Brazil’s Senate passes bill raising taxes on banks, chemicals, lotteries

RIO DE JANEIRO, BRAZIL – The Senate on Tuesday, June 22, approved the Provisional Measure increasing taxation on bank profits, reducing tax benefits for the chemical industry and removing the exemption on fuels and derivatives in the Manaus Free Trade Zone (MP 1.034/2021). It also revises the distribution of revenues from sports lotteries.

The Senate introduced changes to the draft, which will return to the Chamber of Deputies. The Provisional Measure must be approved by June 28 to remain valid.

The bill is intended to offset the reduction in the tax rates on diesel oil and cooking gas. In its original draft, the measure addressed only the taxation of banks and the chemical industry, and also contained rules limiting the purchase of tax-reduced vehicles by people with disabilities. The Chamber of Deputies added the Free Trade Zone and lotteries, and the Senate removed the changes for car purchases.

The bill’s rapporteur Senator Ciro Nogueira (PP-PI) had accepted the draft produced by the Chamber, but the Plenary decided to incorporate three amendments from legislators.

Government leader Senator Fernando Bezerra Coelho (MDB-PE) announced that the Executive will veto the section referring to the Free Trade Zone, because this issue would need to be addressed by a complementary law (one that requires an absolute majority vote) because Provisional Measures can only involve ordinary statutes.

Banks

The bill’s main content is the increase in the rate of the Social Contribution on Net Profit (CSLL) for financial institutions. For banks, the rate will rise from the current 15% to 25% until December 31, 2021. From then on, it will be 20%. Other financial institutions (such as exchange brokers, insurance companies, credit cooperatives, credit card administrators) will pay 20% (today 15%) until the end of 2021, and in 2022 the rate will return to 15%.

The only institutions to be exempt from this change will be development agencies and state development banks. For these, the rate will remain at 15% until 2022, when it will rise to 20%. This exception was proposed by Senator Zenaide Maia (PROS-RN) and accepted by Senators.

“These are small banks, which are only interested in lending to micro and small businesses. The rate can be lower than the 25% being proposed, only during the pandemic. It is one more way for micro and small companies to struggle to access financing,” Zenaide argued.

Chemical industry

The Provisional Measure also initiates the process of revoking the Special Regime for the Chemical Industry (Reiq), which grants tax incentives for the sector. The withdrawal of benefits will be gradual, over the next seven years. The Provisional Measure initially provided for immediate revocation, which was transformed into a four-year transition period by the Chamber of Deputies and further lengthened by the Senate.

The change was advocated by minority leader Senator Jean Paul Prates (PT-RN). He claimed that the change will mitigate the effects of the process of withdrawal of incentives, which, according to him, will be extensive.

“The chemical sector is the third largest manufacturing sector in Brazil and the fifth largest in the world, [but] it struggles greatly to compete with global industry and has more expensive inputs. Any developed country in the world cannot be developed without a strong chemical sector. We are weakening the competitiveness of this sector, which is already penalized.”

According to the Senate text, the current PIS and Cofins collection rates for the sector – 1% and 4.6%, respectively – will be kept until June. From then on, they will be gradually increased, as follows:

Until the end of 2021: 1.08% and 4.98%

2022: 1,24% and 5,74%

2023: 1,32% and 6,12%

2024: 1,32% and 6,12%

2025: 1,40% and 6,50%

2026: 1,48% and 6,88%

2027: 1,56% and 7,26%

2028: End of the incentive

The Chamber had already removed an article from the Provisional Measure that granted, until December 31, 2025, presumed credit for the PIS/Pasep and Cofins contributions, both in the domestic market and in imports, for the manufacturer of 59 products intended for use in hospitals, clinics, medical offices, and vaccination campaigns.

Senator Ciro Nogueira explained that presumed credit would work as a buffer for the impact of the increase in input prices resulting from the sudden extinction of the Reiq, but, as the extinction will be gradual, there is no longer any need for this mechanism.

Cars

The bill would establish a limit on the value of new cars that can be purchased by people with disabilities with a reduction in the Tax on Industrialized Products (IPI), and would also increase the interval between the uses of this benefit from two to three years. However, amendments accepted by the Plenary removed these provisions from the draft.

