Brazil’s Congress passes basic income tax reform text

RIO DE JANEIRO, BRAZIL – After an agreement between Chamber of Deputies president Arthur Lira and deputies who were still resisting the bill, the full membership approved the Income Tax reform bill on Wednesday, September 1.

The plenary is yet to vote on rider amendments, suggestions for changes to the approved basic text made by individual deputies. After approval by the Chamber, the bill needs to be approved by the Senate before heading to president Jair Bolsonaro for enactment into law.

Among other measures, the bill foresees a reduction in corporate income tax and the creation of a tax on dividends. The IRPJ (Corporate Income Tax), currently at 25%, will drop to 18%. The bill’s rapporteur Celso Sabino initially proposed to reduce the rate to 12.5%, but deputies argued that the loss of revenue for states would be too great (states receive part of the IRPJ through revenue sharing).

The text also lowers another tax on corporate income, the CSLL (Social Contribution on Net Profits), from the current 9% to 8%. In return for the tax reductions for companies, a 20% tax will be created on profit distributions to their owners. Dividends from micro and small businesses, using the “Simples” and “presumed profit” reduced tax regimes, with annual gross revenue up to R$4.8 million, will be exempt from the tax.

Another measure included in the bill to offset the loss of revenue with the cut in IRPJ was the reduction of tax benefits, such as exemption from income tax on housing allowances for public officials, reducing to zero the exemption of certain chemical and pharmaceutical products, and eliminatng the “presumed credit” of VAT for producers and importers of medicines.

The tax benefit for imported ships and aircraft was maintained in the text’s latest version. “In fact, the gain obtained from these changes would be minimal, while it could have negative consequences for regions that are highly dependent on waterway transport,” the report says.

Before the vote, Sabino removed all restrictions previously imposed on the use of the simplified income tax return for individuals. The government’s initial plan was to allow the use of simplified statements (which do not require taxpayers to itemize their deductions) only by taxpayers with annual incomes up to R$40,000 (US$7,713).

“We propose to expand the scope of the simplified standard deduction so that it can be used by any taxpayer, not only those who earn up to R$40,000 of taxable income in the calendar year. We have set the maximum amount of R$10,563.60 to be used for this standard deduction, bearing in mind that this is the amount that ensures that no citizen will pay more income tax than what is currently charged,” says the opinion.

Sabino also decided to end the Interest on Equity (JCP), a mechanism that companies use to remunerate shareholders with interest on their capital, while treating the payments as tax-deductible expenses.

The government leader in the Chamber, Ricardo Barros, told deputies that the government is committed not to veto the provision that ends the Interest on Equity and the one that creates tax on dividends. “If there is a veto due to legal claims, we will make an agreement to overturn the veto later,” he assured.

The text also expands the monthly income tax exemption range for individuals from R$1,903.98 to R$2,500. Anyone earning up to this amount will be exempt from income tax.

For the full picture, see our Brazil Tax Reform: Complete Guide.