Brazil: Proposed Tax Measures Aimed at Avoiding a Deficit

With the latest unemployment figures at 8.6% (almost double last year's rate) and consumer prices rising fast, Brazil is in a recession that that shows no signs of abating.

The Brazilian government has issued a number of tax and administrative proposals which aim to tackle the forecasted R$30 billion deficit for 2016. The measures will have the effect of increasing taxes, mainly by reducing the number of tax incentives made available. However, it is the proposed increased tax on capital gains and the reintroduction of the CPMF social security contribution to help fund public health that have generated the most opposition.

To provide a sense of how far reaching the proposals go, it is estimated they will generate an additional R$39.7 billion in tax revenue and R$26 billion in cost cuts resulting in a budgetary surplus of R$34.4 billion (rather than a R$30 billion deficit).

With regards to tax incentives, the REINTEGRA incentive of up to 3% on exports will be limited to 0.1% in 2016, rising to 1% in 2017, 2% in 2018 and back to 3% in 2019. Tax incentives provided to the chemical industry (the REIQ) will be reduced by half. The proposals will also target deductions applied to interest on net equity (INE), limiting it to 5% and increasing the withholding tax on INE to 18% from the current 15%.

Only the change to REINTEGRA will require a decree, the other measures can be implemented through provisional measures. There has been no hard announcement regarding the date in which the changes will take effect.  

Also, Capital Gains will be taxed at higher rates. Currently, the rate is 15% which is applied as a withholding tax. With the new measures, the rate would increase scaling with the size of the gain . For gains up to R$1million, the rate will remain 15%, however the rate will raise progressively up to a maximum of 30% on gains above R$20 million. The new measures are pencilled for a January 1 effective date.

The other major measure that has been proposed is the reintroduction of the CPMF social tax. The CPMF was last seen in 2007 and following a change to the Brazilian Constitution could be reintroduced once again with Congress' approval. The social tax would apply to every banking transaction at a rate of 0.2%. This would be a highly controversial move and one that is bound to meet with strong protest. In the range of measures proposed, this could prove critical in meeting government targets with an estimated revenue increase of R$32 billion.

There are a number of disparate measures aimed at cutting costs such as changing the funding source for a number of social projects, the introduction of a salary ceiling for civil servants, restricting access to bonuses for employees who continue to work beyond the retirement age and a hiring embargo for federal departments. All of these measures have generated a reaction from local trade unions, which suggest a stormy passage to implementation if they are to be approved by Congress.