Brazil Proposing 22% Tax on Savings

By Jaylan Boyle, Contributing Reporter

RIO DE JANEIRO – The government plans to introduce a new tax on savings of approximately 22 percent by January of next year, announced Finance Ministry Economic Policy Secretary Nelson Barbosa on September 15.

The proposal is to be sent to Congress in the next few weeks, confirmed Finance Minister Guido Mantega.

The initiative seeks to impose a tax rate of 22 percent annually on savings accounts with a balance above a minimum of R$50,000. However, only the portion above the floor rate will be targeted for taxation.

The 22 percent rate is equivalent to the highest rates of taxation currently applied to high-yield investment accounts.

The rationale behind the new measure is to ensure that savings accounts offering steady rates of return are not allowed to compete for investment dollars that are currently being directed toward government debt, to compensate for a recent environment that has seen steadily falling interest rates.

Finance specialists are concerned that there is a recent trend among local investors to move toward the near-guaranteed safety and steady returns of savings accounts as interest rates have fallen. The reference Selic interest rate is currently at an all-time low of 8.75 percent. Many analysts have predicted that a continued migration to savings accounts by investors will effectively limit the extent to which the government can continue to lower interest rates.

Finance Ministry officials said the tax would be applied only at the moment of withdrawal from an account, and that the actual application would not begin until early February. “There’s no need for account holders to make adjustments immediately because they still have some time,” said Barbosa.

The proposed tax looks like it will not go through Congress as smoothly as the government might have hoped however. A meeting of the opposition parties was planned for Monday, September 21 for the purpose of discussing possible strategies aimed at blocking the intitiative. While opinions as to how to achieve this vary, all agree that the bill needs adjustment at the very least.

One proposal was the increase of the minimum applicable account balance to R$100,000. All have expressed concern that the legislation is too blunt, and will punish not only those ‘opportunist’ investors who have recently migrated to savings accounts, but legitimate savers as well.

Others have suggested that applying negative incentives are the wrong approach, arguing instead for measures that could encourage investment in more desirable areas, like fixed income funds. Such incentives could include reductions in applicable fees. The government has however said that there are no plans of this sort under consideration at present.

The legislation was tabled in May of this year, but made no progress until recently. Under Brazilian law, changes to the rules of taxation must take effect no later than one year after they are approved.