage distribution of the FPE and of the FPM have implicitly aim at improving the existing regional income disparities, thus following "solidarity criteria".
After the tax revenue transfers, the shares of the Union, States and Municipalities were respectively 59.3%, 26.5% and 14.2% of the total disposable tax revenue, in 2001. The Table 08 shows the composition of tax revenue before and after transfers. The Union transfers approximately 10 percentage points of its revenue collection to subnational levels of government. The Municipalities clearly receive the greatest share of transfers, as the States lose around 1 percentage point due to transfers to the Municipalities.
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TABLE 8 |
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Disposable Tax Revenue, 2001 |
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(after constitutional transfers) |
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Tax competence |
TAX REVENUE |
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Total Collection |
Disposable Revenue |
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|
% |
% of GDP |
% |
% of GDP |
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|
UNION |
68.7 |
23.61 |
59.3 |
20.38 |
|
STATES |
26.8 |
9.21 |
26.5 |
9.11 |
|
MUNICIPALITIES |
4.5 |
1.54 |
14.2 |
4.87 |
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TOTAL |
100.0 |
34.36 |
100.00 |
34.36 |
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Source :Tax Burden in Brazil, 2001 (SRF) |
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This tax revenue reallocation is complemented by transfers embodied in agreements, that is, voluntary transfers – transfers of federal funds to States and Municipalities (or of State funds to Municipalities) – to finance activities of federal (or State) responsibility they carry out on behalf of the Union (or the State). Agreements are means of effecting transfers provided for in specific laws or established voluntarily between the different levels of government.