So, is this the Income Tax reform? Proposal only addresses part of the problem

So, this is Income Tax reform? Proposal only addresses part of the problem

Government project exempts income tax for those earning up to R$5,000 per month; the counterpart is to increase taxation for other situations

By Eduardo Lourenço, tax specialist, is a partner at Maneira Advogados

The government delivered proposal to change the Income Tax, basically exempting people who earn up to R$5,000 per month and reducing taxation on amounts received up to R$7 thousand reais. In return, it intends to increase taxation for other situations, although this is not the only, nor the best, solution.

The counterpart presented is nothing more than the creation of a “new” tax: the IRPFM – minimum personal income tax, which brings taxation on payment, crediting, employment or delivery of profits and dividends made by a legal entity to a person physics.

The system may seem simple, but it has several challenges. Directly, in 2026,taxationwill reach those who have receivedmore than R$50,000 per month with a 10% withholding directly at source.

The idea, in the end, is that it reaches those with an annual income exceeding R$600,000, deducting:

• capital gains, except those arising from operations on the stock exchange or over-the-counter market;
• income received cumulatively taxed exclusively at source;
• donation in advance of legit or inheritance.

In the respective following years, adjustments will be made, in which the rates must be 10% for amounts greater than R$ 1.2 million per year and 0% to 10%, growing linearly, for amounts between R$ 600 thousand and R$ 1.2 million per year. The tax rate is calculated by dividing the income value by 60 thousand and then subtracting 10.

For example, annual income of R$750,000.00: 750,000 divided by 60,000 = 12.5, subtracting 10, the rate is 2.5%.

Before the proposal was presented, one of the risks was the increasing cost of credit, but at least this was kept out of the government's account, not covering investments – Real Estate Receivables Certificates (CRI) and Agribusiness (CRA), for example. Therefore, the following will be deducted from the IRPFM calculation base:

• income from savings;
• compensation amounts for work accidents, material or moral damages, excluding loss of profits;
• income exempt due to illness already provided for by law;
• income arising from bonds and securities exempt or subject to zero rate, with the exception of income from shares and other corporate interests.

After the tax due has been calculated, advance payments and other contributions and donations made may be deducted (as currently permitted).

An interesting point is the provision for a reduction in the IRPFM if the sum of the effective tax rate on the profits of the legal entity and the effective IRPFM rate of the individual exceeds 40% or 45% for financial and insurance companies, depending on how they qualify, and 34% for other legal entities.

A formula is even foreseen for calculating the effective tax rate for people not subject to calculation based on real profit, in which deductions will be made from revenue and then compared with the IR/CSLL taxation. If this, when added to theIRPFMrate, is greater than 34% (or 40%, or 45%, depending), the reduction will be applied.

Government proposal only attacks part of the problem

Although, as seen, some measures seek to alleviate the negative effects of the increase in taxation, this proposal cannot be seen as a reform, as it intends to attack only part of the problem.

The form of compensation brings some losses:

• disincentive to entrepreneurship and innovation, so that the increase in the tax burden on income reduces the appetite to take risks and create new businesses, making people choose to maintain their operations on a smaller scale or seek opportunities in countries with more favorable tax regimes;
• flight of capital and investments: in addition to the increase in the tax burden, Brazil already has a complex and high tax system;
• growth of the informal economy;
• increased pressure on the productive sector, making companies have greater difficulty in maintaining their profitability, which will result in this cost being passed on to the prices of products and services, increasing inflation;
• increase in unemployment, by discouraging investment;
• lower revenue in the long term, as there will be a reduction in economic activity, an increase in tax evasion and a disincentive to work and investment.

Tax burden increases share of GDP

In 1991, the tax burden represented 23.55% of the GDP, while in 2023 it reached an impressive 32.44%. This excessive increase in the tax burden has a direct impact on the country's competitiveness, reducing the population's purchasing power and discouraging productive investments.

And the Union is to blame for this increase. While municipalities, states and the Federal District are increasingly responsible for public spending, with a view to direct “services” to society, it was the União that increased its burden the most. In 1991, federal taxes corresponded to 15.51% of GDP, while in 2023 this percentage jumped to 21.99%.

On the other hand, the state taxes rose from 6.9% of GDP in 1991 to 8.12% in 2023, while the municipal tax revenue rose from 1.14% to 2.32%. Despite the growth in states and municipalities, most of the increase in the tax burden (72.89%) is due to the Union.

If the government's proposal to increase Income Tax is adopted, the impact will be even more severe. The tax burden for this specific tax went from 6.62% of GDP in 1991 to 9.11% in 2023, representing an increase of almost 40%.

This demonstrates that the government has increasingly increased taxation on income, instead of seeking structural solutions such as reducing spending and improving the efficiency of the public sector.

Of course, we are aware that the Income Tax table must be corrected, but the counterpart cannot be an increase in the tax burden, but rather spending cuts.

What is the reason for not updating the Income Tax table based on the same criteria as the minimum wage, ensuring that the tax bands follow inflation and the real increase in the population's income? It is not impossible for this to be done now, if only the government cuts spending.

Instead of raising taxes, the focus should be on reducing expenses and improving fiscal management. Brazil already has one of the highest tax burdens in the world for a developing country, and further increases in the Income Tax will only worsen economic and social problems. It is essential that the discussion on taxation takes into account the need for a fairer, more transparent and efficient system, which allows the country's sustainable growth without excessively burdening citizens and companies.

https://einvestidor.estadao.com.br/colunas/artigos-especialistas/imposto-de-renda-reforma-proposta-governo/