RIO DE JANEIRO, BRAZIL – The special secretary of Treasury and Budget of the Ministry of Economy, Bruno Funchal, said on Friday (3) that the reform of the Income Tax (IR) approved by the Chamber of Deputies this week will reduce the federal government’s tax collection by R$20 (US$5) billion per year. This number does not take into account possible losses by states and municipalities.
According to him, this represents a reduction in tax burden equivalent to 0.2 percentage points of GDP. According to data from the National Treasury, the gross tax burden of the federal, state, and municipal governments is 31.64% of GDP.
The reform approved in the Chamber of Deputies, as sent to the Senate, reduces the tax levied on companies’ net profits. But it creates a 15% tax on dividends distributed to shareholders.
The cut in Corporate Income Tax (IRPJ) was seven percentage points, reducing the current 25% to 18%. The Social Contribution on Net Profits (CSLL) – another tax on companies – on the other hand, falls from 9% to 8.5%. Thus, the tax levied on company income will fall from 34% to 26%. A drop, therefore, of eight percentage points.
Funchal affirmed that the government has been cutting expenses, which can reduce the tax burden. “The best way to pass the control of expenses to the citizens is by reducing the burden. Now there is not so much room to reduce the tax burden,” he said.
Behind the scenes, the economic team did not view the approval of the proposal with concern fromthe fiscal side. The assessment is that the reduction in tax collection is not a problem since taxable revenues are growing above expectations. This general increase in tax revenue, which for the government is structural, can be transferred to a tax reduction.
On the other hand, there is an evaluation that the change in the corporate income tax can increase the deficit in the public accounts next year.
The government is authorized to record a deficit of R$170 billion next year. The budget proposal, however, foresees a smaller loss, of R$40 billion. This number, however, does not consider variables such as a possible loss of revenue.
OVERALL TAX COLLECTION MINUS US$10 BILLION
The calculations were made by economist Sergio Gobetti for the National Committee of State Finance Secretaries (Comsefaz). The project prepared by the team of the Minister of Economy, Paulo Guedes, contained a revenue increase of approximately R$12 billion. At the same time, the text that came out of the Chamber has a net loss of R$41.1 billion for the federal, state, and municipal governments.
The account already considers the vote of the last changes made yesterday when the deputies reduced the tax rate on profits and dividends, from 20% to 15%, in a move that was already agreed upon by the President of the Chamber, Arthur Lira, before the vote on the main text.
The loss of revenue to regional governments was estimated at R$19.2 billion – R$9.9 billion for governors and R$9.3 billion for mayors. [Half of the federal IRPJ tax collections must shared with states and municipalities.] The possible loss of revenue scared the financial market, which reacted negatively to the vote – bank shares fell and Ibovespa, the main index of the São Paulo Stock Exchange, fell 2.3%.
The Budget project for 2022, already tight because of the “precatórios” (debts that the federal government needs to pay after final court decisions), had been made considering a neutral impact of the tax reform, i.e., without losses or gains in revenue.
For the full picture, see our Brazil Tax Reform: Complete Guide.