Tax Reform Complicates and Discourages Venture Investment, Experts Say | Brazil and Politics

The tax reform did not please. Not the productive sector, much less tax specialists heard by Valor Investe. To begin, the promise that everything would be simpler was not fulfilled. On the contrary. Before, the collection that was done in one step, with taxation of companies at once and exemption of profits and dividends for those who invest, will now be carried out in two phases.

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First, there will be tax collection for companies. The rate agreed upon in the House vote dropped from 34% to 26%. Nonetheless, even before the money reaches the investor, there will be another 15% tax on profits and dividends. Only the profits distributed by Simples companies and those that opt ​​for the presumed profit and earn up to R$ 4.8 million per year escape the second bite.

When you do the math, in practice, where you used to pay 34% of the wealth generated by a given company, now 37.1% will be paid. And that comes out of the pocket of those who invest in venture capital.

“In this part of taxation of profit, I consider the project very bad, because it deals with a type of capital that we need a lot in Brazil, for production and goods and services. See how much factory we have lost over the years. We need investment . When they increase the taxation of those who invest, this is very bad. It discourages investment in venture capital. And it also reduces the attractiveness of Brazilian companies for investors, “he says Ana Claudia Utumi, tax specialist and founding partner of the firm Utumi Lawyers.

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According to the tax expert, the reform made everything more complex and unfair, because it segments tax collection into two parts and still fails because it does not have a progressive table. It goes from exemption to 15% tax. No tracks, no nothing.

Utumi further states that the exemption based on the earnings of the presumed profit companies can encourage the slicing of companies. People would be encouraged to make more and more small companies to keep sales below the R$ 4.8 million that guarantees a zero tax rate. “These people are preventing companies from growing to stay within the exemption limit of R$ 4.8 million”, he says.

In addition to taxing dividends, the proposal ends the Interest on Equity, which is a type of dividend that generates a tax benefit for the company. According to Utumi, those who manage to use 100% of this benefit — only a few companies can — reach a 20% tax burden, which will become 37%.

“This project didn’t simplify anything. It brought back a complexity of the 1990s legislation, with a device that aims to avoid a disguised distribution of profits and dividends. It is necessary to control the expenses of members at the tip of the pencil, for example. And they are legal fights for low values. It brings more complexity to companies,” he says.

The analysis is shared by the tax expert and partner of the Candido Martins Advogados, Alamy Candido, which does not see neutrality in the project, but a way to raise more. “Brazil cannot be in a position where we are going to seek more revenue. Look at Brazil’s tax revenue in 2021, it grew 35%, why do we need a higher tax revenue? If we need to balance accounts, let’s work a little on the expenses that Brazil has. I think political interests are not aligned for that.”

Despite the flaws pointed out by the tax expert, he claims that the reform could go down an even more “disastrous” path. Thanks to the reduction of the rate from 20% to 15%, the text is considered bearable. “Fifteen percent I think it’s still high, but it’s more reasonable than originally proposed. I think it would be more balanced if we had a 10% rate“, it says.

bad for the small investor

The small stock market investor, who has been increasing volume in the financial market, will be penalized more. That’s because he, who receives only a small share of dividend income, will have to pay 15% of any amount he receives from most listed companies, which fall outside the proposed reform’s exemption range. Small investors are no longer exempt from this source of income and pay 15%.

On the other hand, those who receive profits and dividends from companies with sales of up to R$ 4.8 million will not pay any tax on this money, points out Utumi.

According to her, the proposal harms those who invest in large companies that represent 80% of GDP (Gross Domestic Product) national.

Another problem pointed out by the tax expert is that the proposal seeks retroactive taxation, which would imply a much higher tax payment, which can reach 47%. This is because the current 34% corporate tax (IRPJ) is being charged, as well as the 15% on profits and dividends accumulated in the past that cannot be distributed this year or before the reform takes effect.

Thus, the tax burden would no longer be the expected 37% and could jump to up to 47%. “It ends up being a tremendous absurdity. This project will generate a lot of legal disputes because I imagine that investors will not accept giving it away for free. Even more so that the exemption on calculated profits is an acquired right,” says Utami.

According to the expert, the public sector knows that there may be lawsuits, but trusts that most investors will not join the fray and counts on this to increase revenue in the period right after the approval of the reform.

Correction of the income tax table

The text brings an adjustment to the progressive income tax table for individuals, which had been frozen since 2015. But, for Utumi, it is still far from reaching the inflation of the last six years.

The correction of the individual table is almost laughable, because in fact they made an adjustment far below the official inflation of all these years. It’s not exactly a tax break, it’s something they should be doing every year. It’s still unfair. It improves a little bit. But it’s still not what it should,” he says.

According to experts, the tax reform is still another point: lack of transparency. To Odair Silva, partner and leader of the tax area of Grant Thornton from Brazil, the rush to vote on the text undermined the fundamental pillars of a reform. “There was little debate with society, whether specialists, companies, individuals. The calculations were not presented to their satisfaction. We need a comprehensive reform that covers some prerequisites, such as being debated in the market,” he says .

Tax expert Alamy Cândido adds that the current text discussed in Congress has the function of collecting, so the other items have been criticized by the market. “What ended up happening was an elaboration of a text by the Federal Revenue, whose function is to collect, it is in their role, but within a society where a balanced text is sought.” Cândido explains that the objective demonstrated by the reform should not be whether to increase or decrease the tax burden with a tax collection bias. “You only see one side of the scale. There was the drafting of the text by the Revenue and, as a result, there was a discussion between the parties in this environment on the background of an urgent project”.

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