Tax reform will make companies on the Stock Exchange go to court, says entity – 08/26/2021

The latest version of the tax reform, which is awaiting a vote in Congress, does not simplify the tax system on companies, it will increase the search for the courts to resolve conflicts and could harm companies’ investment capacity as early as 2022, says Eduardo Lucano, president of Abrasca , Brazilian Association of Publicly-Held Companies.

The entity, which represents the largest companies that have shares and are responsible for 85% of the turnover on the Brazilian stock exchange, defends changes in the text to prevent the tax reform from worsening the tax system on the productive sector – instead of improving it. it.

As it stands, this project will generate more judicialization because it reduces legal certainty, in addition to complicating investment planning for next year.
Eduardo Lucano, Abrasca

Abrasca’s president says that the tax reform as it stands can lead to reduced investments by companies for two reasons: to tax dividends at 20% (today they are exempt); and ending interest on equity (JCP).

Interest on equity represents an accounting instrument used by companies to calculate how much it costs to use their own assets (real estate, machinery, etc.) to produce something. It is calculated as if it were an interest rate on a loan. And, like the cost of a debt, they also serve to deduct part of the income tax payable. But to have this rebate, the company needs to share part of the profit with shareholders. See more details here.

Dividends are also used by companies to distribute part of the profits to shareholders. Dividends are calculated after the balance sheet final result, that is, in relation to net income. See more details here.

We agree to tax dividends, but there needs to be a balance between taxing productive capital and financial capital.
Eduardo Lucano

See below the main excerpts from the interview with Eduardo Lucano, president of Abrasca.

UOL: Will the tax reform encourage production and investment by companies in Brazil?

Eduardo Lucano: As it stands, this project will generate more judicialization because it reduces legal certainty on the taxation of retained earnings until 2021, in addition to complicating investment planning for next year. This reform, as proposed, does not simplify the tax system and makes room for questioning in the courts.

Can you give some examples?

One point that creates room for questioning, for example, is the collection of Withholding Income Tax (IRRF) on retained earnings until 2021, which have already been taxed at a rate of 34%. This will encourage indebtedness for the distribution of dividends in 2021 and will also generate litigation, that is, discussion in court.

Our proposal is to preserve the exemption for retained earnings until 2021 and create a transition rule for dividends from 2022 onwards, so as not to frustrate collection expectations.

The Ministry of Economy alleges that the JCP may end because they have not proved to be useful as a way to reduce the indebtedness of companies and that the taxation on dividends will encourage reinvestment by companies in business.

Regarding the JCPs, we had a good dialogue at the beginning with the government, when they mentioned studies that the JCPs would not have worked in Brazil.

We looked at these studies and saw two points that should be questioned in these conclusions. First, they are old studies.

JCPs were created in the 1990s, but started to be used even after 2003, when the economy took off. The studies did not consider more recent results.

Another problem is that the methodology of government studies considers a general average of companies, without taking into account sectors or sizes of each one.

We then carried out an econometric study with FGV, considering the most recent history and comparing the results by pairs of companies of the same profile, of the same size.

And the conclusion was that JCP did help to reduce the level of indebtedness of companies (see below). Our proposal is to improve the JCP instead of ending them.

What about taxation of dividends? The Ministry of Economy says that the taxation on dividends will be offset with the reduction of the Income Tax, generating a neutral impact in terms of the tax burden.

Here we have a first question, which is the linking of the reduction of the Corporate Income Tax (IRPJ) or CSLL rate to the tax collection, but with immediate taxation on dividends at 20%.

This makes the load unpredictable, generating more instability in the business environment in the country, more contentious, driving away investors. Our proposal is not to link one thing to the other and evaluate other options to alleviate the concerns of states and municipalities.

And about dividends, we agreed to tax them, but there needs to be a balance between taxing productive capital and financial capital.

Like this?

The reform proposes to tax dividends at 20% and fixed income investments at 15%. You are taxing productive capital more than financial capital.

Outside, it’s the opposite. On average, the United States taxes dividends at 23.8%, but fixed income at 40.8%. In Mexico, to take an example more similar to Brazil, fixed income is taxed at 35%, and dividends at 17%.

It is necessary to standardize the rates of dividends and financial investments at 15%, achieving fiscal neutrality so that investment decisions are not affected by tax aspects.

Another issue is the taxation of dividends paid to affiliates with less than 20% of voting capital, which harms companies with capital distributed among several companies.

Our proposal is simply not to collect dividends distributed between legal entities of the same economic group in Brazil, regardless of the percentage of participation in the capital.

So, as the reduction of income tax on companies is doing, isn’t it compensating for the end of interest on equity and the taxation of dividends?

It could make up for it, but not in the way it is.