Opinion – Marcia Dessen: The taxable social security system

Taxation of financial investments in general is carried out exclusively at source, and it is not up to the investor to make choices. But there is one exception: pension plans.

There are two taxation regimes applicable to pension plans, the taxable and the definitive. They are defined by the Federal Revenue and as such should be disclosed, avoiding simplifications that can compromise understanding and prevent investors from knowing for sure how much they will pay in tax.

Calling the regimes progressive or regressive, for example, reveals only the tax rate that will be withheld at source. A more dangerous option is to use the term “offsettable”, suggesting that the withholding tax will be offset and the tax burden reduced. Taxable regime is the correct denomination of the regime called compensable.

Taxation regimes define how income will be treated in the annual income tax return. The matter is serious and important, so let’s speak clear Portuguese, respecting the concepts of the Federal Revenue and explaining the regimes as they should.

As the subject is extensive and I do not want to leave out any aspect, I divide the subject into two columns, starting with the most complex.

taxable regime

Income from pension plans makes up the taxpayer’s taxable income and is added to other taxable income, such as wages and rents, for example.

As the source (insurer) does not know the amount of its client’s taxable income, it withholds 15% tax in anticipation of the tax due on the return. But taxation does not end there.

The rates will be defined based on the taxpayer’s total taxable income, according to the progressive table currently in force, between exempt and 27.5%.

The IR withheld at source will be offset in the final adjustment of accounts with the Federal Revenue Service in the Income Tax declaration. Thus, those earning over R$ 55,976.16 per year will pay 27.5% tax (allowed for authorized discounts), not just the 15% withheld at source.

Who cares

The taxable regime may be suitable for investing resources with a time horizon of less than ten years. The deadline does not change the tax amount. Those with annual taxable income lower than R$22,847.76 will receive back the withholding tax. Attention, I am referring to the total taxable income, not just the amount invested in the pension plan.

Detail: when the taxpayer fails to choose the tax regime when joining the plan, which happens with some frequency, this will be the regime adopted. The change to the definitive taxation regime can be done through portability. However, the time count will restart from the date of the change.

calculation basis

The amount of tax due depends on the product, VGBL or PGBL (and similar). In the case of VGBL, the rate is levied only on earnings, as in traditional investment products.

In the case of PGBL, considering that part of the Income Tax due on taxable income was deferred in the year in which the contribution was made, the rate is levied on the total amount of the redemption or income benefit, capital plus income.

This charge will be made even if the taxpayer has not made the deferral or has made a contribution greater than the limit of 12% of taxable income. Therefore, the investor’s care in relation to the PGBLs taxation regime increases.

The next column will be about the definitive or source-only taxation regime.

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