Donovan Lessa speaks to Jornal do Comércio about the proposal to tax wealth

In an interview with Jornal do Comércio, from Porto Alegre,tax expert Donovan Mazza Lessa, partner at Maneira Advogados, addressed the issue of taxation of large fortunes, which was once again debated. For him, the measure is inefficient. “In all countries where such a tax was implemented, it was followed by enormous social repulsion and difficulty in monitoring due to the complexity of measuring different forms of wealth,” he stated.

Proposals for taxes on dividends and wealth taxation return to debate

Study reveals that 84% of Brazilians agree that the richest should pay more taxes to finance these public services

(Image: FREEPIK/DIVULGAÇÃO/JC)

Published on: 17/05/2022

Nícolas Pasinato

In May last year, a survey published by Oxfam Brasil in partnership with the Datafolha Institute showed that more than half of Brazilians (56%) support increasing taxes to finance public social policies, such as investment in education, housing and health for the most needy in the country, and 84% agree that the richest should pay more taxes to finance these public services.

Entitled Us and Inequalities, the survey also reveals that 86% of Brazilians say that the government has an obligation to reduce the difference between the richest and the poorest and 85% think that public authorities need to reduce regional inequalities in Brazil.

Gradually, measures converging with public opinion revealed by the study are beginning to gain strength around the world, especially after the new coronavirus pandemic. In April this year, for example, the IMF (International Monetary Fund) suggested that countries facing problems of lack of public resources consider increasing taxes on companies that had above-average profits amid the health crisis. The agency, however, did not detail how this taxation could occur in practice.

The allegation is that many governments provided economic aid during the pandemic, such as tax reductions, which served as support for companies and families in a time of difficulty. On the other hand, this led to an increase in government debt, which now finds itself with less financial power to continue supporting areas in need. In Brazil, for example, the federal public debt is expected to reach R$6.4 trillion this year, according to the National Treasury's forecast.

Another example occurred in Argentina, at the end of 2020, when what became known as the “great wealth tax” was approved, a law that taxes assets worth more than 200 million Argentine pesos once. The tax percentage varies between 2% and 3.5% when the fortune declared to the Treasury exceeds 35 million dollars.

In Brazil, the debate related to this movement gained a new chapter on May 9, when the Minister of Economy, Paulo Guedes, defended the progress of a leaner Income Tax (IR) reform, creating taxation on dividends, which is the part of companies' profits distributed to shareholders, in addition to a reduction in taxation on companies.

The mini tax reform would involve reducing the IRPJ (Corporate Income Tax) rate, from the current 34% to 30%. Dividends, in turn, would be taxed at 10% (today, they are exempt). If approved, the measures would come into force in 2023.

“The time is now. We have already approved the reform of the Chamber of Deputies, it is blocked in the Senate. We can do a version by taxing the super rich and reducing taxes on companies, that is what is needed to receive investments from outside”, said Guedes

The project mentioned by the minister, which is paralyzed in the Senate, foresees taxation of profits and dividends of 15% and taxation of corporate profits of 34%. In other words, the federal government's mini-reform would have milder rates in this sense.

Senator Angelo Coronel (PSD-BA), rapporteur of the Income Tax proposal in the Senate, is critical of the content of the piece already approved in the National Congress and sees Guedes' recent speech as positive. “With an effective reduction in corporate taxation and a simplification of their obligations, I see the minister’s speech as positive,” he stated.

According to the senator, the proposal that came from the Chamber would need several adjustments to become viable. “As soon as the reform is to simplify, to reduce taxation and does not harm taxpayers, the chance for progress in the matter gains momentum”, he stated.

While the federal government's economic team studies changes for companies, the department does not plan to change the adjustment of the Personal Income Tax table this year. The legal analysis is that there are restrictions imposed by electoral legislation, since the measure would expand the exemption range.

Brazil is one of the few countries in the world that does not tax dividends

Brazil is part of the restricted list of countries in the world that do not tax the payment of dividends, which is the portion of companies' profits distributed to their respective shareholders. According to an updated table of statistics from the Organization for Economic Cooperation and Development (OECD), in addition to Brazil, only Estonia, Latvia and Colombia do not charge taxes on the distribution of results.

Exemption, however, has not always prevailed in the country and disagreements surrounding the subject are long-standing. The rate on profits and dividends was 15% until the implementation of Law No. 9,249, in the mid-1990s.

