Tax reform: government wants to change payroll – 05/03/2023 – Market

The government of Luiz Inácio Lula da Silva (PT) is considering including in the income tax reform a review of payroll tax rules, today one of the main targets of complaints from companies for raising the cost of hiring employees.

In the current model, employers pay 20% rates on salaries to finance Social Security, in addition to contributions to the S System and the education salary.

There is still no closed proposal within the Ministry of Finance, since the issue will still need to be addressed in internal debates. But some members of the government support the central idea of ​​exempting at least the first minimum wage (the equivalent today of R$ 1,302).

The subject, however, is delicate, since the social security contribution is a major source of revenue for the Union (R$ 564.7 billion last year). Any change can have a billionaire impact, whose replacement is not simple.

Government officials interviewed by Sheet claim that the Executive will put the topic under discussion at some point and may launch the proposal together with the changes in the Income Tax.

The debate is incipient precisely because income taxes will be the target of the second stage of the reform, expected for the second half of the year. The priority at the moment is the PEC (proposed amendment to the Constitution) that deals with taxes on consumption.

An eventual change in payroll taxation would have the expected effect of formalizing workers, especially those with low incomes. Many of them today are without social protection because they do not have a formal contract and do not contribute to Social Security.

Even during the campaign and the transition of government, specialists, business entities and groups of parliamentarians presented different proposals to try to reduce the tax burden on wages.

In a document released in August 2022, economists from the so-called Grupo dos Seis defended cutting the contributions collected on the portion of remuneration equivalent to a minimum wage, from 7.5% to 3% in the case of employees and from 20% to 6% for the employers.

Taxation above the first minimum wage, in turn, could be more progressive to compensate for the loss of revenue with the exemption on the lowest wage. One of the options would be to charge, in this situation, 10% of the worker and 20% of the companies, admitting raising the rates to 11% and 22%, respectively, in case of fiscal necessity.

The group also proposed to end payments from the S System and the education salary on this portion of the salary.

The Grupo dos Seis was formed by economists Bernard Appy, Carlos Ari Sundfeld, Francisco Gaetani, Marcelo Medeiros, Pérsio Arida and Sérgio Fausto. Two of them occupy positions in the Executive: Appy is the extraordinary secretary for Tax Reform, and Gaetani, the extraordinary secretary for Transformation of the State. Their personal positions before taking office will not necessarily be those of the government.

The exemption of the first salary is usually defended due to its potential coverage. According to data from Pnad Contínua, from IBGE (Brazilian Institute of Geography and Statistics), the average income of Brazilians ended 2022 at R$ 2,808 per month. For employees in the private sector without a formal contract, this amount is R$ 1,852 (equivalent to 1.4 times the minimum wage).

There are also studies that suggest offsetting the exemption of lower wage brackets with a higher charge in Income Tax.

There have also been suggestions to make contributions to the INSS (National Social Security Institute) mandatory for all hiring of MEI (individual micro-entrepreneurs) and self-employed workers, including individuals.

This mandatory reduced-cost contribution mechanism for both sides (contractor and worker) would lead to the formalization of Brazilian workers who today do not have social security protection.

Today, the government grants the benefit of exemption from wages only to 17 sectors, without distinguishing the remuneration achieved. The contemplated companies can waive the payment of the 20% rate in exchange for a charge of up to 4.5% on billing.

Last year, the Federal Revenue waived R$ 9.2 billion due to the wage exemption policy.

The renewal of the measure is a constant target of lobbying by the benefited sectors. The last extension took place at the end of 2021, with a deadline until the end of this year.

The policy was originally instituted during the Dilma Rousseff (PT) government and reached 56 sectors, but was cut down due to signs that the effectiveness of a sectoral exemption was being low.

In the government of Jair Bolsonaro (PL), the then Minister Paulo Guedes (Economy) also defended the reduction of payroll taxes. He called the charges “weapons of mass destruction” of jobs and considered a change in the rules urgent.

One of the pillars of the proposal was the so-called Green and Yellow Card, which reduced taxation on the payroll, but also flattened the collections for the FGTS (Guarantee Fund for Length of Service).

To compensate for the loss of revenue, Guedes also proposed the creation of a tax on transactions – along the lines of the former CPMF (Provisional Contribution on Financial Transactions). The idea, however, generated strong opposing reactions in the political class and never even had support from Bolsonaro.