Map of tax expenditures by economic sector – 05/06/2023 – Market

The commerce and services, health and agriculture sectors account for more than 50% of federal tax expenditure, as shown in the tax expenditure map prepared by the Sheet based on data from the Federal Revenue Service of Brazil.

This account includes indirect government expenditures carried out through the tax system with economic and social justifications. In other words, they are exemptions with objectives similar to those of public expenses.

According to the Revenue’s concept, they must represent an exception to the system, reducing potential collection and, consequently, increasing the taxpayer’s economic availability.

The Ministry of Finance has sought to reduce some benefits, but not all of them are classified by the Revenue in the category of tax expenditure. Some of these government targets —in the Michel Temer, Jair Bolsonaro and Luiz Inácio Lula da Silva administrations— are also listed in another table.

The top ten tax expenditures, which account for 84% of the total, are also listed below, with explanations and, in some cases, arguments for and against. They totaled BRL 329 billion in 2020 and should reach BRL 456 billion in 2023.

The ten largest tax expenditures, which account for 84% of the total

1. Simple Nacional (24.7%)

What is it: Reduction of the calculation basis and modification of rates for Micro and Small Companies (invoicing of up to R$ 4.8 million/year). The drop in collection promoted by the systematic means that Simples is considered a tax expense by the Internal Revenue Service

Justification: Entities argue that the program is not a tax expense, as it would increase total collection, and say that its end would close 64% of these companies. The adoption of differentiated treatment aimed at small companies is a common practice in several tax systems

Criticism: The treatment given by Brazil is one of the broadest, according to a study by the Federal Revenue. Data from the Tax Authorities also indicate a high degree of tax evasion. Program expansions attracted companies that were already formal and reduced revenue. For every BRL 1.00 that could be collected by the normal system, BRL 0.47 is obtained with the system

two. Agriculture and Agribusiness (12.7%)

What is it: PIS/Cofins benefits that exempt basic food basket, inputs and agricultural pesticides

Justification: Decreased the cost of more than 30 food and hygiene products, in addition to making inputs cheaper

Criticism: Exemption also benefits the richest and is not completely passed on to the consumer. The consumption tax reform provides for the return of the tax on these products directly to the poorest (cashback)

3. IRPF Exempt and Non-Taxable Income (10.6%)

What is it: Includes exemptions on pensions (for people aged 65 or over, due to serious illness or accident), on insurance or annuities due to death or disability, and on compensation for termination of employment

Justification: Changes to the general rule of income tax used as social assistance policies. In the case of retirements from the age of 65, it seeks to compensate for the negative impact on income and pressure on health care costs.

Criticism: Government studies from 2021 and 2022 state that the exemptions privilege the less poor part of the population and that the resources would have redistributive impacts if they were directed to other policies, such as the Continuous Cash Benefit.

4. Non-Profit Entities (8.4%)

What is it: Benefits for non-profit social assistance entities and philanthropic, recreational, cultural and scientific institutions, among others (IRPJ/CSLL, Cofins and social security contribution)

Justification: Incentive to philanthropy, recreation, education, social assistance and health, civil association, culture, science

Criticism: Not all offer the counterpart in social benefits required by law. A quarter of the benefits go to civil associations that also have other benefits, such as religious organizations and political parties.

5. Manaus Free Trade Zone and Free Trade Areas (7.2%)

What is it: Tax calculation rules conditioned to the taxpayer’s geographic region and whose purpose is to reduce regional inequality

Justification: The Manaus Free Trade Zone represents an economic development model that has contributed to guaranteeing the completeness of the national territory and the conservation of the forest, by compensating for costs and logistical difficulties. Its end would cause the destruction of the regional economy, would lead to the departure of companies to other countries and would encourage the exploitation of illegal activities.

Criticism: The use of tax relief in regional policies is less efficient than investing budgetary resources. It would be cheaper to finance the development of the region through direct government spending. Today, for a tax benefit of R$ 250,000/year per worker, a salary of R$ 56,000/year is generated.

