Government wants to close cryptocurrency loophole and tax haven – 03/28/2024 – Market

The government of Luiz Inácio Lula da Silva (PT) wants to close loopholes used by foreign investors residing in tax havens and holders of cryptoactives in Brazil (which includes cryptocurrencies) to circumvent the payment of Income Tax (IR).

The measures will be included in the bill that changes the taxation of financial investments, announced by Minister Fernando Haddad (Finance) and which will soon be sent to the National Congress.

The Executive’s proposal is aimed at simplifying and consolidating taxation rules for investments in bonds and securities, operations on the Stock Exchange and foreign investment in these two types.

There will be no rate changes, but some changes may generate revenue gains for the Union. Even so, the official estimate is a neutral impact, given that investors can adjust their investment strategies after the changes.

If approved by parliamentarians this year, the new rules will be valid from 2025.

Brazilian legislation exempts the income of foreign investors on the Stock Exchange from income tax and charges a reduced rate of 15% on other investments, which will be maintained to encourage the entry of resources into the country.

The benefit, however, does not apply to residents of tax havens, who should pay up to 22.5% on all types of investment.

Tax havens are those with exemption or taxation below 20% of income, or which provide little or no transparency to the information of companies based there. The list includes 61 countries or territories, such as Bermuda, the British Virgin Islands and the Cayman Islands.

The problem is that the topic is regulated in a normative instruction from the Federal Revenue, while the law that deals with IR on financial investments is vague and does not include in the concept of tax haven countries that impose secrecy on information.

According to government technicians, the absence of an express legal basis for charging in these cases created a “gray area” that has hampered the tax authorities’ actions.

Furthermore, as the Revenue list does not detail why the country was classified as a tax haven, the loophole began to be used by investors to circumvent the payment of taxes in the most different situations.

The bill will make it clear that the concept of tax haven reaches those countries that do not provide transparency to information. The objective is to guarantee the necessary legal basis and close the siege to investors from these countries who bring their resources to Brazil.

The government assesses that this is the remaining step after having already obtained approval from Congress to close the loophole previously used by Brazilians who maintain funds in these locations (offshore).

The Executive will also improve other rules involving tax havens. Today, there is legal uncertainty about what treatment to give when a country enters or leaves the list.

In 2016, for example, the Federal Revenue listed Ireland as a tax haven, and its residents began to have their income from investments in Brazil taxed at a higher rate. There was, however, insecurity about the past.

In the project, the government provides that the Revenue list is exhaustive and only takes effect after the date of publication, that is, the charge only applies to income obtained after the express inclusion of the country. Previous winnings remain exempt.

The same applies in the opposite situation. In 2014, for example, Switzerland left the list of tax havens. Although some taxpayers seek broad application of the exemption, the rule ensures that all income earned before the exclusion is taxable at the highest rate.

The government also intends to end another loophole used by foreign investors (in this case, from any country) to circumvent the IR charge when there is a change in the type of investment.

This happens when, for example, the outside investor invests resources in a privately held company (direct investment, subject to taxation) and, after the company’s IPO, starts to hold shares on the stock exchange (exempt modality).

The IRS understands that the charge is due on income obtained before the change, but taxpayers claim to be exempt from taxation because there was no triggering event in the conversion.

The issue has generated disputes in court, with defeats for the Union. Therefore, the bill must expressly provide for the validity of the charge on gains prior to conversion.

TAXATION OF CRYPTOCURRENCIES

The government project will also regulate the taxation of cryptoassets in Brazil — which includes cryptocurrencies such as bitcoin. Today, there is no specific rule in the legislation on the subject.

The Federal Revenue issued a normative instruction to apply the same IR rule on capital gains to these virtual assets, valid in the sale of assets such as a property or car.

The solution, however, is considered a failure by technicians, as the rule exempts the sale of low-value goods (up to R$35,000) from tax. In these operations, the taxpayer does not need to determine the capital gain.

The government identified that holders of crypto assets are taking advantage of the exemption to carry out operations up to this value and “not pay anything” to the tax authorities.

The proposal to correct the problem is to provide for the application of the same rule as for financial applications (rate of up to 22.5%) whenever this virtual asset is a representation of a financial application (as is the case with cryptocurrencies).

Technicians consider the change necessary not only to allow taxation, but also to maintain equality between taxpayers, since operations with cryptoactives abroad are already subject to Income Tax.

The government’s proposal also contains other changes focused on simplification and correcting distortions.

Today, the government requires Stock Exchange investors to calculate their gains and losses monthly to collect the tax due, observing the exemption for sales of up to R$20,000. The project foresees that this calculation will become quarterly, with a proportional increase in the exemption to R$60 thousand.

The text will also create conditions for investors to adopt the so-called ReVar, a Federal Revenue calculator to calculate the tax due on variable income gains. According to technicians, there are taxpayers who do not pay or pay incorrectly due to the complexity of the calculation, which can be corrected with automation.

The government’s bet is that this will remove a barrier to the more significant entry of resources into the Stock Exchange.

Another change seeks to put an end to the so-called “surrogacy”, when an investment fund subject to a lower income tax rate temporarily receives shares from another fund subject to higher taxation at a time when there is the prospect of paying income, such as JCP ( Interest on Equity).

The maneuver aims to reduce tax payments on these gains, which are passed on to the original holder. The project closes this gap and seeks to guarantee the collection of the tax.