SAO PAULO – There is no doubt that the income tax reform proposal approved in the Chamber of Deputies was seen as negative for the market, both because of the rushed way of voting and because of the measures themselves, such as the taxation of dividends and the end of interest. on Equity (JCP).
Not even the approval of the highlight reducing the dividend rate (which was in the base text) from 20% to 15% – currently dividends are exempt – was received positively by investors, leading to a sharp drop in the Ibovespa the day before, of more than two%.
The stock market’s fall was also due to fiscal fears with the reform. According to the Independent Tax Institution (IFI), a body linked to the Federal Senate, the final version that came out of the Chamber of Deputies of the bill that deals with the reform of the Income Tax (PL 2337/2021) should have a negative tax impact of R$ 28.9 billion in 2022 for the public coffers, if it enters into force without further modifications.
The bill approved by the Chamber also proposes a 7 percentage point cut in the base rate, from 15% to 8%. The additional rate is maintained at 10%. Thus, the IRPJ will drop from the current 25% to 18%. The CSLL (today there are three types: 9%, 15% and 20%) falls to a percentage point. But this drop is subject to the revocation of PIS/PASEP and COFINS tax benefits for specific sectors.
The tax burden for companies, currently at an average of 34%, could be raised to 40.8%, taking into account the original proposal of the rapporteur Celso Sabino (PSDB-PA). However, with the changes in the IRPJ rules and in the taxation of dividends, this charge should go to 37%. However, the change affects, above all, the larger companies, since the Simples participants and part of the Presumed Profit regime (only those that earn up to R$ 4.8 million in revenues per year) remain exempt.
What changes for investments with the approval of the Income Tax reform in the Chamber?
It is worth noting that, to offset the cuts in corporate taxes, the bill proposes the elimination of some tax benefits, such as the importation of medicines, sale of natural gas and mineral coal, and tax exemption on housing assistance for public agents. However, tax benefits for the ship and aircraft sector remain. In addition, taxes on materials such as iron, copper, nickel and gold will be increased from 4% to 5.5%.
Relative Winners and Losers
In a report, XP strategists Jennie Li and Fernando Ferreira highlighted that the end of the JCP and the tax exemption on dividends tend to be negative for companies and the capital market, and may not be enough to offset the cut in taxes on companies. societies.
As XP highlights, currently, JCP is considered a financial expense and reduces taxable income. Thus, the distribution of profits via JCP reduces the amount of tax to be paid by a company. “Therefore, the elimination of this benefit would negatively impact the companies’ net results”, they point out.
According to Jennie, the end of the JCP has an average impact of 5% on the aggregate result of the companies on the Stock Exchange, which, on the other hand, can be mitigated by the average reduction of 8% in the Corporate Income Tax, which was also included in the text of the reform as compensation (read more by clicking here).
However, some companies would be more or less affected by these changes in taxation.
With the taxation of dividends, companies will have a greater incentive to retain their profits and reinvest in their future growth. Also, as in the US, companies will also have an incentive to make more share buybacks rather than paying dividends.
In recent reports on the topic, analysts from several houses have highlighted the expectation that low-growth companies that pay high dividends will be the most affected, such as the electricity, sanitation and telecommunications sector.
On the other hand, high-growth sectors, and current low profits and dividends, tend to benefit relatively from the reduction in Corporate Income Tax and because they do not distribute many dividends.
The technology industry and recent IPOs (SMEs) are examples of companies with low dividend payouts.
Regarding the elimination of JCPs, the companies that make the most use of this benefit in Brazil are those in the financial sector – such as banks, B3 (B3SA3) and insurance companies -, companies in the telecommunications and electrical sectors, and several companies in the consumption, such as Ambev (ABEV3), Hypera (HYPE3) and some retailers, such as Magazine Luiza (MGLU3), Lojas Renner (LREN3), Via (VVAR3), Raia Drogasil (RADL3), Pão de Açúcar (PCAR3), Carrefour Brasil ( CRFB3), rental companies, in addition to some malls such as Multiplan (MULT3).
This, by the way, helps to explain the sharp fall in the shares of banks and Ambev after the approval of the reform, last Thursday (2).
