Understand how the Tax Reform impacts the stock market and fixed income – 7/9/2023 – Market

Last week, the attention of financial market agents turned to discussions surrounding the processing of the Tax Reform in Brasília, approved on Thursday (6th) by the Chamber of Deputies.

The economic agenda and the government’s commitment to an agenda seen by investors as fiscally responsible was well received by the market, with an increase of 1.2% in the Ibovespa on Friday (7).

“The main impact on the financial markets at this moment is the drop in the Brazil risk”, says Michael Viriato, investment adviser and author of the blog De Grain in Grain, from Sheet.

The approval demonstrates an alignment between Congress and the government and the perspective of other projects for the development of the country, says Viriato, adding that the reduction of country risk means that investors charge less to lend to the government.

“This reduces interest expense paid by the government and at the same time reduces the cost of capital for companies to borrow to make investments.”

The greatest impact on investment portfolios, however, is still expected for the second half of the year, when the second part of the tax reform should come under the focus of Congress, this time on Income Tax.

Topics such as the possible taxation of dividends and the end of JCP (interest on own capital), practices that are quite common among companies listed on the Stock Exchange, should be part of the discussions over the next few months.

Anyway, with the approval of the tax reform on consumption, analysts point out that some companies on the Exchange should be more impacted than others, if the proposed changes are actually sanctioned.

Impact of tax reform on the stock exchange

According to an analysis by the American bank Goldman Sachs released on Friday (7), the potential unification of taxes on goods and services should have different effects for companies on the Stock Exchange.

Analysts at the bank point out that the ISS (Tax on Services) rate charged by municipalities ranges from 2% to 5%, while the IPI (Tax on Industrialized Products) rate ranges from 1% to 40%.

There is still no definition on the VAT (Value Added Tax) rate, but government signals indicate that the percentage should be around 25%.

“Given that the VAT proposal is to unify taxes with a neutral impact on collection, the tax reform could increase taxes on service companies, while potentially reducing taxes on the most taxed segments of the industrial sector”, says the Goldman Sachs report.

With this, it is possible that service companies will be pressured to raise prices to compensate for higher taxes, with a consequent reduction in demand, evaluate analysts at Goldman Sachs.

“Banks and transport companies appear among the names most exposed to tax reform on consumption”, points out the Goldman Sachs report.

The bank also recalls that a differentiated rate to be charged from financial institutions is not ruled out, which already pay a rate of 45% (25% income tax and 20% social contribution), against an average of 34% for large companies.

Analysts also point out that, among the stocks covered by it, exporters such as PetroRio, Suzano and JBS may not be affected by the reform, since there is no forecast for the application of VAT on exports.

In the case of JBS, they point out that the refrigerator can benefit from the subsidy provided for in the project for the basic food basket. Along the same lines, analysts add that Rede D’Or may also be among the names benefited, due to the forecast of reduced rates for medical service providers.

Analyst at Nord Research, Danielle Lopes adds that, according to the reform proposal, the tax will be charged at the destination, that is, at the place of consumption, and no longer at the source, as is done under the current tax regime.

Because of this, the analyst says that Ambev, with its focus on the production of alcoholic beverages, should be greatly affected, since Brazil corresponds to 50% of the company’s revenues.

XP analysts add that, for alcoholic beverages, there may be additional incidence of Selective Tax intended for any product harmful to health.

“In the refrigerator sector, the most impacted would be BRF due to greater exposure to the Brazilian market, unlike peers with a greater focus on exports, such as Minerva, Marfrig and JBS”, says Danielle.

Impact of dividend taxation and end of JCP

Goldman Sachs analysts also list the companies that may be most impacted by the second stage of the tax reform related to income tax.

In the event of the eventual end of the JCP, the impact may materialize negatively for companies on the Stock Exchange because the type of remuneration to shareholders is considered a financial expense and reduces taxable income, that is, the distribution of profits via JCP reduces the amount of tax to be paid by a company.

Among the B3 shares covered by Goldman Sach, Ambev, Telefonica Brasil, Itaú, Banco do Brasil, Lojas Renner, Bradesco and Localiza are the ones that most benefit from JCP to reduce the amount of tax to be paid, and, therefore, would be the most impacted by the end of the measure.

In the case of taxation on dividends, Petrobras, PetroRio, Telefonica Brasil, BB Seguridade, Banco do Brasil, B3 and Cielo are pointed out by the bank among those potentially most affected by the measure.

“Even in a scenario of taxation of dividends, this would not be something unique and exclusive to Brazil, which is one of the few countries in the world where there is no taxation”, comments Danielle, from Nord.

Impact of tax reform on fixed income

Analysts also believe that the Tax Reform is capable of amplifying the downward trend in the future interest rate market, which embodies the expectations of financial agents for the course of monetary policy. Further declines in future interest rates, in turn, could fuel the bullish potential of stocks on the Stock Exchange.

Fixed income analyst at Nord Research, Christopher Galvão says that, while the Tax Reform has the potential to increase economic growth in the coming years, the fiscal framework, also under discussion in Congress, brought an improvement in the expected trajectory of the federal debt.

“We have already had a significant drop in interest rates [futuros] in the long term, and the approval of the Tax Reform could be one more factor contributing to this downward movement, since we would have the prospect of a more sustainable path for the relationship between debt and GDP”, says Galvão.

In recent weeks, banks and brokerages have adopted a more positive view of the performance of the Brazilian Stock Exchange in the coming months, with the drop in interest rates being one of the main catalysts for the expected performance ahead.

Chief economist at Suno Research, Gustavo Sung adds that the adoption of a system with fewer distortions, greater efficiency in the allocation of resources and more transparency should lead the country to a path of sustainable growth with increased productivity.

“With the growth of productivity and economic activity, the country’s collection would be greater and more efficient, helping to stabilize the debt. And the fiscal risk, the country risk, the structural interest rate, among others, would fall. Brazil could enter a virtuous cycle,” says Sung.

Advisor Michael Viriato also states that the drop in interest rates causes the price of fixed-rate and referenced securities to rise, while on the side of the stock market, the reduction in the cost of capital and interest expense of companies improves their results and help with investments. “Therefore, the outlook for future earnings growth rises. With the outlook for higher earnings, stock prices gain more support for appreciation.”