Website O Antagonista discussed with Eduardo Maneira the government's IR reform proposal

Report from the website O Antagonista reflected with experts the Income Tax reform proposal presented by the federal government. Dr. Eduardo Maneira was heard to speak on the topic.

IR reform could result in tax increase, experts say

Brenno Grillo

14.07.21

Changes presented by the Minister of Economy almost 20 days ago did not please some of the political, business and stock market sectors

Photo: Fabio Rodrigues Pozzebom/Agência Brasil

Arthur Lira (PP-AL) said yesterday that the Income Tax reform is “neutral, fair and modern”. The emphatic defense of the president of the Chamber is justified, since the text delivered by the Minister of Economy to Congress almost 20 days ago was not very popular.

The rapporteur of the proposal, deputy Celso Sabino (PSDB-PA), has already presented a substitute, in an attempt to calm down investors, businesspeople and parliamentarians.

These groups complain that Paulo Guedes has used a speech about “reducing taxes charged to the poorest and companies”, without this being necessarily true.

“For 40 years, Brazil increased taxes on companies. Also for four decades we increased taxes on employees. And on the contrary, there was no courage to tax capital income”, said the minister, when delivering the text to Parliament.

One of the reasons for the almost unanimous discontent was cited yesterday by Lira. The president of the Chamber stated yesterday that the ""tenentism of the Federal Revenue, apparently, influenced 75% of the text" presented by Guedes.

Guedes' proposal foresees a 20% tax rate on dividends distributed by companies to their partners and investors, to compensate for the adjustment in the Personal Income Tax (IRPF) brackets. The exception would only apply to those who receive up to R$20,000 from small or medium-sized companies.

In the IRPF, the exemption range would rise from R$1,900 to R$2,500. If the proposal moves forward, the change will double the total number of exempt taxpayers compared to the current 8 million taxpayers. The average number of Income Tax returns filed is 30 million per year.

Disorganized renovation

Deputy Jerônimo Goergen (PP-RS), who is part of the government base in the Chamber, called the planning for the presentation of the tax reform “absurd.” According to him, the ideal would be “an articulated reform”.

“It doesn't seem like a coordinated thing to me. I hope the government reviews it. It's not a proposal suited to the need for economic recovery that we have.”

Among taxation experts, the opinion is almost unanimous that Guedes proposed an increase in the tax burden with the changes.

Tax lawyer Manuel Eduardo Cruvinel said that the current global movement is to tax companies' profits, not dividends, as proposed by the Ministry of Economy.

“This is more of a political consequence of this project than a technical issue. Taxation only on profit has a simplification that people expect from tax reform. It is as if the IRS taxes at source.”

Added to this is the fact that taxes on corporate earnings total 34% of revenue in Brazil, while in countries that are part of the Organization for Economic Co-operation and Development (OECD) the total rate varies from 20% to 25%.

If the changes are approved, the proportion of tax that will be levied on companies' profits will increase to at least 43%, said Manuel Eduardo Cruvinel.

To try to correct this distortion, the reform rapporteur proposed reducing taxation on corporate income by up to 12.5 percentage points.

Sabino wants to reduce the tax rate on companies with revenues of up to R$20,000 a month from 15% to 2.5%. For companies with revenues above this amount, the rapporteur proposed an additional rate of 10%.

Disproportionate increase

Tax expert Filipe Arantes stated that the increase in the burden did not need to be so high to compensate for the changes in the IR exemption. He further said that this will affect many family businesses.

“Family businesses, for the most part, are micro or small. In the end, they will only change the pocket where the tax will be levied. This is a concern for capital flight, as it can encourage a change of tax address. Let's go back to the problems of the past, those experienced before 1996, mainly the patrimonial confusion.”

To correct this problem, the text's rapporteur proposed exemption for micro-enterprises or small companies that pay dividends of up to R$20,000 to “beneficiaries who are spouses, partners or relatives, blood or related, up to the third degree”.

Those who receive more than R$20,000 will pay income tax only on the excess amount.

Eduardo Maneira, specialist in Tax Law, stated that Guedes' proposal “is not neutral, it is an increase in burden”.

“The speech is far outside what is expected from a technical minister. And this is not tax reform. The old problems remain the same. There is no change in taxes on consumption.”

According to the lawyer, these inconsistencies appeared because the government ““needs to save money for the election year”.

“You are encouraging complexity, contrary to a discourse of simplification, a liberal discourse. In the end, the middle class will be sacrificed.”

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