“In 1995, numerous questions were raised, especially due to the supposed loss of revenue. However, the justification for its creation was precisely to encourage the development of the national economy, to guarantee a stable and predictable business environment, in addition to the return of investments to the investor”, says lawyer and specialist in tax law Jéssica Garcia Batista.

According to her, at the time, the initiative proved to be effective due to the development that the national economy underwent in the 2000s. The lawyer views the taxation of the “super-rich” mentioned by Guedes with suspicion. "The intention presented by the Government to streamline the tax reform proposal is very valid, since the reduction of matters for consideration and approval tends to have a faster process. However, the points presented for change are very controversial, which may not have the desired effect", he declared.

In any case, the lawyer assesses that the election year period is not the most conducive to advancing issues like this. “The ideal, when talking about a system change of this magnitude, is that all proposals being voted on are evaluated calmly and stably, and by members of the Legislative houses from start to finish, as their approval will have a long-term national impact, and a series of legitimate interests such as states and municipalities that could suffer a loss of revenue”, he considers.

While taxation on dividends in Brazil begins to gain strength in the public debate, in most OECD countries taxation that affects shareholder value is the rule. The tax rate percentage varies from country to country. In the United States, for example, the rate is 28%, in Germany, 26%, in Japan, 20%, and in France, 34%.

Tax on large fortunes accumulates projects in the National Congress

Another measure that normally appears in this type of debate is the creation of the tax on large fortunes (IGF), which is even provided for in the 1988 Federal Constitution, but has never had a rule approved in the National Congress.

The attempts, however, are recurrent. According to a survey by Insper, from 1989 to 2020, 49 bills of this kind are being processed or have already been processed in the national Legislature. Current economic management, however, should not encourage its advancement. Minister Paulo Guedes has already expressed his opposition to the idea of the IGF, as, according to him, there is a risk that the initiative will cause resources to be sent abroad.

In the same vein, professor and member of the Brazilian Association of Financial Law (ABDF), Donovan Mazza Lessa, sees the taxation of large fortunes as an inefficient measure. “In all countries where such a tax was implemented, it was followed by enormous social repulsion and difficulty in monitoring due to the complexity of measuring different forms of wealth”, he states.

According toLessa, the IGF should function as a periodic taxation that depends on an assessment of the person's assets, but there is no consensus on how to value corporate interests (whether at nominal value or book value), properties (historical or market value) and financial investments, which may suffer fluctuations.

“For this reason, the taxation of large fortunes implemented by other countries ended up being reduced to the taxation of real estate assets, leaving out large portions of manifestations of wealth. The consequence is the reduced revenue resulting from these taxes and, also, the flight of capital to other countries where there is no such taxation”, he states.

According to data from the Fiscal Justice Institute, the creation of the IGF would generate revenue in the order of R$40 billion per year, which, according to tax lawyer Fábio Nieves Barreira, is an amount considered less than necessary. "In the first quarter of 2022, the country totaled R$548.13 billion in revenue. Therefore, what would be gained from taxation on large fortunes is little compared to the Union's current revenue", he ponders.

According to data from the OECD, of the 37 member countries, 12 have already instituted this type of tax (Germany, Spain, France, Denmark, Austria, Norway, Iceland, Finland, Luxembourg, Sweden, Switzerland and the Netherlands). However, due to the risk of capital flight and the ease of dodging the tax, many of these countries have repealed the tax. Considering the nations that are part of the OECD, currently, the tax on large fortunes is still only in force in Spain, Norway and Switzerland. In France, since 2018, under Macron's government, the IGF began to focus only on real estate.

Proposals aim to make the Brazilian tax system fairer

In the United States, President Joe Biden has also shown interest in increasing taxes on the richest, according to his budget project published at the end of March. The proposal, called “Billionaire Minimum Income Tax”, seeks to create a minimum rate of 20% on annual income of more than US$100 million. According to the White House, this tax would affect 0.01% of the country's families.

In addition, the US government's 2023 budget plans to raise the corporate tax rate to 28%, reversing the law passed in 2017, under the administration of former President Donald Trump, which reduced it to 21%. It also foresees an increase in the income tax rate on families earning more than US$400,000 – which would rise from a rate of 37% to 39.6%.

In Brazil, a study commissioned by Fenafisco (National Federation of State and District Tax Authorities) recommends similar measures as a way of reducing inequalities and helping the Treasury's accounts. The document defends, for example, the increase in CSLL (Social Contribution on Net Profit) rates for the next four years and the implementation of the Tax on Great Fortunes (IGF).

