Changes in income tax may harm micro and small businesses

Posted on 7/25/2021 at 7:00 am

(credit: Marcelo Cassel Jr. Agencia Brasil)

Tax reform, which promised to improve the business environment and ease taxation in Brazil, appears to be a Trojan horse, one of the big ambitions of Jair Bolsonaro’s government economic team. This is because, according to analysts, apart from adding even more complexity to the system, the lessons result in increased tax burden for many sectors, especially micro, small and medium-sized companies.

Faced with the negative impact of a bill to replace the income tax – presented in late June and which already has an alternative text presented by the rapporteur in the chamber, deputy Celso Sabino (PSDB-PA) – President Bolsonaro promised that if There is an increase in the tax burden, he will veto knowing that the project has come from the executive.

“There was an exaggeration in the tax reform on the part of the economy, it is already being settled with synergy. In fact, the revenue (federal), in my opinion, because it is too conservative, was too thirsty in the pot , ” He said in an interview with Radio Itatia last week. In turn, Economy Minister Paulo Guedes has been fierce in defending the country’s taxation of dividends and a reduction in corporate income tax (IRPJ). According to him, non-payment of taxes is a “privilege” in the distribution of company profits.

The fact is that yes, there are a series of complications brought by the project, resulting in increased tax burden, which need to be rectified. According to Evardo Maciel, former Secretary of Federal Revenue, taxes have begun to increase in the case of those who will no longer opt for the ordinary declaration of income tax – those who receive more than R $ 40 thousand per year (R $ 3.3 thousand per month). Updates to the table could remove R$ 10.7 billion more from this category.

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In the case of legal entities, Maciel cautions that the government and synergies, by defending a reduction in income tax, hold Brazil against practices adopted by developed countries. He also shows concern with the taxation of dividends. “You can be sure that tax evasion will increase through disguised distribution of profits, which will affect revenue. Hence, the deficit is even higher”, he explains.

To them, the lack of an IRPJ, which clearly benefits companies, does not protect small and medium businesses from the high impact on the distribution of dividends. More than 850 thousand legal entities – which are small and medium-sized companies – opting for the projected benefit can see an 80% increase in the tax burden.

“I suggest this project be filed. It is an electoral project, which is democratic and presented out of the blue to see if it is approved quickly. These are the companies that create jobs. There are 15 million unemployed in Brazil. Instead of helping the companies, you hit them”, he says. “It (government) manages to increase the burden on the small by saying that it wants to tax the rich. It hits hard on simplified systems which means it will get simpler. In other words: say one thing and do another. It is adding too much complexity to the system”, says the former secretary.

Suggestion

Economist Bernard Appi, director of the Tax Citizenship Center (CCiF) and co-author of the Chamber’s tax reform proposal, PEC 45/2019, says the project seeks to replace the income tax, even if amended by Celso Sabino, It doesn’t make sense. He remarked that if the objective is to reduce corporate taxation, then in order to maintain neutrality, the government and synergy should at least compensate for the loss of revenue with higher taxation of individuals and financial investments.

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“Brazil is a country that has two huge tax bases: consumption and payroll. And there are two bases that are taxed less, but which should be higher, are income and equity. A change that in a country like ours is a 50% increase in income tax. It makes no sense to cut billions of dollars. It goes against everything that everyone says should be the design of Brazil’s tax system,” he says.

In turn, the synergy has said that the loss of revenue anticipated with the proposal could be offset by the growth of the economy. To Appy, it’s a lie. “International experience does not show that there is a direct correlation between a reduction in corporate tax and an increase in economic growth. This means that companies are increasing their earnings. In the end, that’s it.”

In this sense, Celso Sabino’s proposal could reduce the taxation of the richest people in Brazil, large shareholders of companies. If profits are reinvested, taxation is reduced. According to the government its aim is to make companies grow and create more jobs, improve the economy. According to Appi, this is another misconception. “The literature shows that when dividend taxation is increased or introduced, it encourages reinvestment. But it does not necessarily make the country more developed”, he says.

Tax consultant Jose Messias Teodoro also sees distortions and criticizes the increase in burden. “With the amendments to the synergies, there is still a residual weighting increase of 2.4%. This can be removed from the base rate or from dividends to neutralize it – which is one of the tenets of tax reform. The government is against the grain. Time has come to change this taxation punishing the poor. A tax reform cannot be done on cash basis. This needs to be discussed with the society with the participation of everyone, not just half a dozen. There is a need to stop making laws on tax matters”, he emphasized.

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What can change with PL 2337/2021

text reporter proposals
The IRPJ rate, which is 15% today, will be 2.5% by 2023 – a reduction of 12.5 percentage points. Government text provided for a 10% rate until 2023;
Expenses for training administrators, participants in short-term events are now allowed. Spending on health plans, clubs and others in the form of disguised benefit distribution (DDL) is prohibited;
cessation of the mandatory calculation of actual profits for real estate and construction companies or those devoted to the exploitation of royalty, copyright, brand or image;
Real estate investment funds (FIIs), which will be taxed at 15% for individuals, will continue to be exempt. In the original text, income from closed-end funds would no longer be exempt and would be treated in the same manner as open-end funds. The reporter set up exceptions.

main effect
Micro, small and medium sized companies are taxed more. Partners of these companies, which were earlier exempted from dividend fee, are now taxed. The exemption limit is now R$20,000, which is equivalent to the terms between the first group and the larger companies;
Individuals who earn more than R$40 thousand per year (R$3.3 thousand per month) start paying more taxes, as they will no longer be able to opt for the simplified 20% discount and will have to make a full declaration;
Lower income taxes, in the opposite direction of what is done in developed countries like the United States – where income is taxed more and consumption is lower. Individuals will be exempted if they earn up to R$ 2.5 thousand per month and legal entities will pay the IRPJ at the rate of 2.5% until 2023.

About the author: Sarah Gracie

Sarahis a reporter covering Amazon. She previously covered tech and transportation, and she broke stories on Uber's finances, self-driving car program, and cultural crisis. Before that, she covered cybersecurity in finance. Sarah's work has appeared in The Wall Street Journal, Bloomberg, Politico, and the Houston Chronicle.

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