Second part of Tax Reform will try to place rich people on Income Tax

Sao Paulo-SP) – The Ministry of Finance must submit to Congress by 2024 the second part of the Tax Reform of the Lula government, which deals with changes in the Income Tax.

The main point of the bill will be the end of revenue for profits and distribution by companies. Changes are also expected in the JCP (Interest on Equity) mechanism paid to shareholders. The project should also reduce taxes on corporate income (IRPJ/CSLL).

The reform of the obligation on income includes at least two other texts: the provisional measure that corrects the Income Tax table and changes the requirement for investments abroad ( MPV 1.171/2023 ), sent to Congress in April, and a bill of law to tax exclusive funds, as announced by the Minister of Finance, Fernando Haddad.

Also on the table is the possibility of jointly discussing changes in the entry of the consumption sheet, a demand, mainly, from the service sector.

In 2022, the Chamber of Deputies started a project by the Jair Bolsonaro (PL) government on the subject, but the text was abandoned in the Senate. He predicted a 15% IR on the distribution of profits and dividends, with exemptions for some companies, and the end of JCP. It also determined a cut in the main rate of the Corporate Income Tax (IRPJ) from 15% to 8% and a reduction in the Social Contribution on Net Income (CSLL) of up to 1 percentage point, to a minimum of 8%.

In March of this year, members of the Ministry of Finance listed some principles that the Lula government’s proposal on the IR should observe, such as progressivity (the higher the income, the higher the tax), equality with other capital incomes, international competitiveness and security legal .

The current Brazilian model provides for the concentration of income tax on the profit of the legal entity, exempting its distribution to individuals or other companies. Most countries practice lower rates than the Brazilian rate on corporate profits, but also tax their distribution, preventing any mechanism of deduction for lower amounts.

OECD countries (groups of rich countries) have migrated in recent years to a model of greater shareholder participation and less on corporate profits. Among the advantages of the change are a more progressive charge (the tribute grows according to the amounts received).

Experts also point out that the largest demonstration in the PJ is normally offered to workers and consumers, while the burden of dividends is borne by the shareholder himself.

Interest stability and the use of JCP were a trend in the 1990s, with the aim of stimulating investment, but several studies show that this was not guaranteed either in Brazil or in other countries —many have even revised this model.

Marcos Paiva, partner at the Choaib, Paiva e Justo Advogados law firm, says that the advantage of receiving with some limit so as not to change the small service setbacks, together with the reduction of the tax on corporate income, is a positive change.

“Brazil is closer to what it has in the world, which taxes dividends, offshores and tries to tax companies less. All you have to do is calibrate the rates so that the load doesn’t get too high,” he says. “Many caused in Brazil work for companies as a legal entity, and they are not necessarily the richest”

he declared.

Hermano Barbosa, partner in the tax area at the BMA office, says that discussions on Income Tax can be even more difficult than the debate on consumption participation.

He cites a series of proposals promoted in the Dilma Rousseff (PT), Michel Temer (MDB) and Jair Bolsonaro governments on the subject that were not approved by Parliament. Among them, attempts to tax exclusive funds, investments abroad and dividends through projects that they classify as problematic from a technical point of view.

“For all these topics, we have a very legitimate political discussion, but we cannot find out how these changes would be incorporated from a technical point of view”

he says.

“All the projects that have been presented so far have faced difficulties due to imperfections or possible unwanted consequences that could result from the application of these rules”

he declared.

Brazil has a corporate tax rate of 34%, consisting of 15% IRPJ, 9% CSLL and an additional 10% for profits above BRL 20,000. It is one of the highest in the world.

The deduction procedures are also outside the international standard. In Simples companies, the average rate is 6.1%. No presumed profit of 20%. No real profit, from 23% to 29%. As a result, Brazilian companies are taxed on average at 23%, according to calculations by Ipea (Institute for Applied Economic Research).

PROPOSALS BY THE LULA GOVERNMENT IN THE TAX AREA

• Consumption and wealth tax reform (approved by the Chamber in July)
• Correction of the Individual Income Tax table (sent to Congress in April)
• Taxation of investments abroad (sent to Congress in April)
• Taxation of closed-end funds (to be sent to Congress in August)
• Tax on the distribution of profits and dividends (expected for 2024)
• Changes to the JCP (planned for 2024)
• Regulation of the consumption and equity reform (scheduled for 2024)
• Payroll exemption (no forecast)

REFORM APPROVED IN THE CHAMBER IN THE BOLSONARO GOVERNMENT

• Correction of the Individual Income Tax table
• Reduction of the simplified IRPF discount
• 15% tax on distribution of profits and dividends
• Exemption for Simple and Presumed Profit companies with revenues up to R$ 4.8 million/year
• Exemption for distribution to another company of the same economic group
• Cut the main IRPJ rate from 15% to 8%
• CSLL reduction of up to 1 percentage point
• End of JCP
• Annual taxation of closed-end funds

*With information from Folha de S.Paulo

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