“The result of the study was the elaboration of eight proposals that would generate an increase in revenue of approximately R$ 292 billion annually, focusing on high incomes and large assets”, states the director of Union Training and Inter-Union Relations at Fenafisco, Francelino Valença.

According to Valença, the conclusion of the analysis is that it would be “perfectly possible” to mitigate the economic effects resulting from the pandemic. "The most interesting thing is that it would only impact 0.3% of the population, in this case, the richest. We are not referring to the middle class, but to those whose increase in taxation in these two tax incidence bases would not impact their livelihood, much less cause a significant reduction in their consumption pattern", he concluded.

In line with this opinion, the coordinator of advocacy and programs in social and economic justice at Oxfam Brasil, Jefferson Nascimento, refutes the criticism that measures such as the implementation of large fortunes would be inefficient, but recognizes that they, in themselves, would not resolve the country's inequalities. “Just changing the tax on large fortunes does not solve every problem alone, but it would contribute to making the tax system more progressive”, he argues.

In addition to the IGF, Nascimento cites some measures advocated by Oxfam to make the Brazilian tax system fairer and more progressive, such as simplifying the consumption tax; a higher number of tax brackets for higher incomes in personal income tax taxation; review of the corporate income tax with regard to the interest on equity mechanism and review of the rural territorial tax so that it increases its collection capacity in the country.

In May last year, a survey published by Oxfam Brasil in partnership with the Datafolha Institute showed that more than half of Brazilians (56%) support increasing taxes to finance public social policies, such as investment in education, housing and health for the most needy in the country, and 84% agree that the richest should pay more taxes to finance these public services.

Entitled Us and Inequalities, the survey also reveals that 86% of Brazilians say that the government has an obligation to reduce the difference between the richest and the poorest and 85% think that public authorities need to reduce regional inequalities in Brazil.

Gradually, measures converging with public opinion revealed by the study are beginning to gain strength around the world, especially after the new coronavirus pandemic. In April this year, for example, the IMF (International Monetary Fund) suggested that countries facing problems of lack of public resources consider increasing taxes on companies that had above-average profits amid the health crisis. The agency, however, did not detail how this taxation could occur in practice.

The allegation is that many governments provided economic aid during the pandemic, such as tax reductions, which served as support for companies and families in a time of difficulty. On the other hand, this led to an increase in government debt, which now finds itself with less financial power to continue supporting areas in need. In Brazil, for example, the federal public debt is expected to reach R$6.4 trillion this year, according to the National Treasury's forecast.

Another example occurred in Argentina, at the end of 2020, when what became known as the “great wealth tax” was approved, a law that taxes assets worth more than 200 million Argentine pesos once. The tax percentage varies between 2% and 3.5% when the fortune declared to the Treasury exceeds 35 million dollars.

In Brazil, the debate related to this movement gained a new chapter on May 9, when the Minister of Economy, Paulo Guedes, defended the progress of a leaner Income Tax (IR) reform, creating taxation on dividends, which is the part of companies' profits distributed to shareholders, in addition to a reduction in taxation on companies.

The mini tax reform would involve reducing the IRPJ (Corporate Income Tax) rate, from the current 34% to 30%. Dividends, in turn, would be taxed at 10% (today, they are exempt). If approved, the measures would come into force in 2023.

“The time is now. We have already approved the reform of the Chamber of Deputies, it is blocked in the Senate. We can do a version by taxing the super rich and reducing taxes on companies, that is what is needed to receive investments from outside”, said Guedes

The project mentioned by the minister, which is paralyzed in the Senate, foresees taxation of profits and dividends of 15% and taxation of corporate profits of 34%. In other words, the federal government's mini-reform would have milder rates in this sense.

Senator Angelo Coronel (PSD-BA), rapporteur of the Income Tax proposal in the Senate, is critical of the content of the piece already approved in the National Congress and sees Guedes' recent speech as positive. “With an effective reduction in corporate taxation and a simplification of their obligations, I see the minister’s speech as positive,” he stated.

According to the senator, the proposal that came from the Chamber would need several adjustments to become viable. “As soon as the reform is to simplify, to reduce taxation and does not harm taxpayers, the chance for progress in the matter gains momentum”, he stated.

While the federal government's economic team studies changes for companies, the department does not plan to change the adjustment of the Personal Income Tax table this year. The legal analysis is that there are restrictions imposed by electoral legislation, since the measure would expand the exemption range.

https://www.jornaldocomercio.com/_conteudo/cadernos/jc_contabilidade/2022/05/847293-propostas-de-impostos-sobre-dividendos-e-taxacao-de-fortunas-voltam-ao-debate.html