Brazil’s President Elect Pledges Hefty Corporate Tax Cut

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By Ed Taylor

Jair Bolsonaro, Brazil’s president elect, has a bold tax plan including a flat 20 percent corporate tax rate.

The new government will take office in 2019. Bolsonaro and his future top financial minister Paulo Guedes have thus far outlined a tax plan designed to spur the economy by reducing income taxes for both business and individuals.

Brazil’s current corporate tax rate is 34 percent. Such a drastic cut comes in response to a similar move in the U.S., which lowered its corporate tax rate to 21 percent from 35 percent in 2017. The measure could make Brazilian companies more competitive.

“These proposals are much welcomed by companies, as Brazil is known for the complexity of its tax system and heavy reliance in compliance and bureaucracy,” Adriana Gravina Stamato de Figueiredo, a tax partner at Trench Rossi Watanabe in Sao Paulo, said in an Oct. 31 email to Bloomberg Tax.

Bolsonaro won the second round of Brazil’s presidential election on Oct. 28. He is Brazil’s first conservative president since the military regime of 1964 to 1985 and was elected over a leftist rival.

His governance plan speaks in general terms of reducing Brazil’s tax load and simplifying the country’s complex tax structure, which today has some 50 municipal, state and federal taxes.

Bolsonaro was forced to abandon campaigning in September, when he was stabbed in an assassination attempt and severely wounded.

Tax Plan

His tax plan includes extending the cutoff point for the payment of individual income taxes from the current monthly income of $514 to $2,570. Income below that point would be tax exempt which would increase the number of Brazilians not paying income taxes by 16 million. In addition, the new government would create a single tax bracket of 20 percent for all Brazilians paying income taxes. This would eliminate existing brackets of 22.5 percent and 27.5 percent.

The expansion of the tax exemption category makes sense because tax brackets haven’t been adjusted for inflation for four years, attorney Luiz Gustavo Bichara of the law firm Bichara Advogados said in an Oct. 31 email.

“The exemption level is very low. This has to be done,” he said.

Tax Revenue

Current President Michel Temer’s economic team has warned that these tax reductions would cost the Bolsonaro government over $16 billion in lost revenues.

“This is a positive proposal but you can’t risk losing tax revenue at the present moment. You can’t increase the fiscal deficit,” stated Isaias Coelho, a law professor at the Getulio Vargas law school in Sao Paulo in an email Oct. 30.

The Brazilian government is currently struggling to reduce its massive fiscal deficit. Bolsonaro has proposed a 20 percent tax on company dividends paid to shareholders, which currently are tax-exempt. Another proposal calls for a reduction in the tax breaks the Brazilian government has granted companies in recent years.

Economist Marcos CintraCavalcani de Albuquerque, a member of Bolsonaro’s economic team, told Bloomberg Tax via email on Oct. 31 that the combination of the tax on dividends and the elimination of tax benefits will cover any loss in revenues caused by the income tax reductions.

“There won’t be any tax loss. We are still working on the final model,” he said.

Some Doubts

Doubts, however, have been raised regarding the proposed tax on dividends and its impact on companies.

“This measure could cause a grave impact on capital markets, affecting investment strategies and portfolios as well as stimulating equity confusion between company partners and shareholders,” said attorneys Gabriel Barreto and Hugo Palo of the firm Almeida Barreto, who wrote a Jota report on the proposals.

In televised interviews, Guedes has also discussed merging several federal taxes into one value-added tax but thus far he hasn’t detailed this proposal.

“There is a VAT reform bill currently under analysis before the Brazilian Congress, but it not possible to determine whether it has chances of being approved still this year or right after Mr. Bolsonaro takes office,” Stamato de Figueiredo said.

Brazil’s National Confederation of Industry declined to comment on the Bolsonaro tax plan.

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