However, it is worth remembering that the text of the IR reform is still going to the Senate, so it is not possible to guarantee that the wording of the bill as it is will be maintained. “Some changes can still happen, so it’s too early for investors to make changes to their strategy. It is worth remembering that the initial project included the taxation of dividends from real estate funds, something that was removed, with a very positive effect for this market”, highlighted Jennie during a live held last Thursday night.
In addition, assess Jennie and Ferreira, there are other points to be considered when analyzing the impact for companies and shareholders.
“In addition to the distribution of dividends and interest on equity, companies have another tool to reward investors, which is the repurchase of shares, which reduces the number of outstanding shares and tends to increase asset prices. Furthermore, while taxation of dividends discourages companies from making distributions, they may choose to reinvest the additional cash. Lower taxes can also have the same effect, stimulating the company’s growth in the long term”, they emphasize.
There is still a forecast that many companies may anticipate their dividends, in the case of Gerdau (GGBR4). Steelmaker executives said yesterday, during Gerdau Investor Day, that they will be able to bring forward the payment of dividends to shareholders referring to 2021 after the Chamber establishes taxation of dividends and ends the JCP.
This takes into account that, if Congress passes this bill and it is signed by the President of the Republic, it is expected to enter into force in 2022. As such, this possibility is taken into account to maximize shareholder value.
“We can anticipate this year’s dividends initially expected to be paid in March,” said the director of rel.actions with Gerdau investors, Harley Scardoelli.
But the executive said that the dividend distribution rate should remain at around 30% for the time being, when asked if he was considering raising this amount, given the recent high cash generation.
In a report this week, days before the approval of the IR reform in the Chamber, Bradesco BBI made a projection of companies that may pay special dividends amid the expectation of taxation of earnings: “the taxation introduced on dividends could lead to payments of special dividends in the second half of 2021, especially in the capital goods sector”, pointed out the analysis team.
Analysts at BBI highlighted that, in the sector, they see potential for a 1.6 percentage point increase in the average dividend yield (dividend in relation to the share price) driven by WEG (WEGE3), Mahle Metal Leve (LEVE3), Tupy (TUPY3) and Iochpe Maxion (MYPK3).
“In our view, Mahle Metal Leve, Tupy and Iochpe are the three companies most likely to pay a
special dividend in the second half of 2021. WEG could pay R$2.6 billion in special dividends, or a dividend yield of 2.2%, in the second half of 2021, increasing the efficiency of the capital structure to zero net debt 2021 (compared to net cash of R$ 2 billion in the second quarter of 2021)”, reinforced analysts Victor Mizusaki, Andre Ferreira and Pedro Fontana.
Mahle Metal Leve could distribute BRL 673 million in special dividends, resulting in a dividend
yield of 14.3%.
They also point out that, during the second quarter result, Tupy announced the payment of R$ 39.3 million in interest on equity for the second half of the year. It would have the flexibility to distribute a special dividend of R$280 million, resulting in an attractive dividend yield of 9.4% in the second half of 2021, they point out.
Iochpe can also increase its payout (payment of dividends in relation to earnings) to 40%, against 30% in the base scenario, resulting in a dividend yield of 7.6%.
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As for the transport sector, no special dividends are expected.
“Brazilian airlines cannot distribute dividends due to negative shareholder equity. While infrastructure concessionaires such as CCR (CCRO3), Ecorodovias (ECOR3), Rumo (RAIL3) and Santos Brasil (STBP3) are focused on the robust pipeline of concessions that will be auctioned in the coming months”, they point out.
The actions of the car rental sector, in turn, are focused on growth, and considering the greater financial leverage in 2022 to renew and expand fleets, analysts do not expect that Localiza (RENT3), Movida (MOVI3), Unidas (LCAM3) and Vamos (VAMO3) distribute special dividends.
In addition to this sector, other companies are on the radar to pay more dividends due to the reform of the Income Tax. In June, BTG Pactual had already highlighted the possibility that Vale (VALE3) would anticipate payment.
“We concluded that there is a clear incentive for management to intensify and anticipate higher dividends in the second half of 2021 than previously outlined, which would be a natural result to increase shareholder value”, evaluated at the time analysts Leonardo Correa and Caio Greiner. This in a scenario where new dividend announcements were expected for the mining company’s shareholders (see more by clicking here).
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