Brazil Removes Payroll Tax Cut for 50 Business Sectors

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By Ed Taylor

Brazil’s government has rolled back payroll tax cuts for thousands of multinationals and other companies as part of efforts to reduce its budget deficit for 2017.

Under pressure to avoid raising taxes, Finance Minister Henrique Meirelles March 29 announced a $1.5 billion reduction in tax benefits with the elimination of payroll tax cuts for 50 business sectors.

Starting in 2011, the government began to offer selected sectors an opportunity to substitute a 20 percent payroll tax with a tax on gross revenues, which could be 1.5 percent or 2.5 percent, depending on the sector. The program was aimed at helping sectors being hurt by the global economic slowdown.

In the 54 major business sectors selected, some 40,000 companies received the tax cuts, many of them multinationals. Meirelles announced that 50 of these sectors will no longer be helped. The other four are all labor intensive—the reason they were selected to maintain the tax cuts, Meirelles said.

The four are: construction and infrastructure companies; rail and subway transportation companies; highway bus transportation companies; and communications firms.

Tax Hikes

In the week before the March 29 announcement, Meirelles had stated that tax hikes were virtually guaranteed in order to reduce the government’s deficit. These comments led to angry reactions from business leaders, who stressed that the economy is just beginning to emerge from Brazil’s deepest recession in history, and tax increases could kill the recovery.

In his comments after the tax measure was announced, Meirelles insisted that this wasn’t an increase of an existing tax or the creation of a new tax.

“This is not considered an increase in taxes. What existed was a concern with generalized tax hikes. This did not happen,” Meirelles said, in justifying the decision.

He added that the payroll tax cuts had been designed to stimulate the economy and help companies create jobs, but there was no indication that this in fact happened while the government lost $22 billion in tax revenues between 2012 and 2016.

“This program generated fiscal losses for the government. The original idea was that it would permit a recovery of the economy, but it did not generate the expected results. Now we are eliminating these distortions,” he told a televised news conference.

Affected Sectors

Business associations representing the affected sectors, however, objected to the elimination of the tax break, warning it would increase their costs and hurt the economy. Among the sectors that have now lost the tax cut are the auto industry—dominated by multinationals, the textile industry, food and beverages, the electronics industry, machinery, furniture and toys.

In a 2016 survey conducted by the National Confederation of Industry, 96 percent of the companies rated the program “highly positive,” 91 percent said it had improved their cash flow, 87 percent stated that their tax payments had been reduced, 70 percent said they had become more competitive, and 63 percent said they increased their hiring thanks in part to the program.

Sergio Gallindo, president of Brazil’s association of information technology firms (Brasscom), warned that the government’s elimination of the payroll tax cut would have a highly negative impact on his sector—another with a strong multinational presence.

“Information technology workers are among the highest paid. The end of this tax cut will generate a violent contraction of the sector,”he said via an email to Bloomberg BNA on March 30.

Fernando Pimentel, president of the Association of the Brazilian Textile Industry (Abit), released a statement on March 29 calling the government’s decision a “disaster.”

Public Accounts

“We realize the gravity of the situation of public accounts, but it is not by burdening the productive sector that we are going to produce an economic recovery. This shows that the government remains bloated and instead of improving its efficiency, it reverts to the easy way to close its accounts,” he said.

Economists criticized the government for removing the tax cut immediately for the 50 sectors, instead of conducting a gradual elimination.

“It’s easy to give candy to a child but it’s difficult to take it away. This [tax cut] is already incorporated in company management. You can’t just take it away from one moment to the next at a moment when companies are fragile and demand is weak. The impact is going to be large,” said economist Francisco Lopreato, a professor at the Economic Institute of Brazil’s University of Campinas.

In a more limited tax measure, Meirelles also announced that the government will begin requiring credit cooperatives, such as credit unions, to pay Brazil’s financial operations tax (IOF). This is expected to produce $385 million in annual tax revenues.

To contact the reporter on this story: Ed Taylor in Rio de Janeiro at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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