6. IRPF Taxable Income Deductions (6.5%)

What is it: Deductions from health and education expenses, donations and sponsorships of cultural and sports activities, and child and elderly funds

Justification: Health and education rebates are compensation for expenditures on services not fully covered by the State

Criticism: According to the 2021 government report, waiver of medical expenses benefits the health plan market to the detriment of strengthening the SUS and favors the upper income strata – 88% of the benefit goes to the richest 20%. In education, it is concentrated in the richest incomes and regions, where there are fewer problems in the quality of education. A similar assessment was made in 2003.

7. Medicines, Pharmaceutical Products and Medical Equipment (4.0%)

What is it: PIS/Cofins benefits for manufacturing and importing medicines and some pharmaceutical products

Justification: Initiative lowered the cost and facilitated access to these products

Criticism: There is a concentration of subsidies on the medicines most consumed by families with higher incomes. Inclusion of those used by the poorest and free distribution would help reduce inequality in access to medicines

8. Worker Benefits (3.7%)

What is it: Deduction from IRPJ of expenses with medical assistance to employees and supplementary pension, with the worker’s meal programs and Citizen Company and Savings and Investment Plans

Justification: Health and social assistance policies

Review: Benefits limited to large companies

9. Regional Development (3.4%)

What is it: Series of benefits linked to the superintendence of the development of the Amazon and Northeast and the transport of goods in the North and Northeast

Justification: Benefits are part of the policy to combat regional inequality

Review: The use of tax benefits in regional policies is less efficient than investing budgetary resources

10. Exemption from the payroll (2.5%)

What is it: Replacement of the 20% employer contribution to social security by a tax on gross revenue for selected sectors and with differentiated rates.

Justification: Stimulate job creation by making it cheaper to hire workers. The end of the policy would lead to increased unemployment in the benefited sectors

Criticism: Random selection of sectors, high cost (R$60,000 waiver for each R$5,000 job) and low job creation. New contribution does not compensate tax waiver and focuses on consumption, harming the poorest.

Other tax benefits targeted by the Ministry of Finance

Distribution of profits and dividends

What is it: The receipt of dividends by individuals is exempt from IR, with the justification that the company’s profit has already been taxed. According to the Revenue, the integration of the IR taxation of individuals and companies is part of the reference tax system and is not considered a tax expense.

Justification: Charging in legal entities reduces the level of tax evasion, by reducing the number of taxpayers that will be inspected, for example

Criticism: Most countries have lower corporate rates and also tax individuals

Proposals: Project approved by the Chamber in 2021 provided for the taxation of dividends with a reduction in the IRPJ rate. The first would increase revenue by BRL 45.7 billion, while the second would have a negative impact of BRL 41.5 billion, according to projections for 2024. The Lula government should send a new proposal that addresses the issue to Congress.

JCP (Interest on Equity)

What is it: The mechanism for distributing resources to shareholders, with taxation of 15%, is also not included in the list of tax expenses, but can generate an estimated collection of R$ 15.4 billion.

Justification: The JCP should encourage equity investment to the detriment of investment in the financial market

Criticism: Minister Fernando Haddad stated that there is abusive use of the mechanism by “very profitable companies” to artificially reduce profits and pay less tax, neither as a legal entity nor as an individual

Proposals: Project approved by the Chamber in 2021 also provided for the end of the JCP. The topic should be part of the IR reform of the Ministry of Finance.

taxation of funds

What is it: The end of the exemption for real estate funds and the institution of quota eaters for exclusive funds have also been on the agenda of the economic area since the last administration

Justification: Encourage this type of application in Brazil

Criticism: Need to match these investments to others

Proposals: The charge on exclusive funds has already been proposed by Temer and Bolsonaro and is cited by the Treasury as part of the IR reform