Proposing taxation on capital income was once taboo in Brazil, but it is now a priority. The four best-performing presidential candidates, as well as groups working to present suggestions to candidates, predict changes in taxation of profits and dividends distributed to corporate shareholders.
The measures in progress also target the super-rich, as well as the so-called high-income PJ, the professional with high earnings who becomes a legal entity, that is, a company, for taxation purposes. The phenomenon is known as pejotization and attracts lawyers, doctors, executives from medium-sized enterprises and even large companies to the Simples Nacional or the presumed profit regime.
Brazil stopped taxing the distribution of profits and dividends in 1996, and there are still those who defend the exemption. For a group of jurists, it would be double taxation to charge, at the same time, the corporate profit and the shareholder’s gain. This current also says that it is more effective to concentrate the collection on the company, without having to worry about the taxation dispersed in numerous partners in the IRPF (Individual Income Tax) declaration.
However, the understanding that company and shareholder are distinct entities that can have taxed gains has become the majority. The consensus that the Brazilian system is socially unfair is also consolidated.
“The current model endorses the perception that the rich do not pay taxes in Brazil because when only the company is taxed, it is not always the shareholder who pays”, says economist Bernard Appy, director of the CCiF (Centro de Cidadania Fiscal) and secretary of Economic Policy of the Ministry of Finance during the administration of Luiz Inácio Lula da Silva (PT).
Corporate taxation, he explains, should reduce shareholder remuneration. However, studies show that the value of the tax can be offset by an increase in the final price of the product or service, so the consumer would be the tax payer.
It can also be written off in the form of a lower salary, which transfers the account to the employee. Depending on the transfer, the shareholder would even be exempt.
Appy is part of the Group of Six, along with economists Francisco Gaetani, Marcelo Medeiros and Pérsio Arida, professor Carlos Ari Sundfeld (FGV Direito SP) and political scientist Sérgio Fausto. They drafted a government proposal with reforms for presidential candidates that include taxation on the distribution of profits and dividends.
Researcher Sérgio Gobetti, one of the first to defend the return of this taxation, highlights one more problem. In practice, because of deductions, tax planning and other subterfuges, the company in Brazil does not pay the nominal ceiling of 34% on profit, but an effective ceiling that varies from 22% to 24%. Gobetti even identified that Petrobras had achieved an effective rate of 18% for eight years.
Concentrating taxation on company profits also puts Brazil at an international disadvantage. Although the percentage of 34% is not effective, it is what guides foreign investment decisions.
Only Estonia, for example, does not tax profits and dividends on individuals in the group of 38 countries that make up the OECD (Organization for Economic Co-operation and Development). On average, the shareholder rate is 24%.
“Even if we wanted to tax only the company, the world is moving to the other side”, says Gobetti. “We are losing the international fiscal and tax war, because even the highest rate abroad is still lower than ours because of this model.”
The presidential candidates propose the same roadmap: reduce company taxation and charge the shareholder, calibrating the rates to maintain current charge. What varies is how to make the change.
Economist Guilherme Mello, one of those responsible for the PT government program, says that the return to collecting profits and dividends is essential to modernize Brazilian taxation. “In our view, it is necessary to change the composition, but without increasing the load”, he explains.
According to Mello, there is greater taxation on labor income than on capital income, which benefits high incomes and encourages pejotization.
“The individual income tax is progressive up to the ranges between 30 and 40 minimum wages, from here onwards, the share of income with capital grows, with exemption from profits and dividends”, says Mello.
The government of Jair Bolsonaro (PL) has already tried to rescue the taxation of profits and dividends in its tax reform and promises a new offensive in a second term. The mishaps show the challenge of change.
Initially, it proposed a rate of 20%. The percentage, however, was falling, first to 15%, until it reached 10%. This also affected the counterpart. The reduction in the company’s profit taxation was more timid, from 34% to 30%.
The proposal excluded a series of entities, among them, micro and small companies from Simples Nacional and from the presumed profit. Still, it faced strong opposition. It passed the House, after many changes, and stalled in the Senate.
Now, President Jair Bolsonaro (PL) and Economy Minister Paulo Guedes want to break up this part of the reform, taxing the richest and getting R$70 billion to keep the R$200 of Auxílio Brasil in 2023 and expand the range. IR exemption.
“Any tax reform is against interests, so it takes a government well connected with a development plan to resist lobbies”, says Isac Falcão, president of Sindifisco Nacional (Brazilian Federal Revenue Auditors Union). “That’s not what happened with this project of the current government, which, after being disfigured, was abandoned.”
In his campaign, Ciro Gomes is among the candidates that most reinforces the need to reduce the tax burden on production and consumption to generate economic growth.
His proposals include the return of taxation on distributed profits and dividends and taxation of assets, explains economist Nelson Marconi, who coordinates the candidate’s government program.
“We started talking about taxation of profits and dividends still in the 2018 campaign and we were very criticized, but now there is a consensus that some collection is needed to do tax justice”, says Marconi.
In Simone Tebet’s group (MDB), coordinated by economist Elena Landau, the tax area proposals are managed by lawyer Vanessa Canado, a former special advisor to the Ministry of Economy.
Canado explains that the exemption of profits and dividends needs to be reviewed as an ally in the fight against sub-taxation of corporate profits in special regimes, such as Simples Nacional.
“In the world, taxation of profits and dividends is a choice between taxing a company, a shareholder or both — which is the most common option,” she says. “But in Brazil, this discussion was contaminated because the rate on corporate profit varies according to the size of the company, which is not common, because taxation needs to vary is on income.”
Canado recalls that a person with a higher income, R$ 30 thousand, for example, pays 27.5% of IRPF if they have a formal contract. If it is a company with real profit, it pays 34% of IRPJ. But if you are a PJ, you are in Simples or in the presumed profit, schemes used by micro, small and medium-sized companies, you pay between 4% and 15%.
“The simplified regimes were created with the objective of speeding up the calculation of the tax. We can maintain them. But these systems should not imply double non-taxation, as is happening”, says Canado.
PROPOSAL OF THE GROUP OF SIX
Reduce company taxation from 34% to 25% and tax distribution to shareholders in two stages. In the first, a rate of 15% would be applied to taxation at source. The second step would take place in the individual’s annual adjustment statement. In this case, there would be progressive rates of zero, 7.5%, 15% and 22.5%, offsetting what has already been taxed at source. Whoever is zero, would get back the 15% of the source. Whoever fell on the ceiling would pay the difference of 7.5%. To establish the tax rate for each taxpayer, the sum of capital income and current income for taxation purposes would be considered. But the charge would be made on capital income.
QUESTIONS AND ANSWERS
What is dividend?
It is the portion of the company’s net income paid to shareholders according to the number of shares, that is, the interest, that they have in the company.
How is taxation today?
It is governed by Law 9,249, of December 26, 1995. It ended the levy of 15%, applied to the IR and the IR withheld at source, on profits or dividends distributed to shareholders in results earned as of January 1996. taxation falls on the company’s profit, with a maximum rate of 34% via IRPJ (Corporate Income Tax) and CSLL (Social Contribution of Net Income). The exemption is also provided for in the Simples Act.
How would taxation be for the proposals of the presidential candidates?
A new assessment understands that company and partner are distinct entities and should be taxed based on income and not on the size of the business. It would be possible to establish taxation on dividends distributed to shareholders and tax the company, calibrating the rates to preserve the current total burden. There would be an exemption range, and the adoption of progressive rates, always higher for higher values. The tendency is to reduce the percentage charged to the company so that the company’s rate in Brazil is at or below the international average.
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