At the same time as it works on regulating the tax reform on consumption, enacted at the end of last year, the government is preparing the second stage of the change in the tax system, which now aims to change income taxation rules. Constitutional Amendment 132 establishes that a proposal on the topic must be sent by the Executive to Congress by March 20th.
Among the main changes that the new phase of the tax reform should foresee is the taxation of dividends, the portion of the profits of public limited companies distributed to shareholders and which has been exempt from Income Tax (IR) since 1995.
“The government, in this slicing of the reform, is seeking to make the taxation of some sectors less unequal, especially with regard to those that have more or less resources”, assesses Renato Aparecido Gomes, tax lawyer at Gomes, Almeida e Caldas Advocacia . “The hot topic now is income taxation, especially dividend taxation,” he says.
Taxation is defended by members of the economic team. “There will most likely be a return to dividend taxation, along with a reduction in company taxation,” said the special secretary for tax reform, Bernard Appy, in August last year, during participation in an event organized by tax auditor unions.
“Brazil opted for high company taxation and did not opt for dividend taxation. There is a strong tendency to get closer to the international standard. A lower tax rate on the company and starting to tax the distribution of dividends”, he continued.
In 2021, the then Minister of Economy, Paulo Guedes, even forwarded a bill that reformed income taxation and provided for the taxation of dividends. But the text, approved after several modifications in the Chamber, did not advance in the Senate.
Guedes’ proposal was to tax dividends by 20% and reduce the Corporate Income Tax (IRPJ) rate by 5 percentage points, from 15% to 10%. In the Chamber, however, the taxation of distributed profit was reduced to 15% and the cut in IRPJ was raised to 7 percentage points. Furthermore, the version that was sent to the Senate provided for a reduction of up to one point in the Social Contribution on Net Profit (CSLL) rate.
In July last year, the Minister of Finance, Fernando Haddad, said that he should not use the text that was stuck in the Senate. “We shouldn’t take advantage of it, no. In this case it is ordinary law, not PEC [proposta de emenda à Constituição]”, he explained.
At the time, the minister denied that there was already a definition of a rate for dividends and IRPJ in the reform. “We are going to start internal discussions at the Treasury, we are going to present it to the economic area, using the same protocol that we always do to ensure things are done well,” he said.
Regarding Personal Income Tax (IRPF), there is an expectation that the government’s proposal will establish exemption for those earning up to R$5,000 per month by 2026, as promised by President Luiz Inácio Lula da Silva (PT).
In January, both Lula and Haddad confirmed that there will be an increase in the IRPF exemption range for 2024, but only up to the equivalent of two minimum wages, or R$2,824.
According to behind-the-scenes reports, the government is also studying the imposition of a limit on deductions for health expenses, as is already the case with education expenses.
The argument is that the lack of limits privileges the richest. This is what has been confirmed by studies by the economic team since the Temer government, at least.
However, no proposal to contain deductions has been formalized since then, probably because of the high political cost – although it may affect high income, a reduction in deductions would certainly have a strong impact on the middle class.
The issue of deductions was not addressed in public by Treasury representatives. In January, when the possibility of limiting them became public, the People’s Gazette He contacted the department, which did not respond to questions.
New phase of reform should have a minimum tax of 15% on multinational profits
According to the newspaper “Valor Econômico”, the new stage of the reform must also include an effective minimum tax of 15% on the profits of multinationals operating in Brazil, a measure negotiated internationally under the coordination of the Organization for Economic Cooperation and Development (OECD) and already adopted in at least 55 countries, including those in the European Union.
Although the tax rate on corporate profits in Brazil (IRPJ and CSLL) reaches 34%, some multinationals count tax benefits or deductions in the calculation base that bring the effective rate to less than 15%.
The Treasury must still insist on trying to revoke or restrict as much as possible the use of Interest on Own Capital (JCP), an alternative profit distribution mechanism to dividends which, as it is accounted for as an expense, is deducted from the IRPJ and tax calculation base. CSLL.
Last year, the government tried to end the JCP through a bill and later a provisional measure, but, without agreement with parliamentarians, only some restrictions on the use of the financial instrument were approved.
For Haddad, the new reform should increase income taxation to enable a reduction in the burden of taxes on consumption. “We have a tax burden on consumption that is disproportionately higher than on income and assets”, he said recently in an interview with the newspaper “O Globo”.
“From my point of view, this reform should make it possible to reduce the burden on consumption, which would allow for a lower VAT rate. It taxes income more, reduces the burden on consumption, and the effect is neutral on the total tax burden. Everything with transition so that it is not from one year to the next, it is diluted over time”, explained the minister.
Despite this, he said, on the same occasion, that details of the reform have not yet been discussed, such as the possibility of creating a new IRPF collection range. “We have not reached this point in the formulation; we just approved consumer reform,” he said.
For the head of the Treasury, it is possible that the processing of the IR reform will only be completed by Congress in 2025. “The challenge of approving the IR reform in 2024 is that, as we have municipal elections, there is a window problem, which will have to be evaluated by policy. Consumption regulation needs to be voted on first, especially because it will come into force in 2026,” he said.