Senator Mara Gabrilli (PSDB-SP) argued against these restrictions, stating that people with disabilities need this kind of help in the absence of adequate urban accessibility and mobility policies in Brazil.

“These people face a real rally to circulate in the cities, with no safety, no lowered curbs, no transportation. No Brazilian capital city has adequate sidewalk conditions for pedestrians and wheelchair users on the streets and at crosswalks. This exemption was proposed precisely so that these people can go to school, to work, and to rehabilitation appointments with dignity.”

Senators maintained the Chamber’s proposal to include hearing-impaired individuals among those who can benefit from the tax reduction. Currently, the law mentions only “people with physical, visual, severe or profound mental disabilities, or autistic, directly or through their legal representative.”

Free Trade Zone

Another of the Chamber’s inclusions were changes in the taxation of fuels and derivatives in the Manaus Free Trade Zone (ZFM). Currently, the legislation considers as exports, exempt from tax, sales to the ZFM made by producers located elsewhere in the country. The bill determines that this exemption will not apply to the sale of oil, lubricants, or liquid or
gaseous fuels derived from petroleum. Likewise, producers located in this zone will not be exempt from the Import Tax for these products, either for internal consumption or for the production process that results in their re-export.

Amazonas Senators – Eduardo Braga (MDB), Omar Aziz (PSD) and Plínio Valério (PSDB) – opposed the change and asked Senate President Rodrigo Pacheco to consider the issue as impertinent to the original purpose of the provisional measure. Pacheco rejected the request, because he does not see the issue as extraneous, but Senator Fernando Bezerra Coelho anticipated that the section will be vetoed.

Lottery

The deputies also included in the Provisional Measure text a change in the distribution of the collection of fixed odds lotteries, also known as sports lotteries. According to Ciro Nogueira, the change renders the mode more attractive to investors. Senators maintained this proposal.

In this type of lottery, players try to predict the outcome of sporting events, such as the score, first goal scorer and number of cards in soccer games. Unlike other sports lotteries, in the sports lottery players know at the time of the bet how much they can win in case of a match through a multiplier (the fixed share) of the amount bet.

“This type of bet is already being explored internationally, online, with Brazilian players, generating approximately R$2 billion a year, which is ultimately transferred out of Brazil,” says the rapporteur.

The bill revokes the destination of proceeds from the collection of fixed-quota betting lottery foreseen in the law and establishes that, of the total amount collected, prizes will be paid out first, without fixing the amount. Of what remains, 0.05% and 0.10% will go to social security; 0.82% to schools that have achieved performance goals on national exams; 2.55% to the National Public Security Fund (FNSP); 1.63% to clubs that have ceded their
symbols for use in the lottery; and 95% to lottery operators, which must be bid for operation by the private sector.

“In this modality, since the prize value is associated with the amount of the bet and not with the product of collection, it makes sense to distribute the collected values according to the operator’s gross profit. This way, the distribution percentages (except for the one related to the Social Contribution on Gaming and Prognostic Revenue) will be based on the amount calculated after taxes and prizes have been discounted,” explains Ciro Nogueira.

Currently, the law splits the revenue between physical and online betting. In the case of physical bets, 80% will be allocated to the payment of the prize and the collection of income tax, and the rest will be divided between social security (0.5%), schools of early childhood education, elementary school and high school that reach the performance target (1%), the National Public Safety Fund (2.5%) and the maintenance and funding of the lottery operator (14%).

In relation to online bets, 89% will be used to pay prizes and income tax on the winnings; 0.25% will go to social security; 0.75% to schools that meet performance targets; 1% to the FNSP; 1% to soccer clubs that lend their brands to the promotion and execution of the lottery; and 8% to cover the costs and maintenance of the lottery operator.

The bill also amends Law 9.613, from 1998, which deals with the crime of money laundering, to specify that companies that operate lotteries of any kind with prize payments in cash or real estate will be subject to financial control. This control is performed by banks and other financial institutions, which must send reports to the Central Bank’s Financial Intelligence Unit (UIF).

According to the rapporteur, the amendment aims to subject companies that operate lotteries to the control mechanism. “Certainly, one of the ways to launder money is precisely the acquisition, at a premium, of winning tickets. We are sure that the proposed fixed odds betting system will reduce the size of the illegal online betting market and increase tax collection, allocating more resources to social security,” Ciro said.