RIO DE JANEIRO, BRAZIL – Tax reform, one of the main concerns of President Jair Bolsonaro’s government along with privatizations, will be at the center of the economic agenda of the Brazilian Congress in coming months, which resumed its work this week after the parliamentary recess in July.
The bill presented by the government is divided into different sections and has as one of its main points the reform of income tax in the country, which has one of the most complex tax systems in the world.
“The government has proposed small reforms for tax reform. Real reform is when you move the structure, now they are just painting the wall,” Gabriel Quintanilha, tax expert and professor at the Getulio Vargas Foundation (FGV), said in an interview.
One of the most controversial points of the proposal presented by the government is the taxation of dividends, which have been tax-free in the country since 1995.
According to the Tax Foundation, Brazil is one of the few countries globally, along with Estonia, that does not tax profit distributions, a situation that could change if Congress passes the “second phase” of the government’s proposed bill.
The taxation of dividend income has been widely defended by Economy Minister Paulo Guedes, an orthodox liberal of the Chicago school, who claims the measure will eliminate privileges and help lower taxes for businesses and workers.
“Thirty million Brazilians with a relatively low income receive no tax advantages, while on the other hand, 20,000 owners of capital received R$400 billion (about US$77 billion) in dividends and were exempt from R$50 or 60 billion (between US$9.615 and US$11.5 billion) in taxes,” Guedes justified a few weeks ago.
In its initial proposal, the government envisions a 20 percent tax on profits and dividends, with an exemption for individuals who receive dividends greater than R$20,000 (about US$3,846) per month from small and medium size businesses (SME). However, the bill’s sponsor in the House of Representatives, Celso Sabino, intends to extend the rebates to legal entities who receive dividends.
According to some experts, however, taxing dividends could discourage investment in a country that has been plagued by political and economic instability in recent years. “Brazil’s political and economic scenario is a high-risk one. It must be worthwhile to invest in Brazil,” Quintanilha stressed.
In parallel with the proposal presented by the government, to which changes can still be made, the Senate recently resumed discussions on a much more profound reform of the tax system. According to Quintanilha, the proposed constitutional amendment (PEC 100) would simplify the system by merging state and municipal taxes.
BOLSONARO RULES OUT TAX ON LARGE FORTUNES
Faced with business and upper-class displeasure over the government’s proposed income tax reform, Bolsonaro hit back the previous day, ruling out the introduction of a tax on large fortunes in Brazil.
“Some people want me to tax large fortunes in Brazil: is it now a crime to be rich in Brazil? A few decades ago, France did it, and the capital went to Russia,” the Brazilian right-winger said after criticizing the situation in Argentina and Venezuela.
The tax on large fortunes is specifically provided for in the 1988 Constitution but has never been implemented by a statute, in a country where the richest 1% earn 33.7 times more than the poorer half of the population.