BRASILIA – The time is inappropriate and “on the verge of insanity” to approve the tax reform of the Income tax, because it could further increase the uncertainties aggravated by the covid-19 pandemic and by internal crises, warn economists José Roberto Afonso, Geraldo Bisoto Jr and Murilo Ferreira Viana. If the government insists, the result will be more complexity in the system, loss of revenue for the public coffers, an increase in the phenomenon of pejotization (in which liberal professionals act as legal entities to pay less taxes) and encouragement of companies’ indebtedness.
The experts’ diagnosis is that the government and Congress they try to approve the reform as if they were driving a car through the rearview mirror and looking at the reality of the last century, which no longer fits in a world of rapid digital structural transformation, which was accentuated by the pandemic.
In a study published by Conjuncture Magazine of Brazilian Institute of Economics (IBRE) gives Getúlio Vargas Foundation (FGV), the three warn that Brazil today suffers from a disease of betting too high on simplistic and easy answers to resolve complex issues. In the case of the IR tax reform, they assess, this path is even more perverse.
The reform approved by the Chamber – and which awaits analysis by the senators – modifies the income tax charged on individuals, companies and also investments. In general, the text reduces the rates for both individuals (IRPF) and companies (IRPJ), but comes back with a tax on the distribution of profits and dividends (exempt in Brazil for 25 years) and the end the so-called Interest on Own Capital (JCP), a very common way for companies to remunerate their partners and pay less taxes.
For the authors, one of the problems is that the pandemic produced an acceleration of economic change, with the use of new digital technologies, which poses a new reality with implications for the tax system, including increasingly “fluid” employment relationships. Discussions that bypass the proposals that are being processed in Congress.
In addition to the IR reform, the Chamber is discussing a project that creates the Contribution on Goods and Services (CBS) and the Senate, a proposal to amend the Constitution (PEC) that creates the Tax on Goods and Services (IBS) for states and municipalities.
“The pandemic produced an acceleration of economic change, with the use of new digital technologies, and the profound proactive responses of States and supranational blocs. While the world watches State policies reforming structures and organizing the new normal, Brazil seems to be stationed in the old world, looking for easy solutions to extremely complex problems”, says the text.
Among the biggest mistakes in the IR project, the study points to the end of the JCP, which can bring “negative and non-negligible impacts” for productive investment and hinders the economic recovery in the post-pandemic scenario. Mechanism created after the Real Plan, with the end of monetary correction on balance sheets, the JCP is a way that large companies use to remunerate their shareholders whose expenses can be deducted from the tax payable. Thus, the payment of interest on equity encourages the use of the companies’ own capital, by lowering the cost of using shareholder resources in investment projects.
In the study, economists point out that this mechanism is particularly relevant in an economy like the Brazilian one, marked by a severe restriction on access to the credit market, either because of the prohibitive cost for many operations, which would stifle the business’s profit margin, or because of the absolute lack financing for certain business segments and sizes.
The study projects that there will be an incentive for indebtedness. This is because companies can use new operations to reduce the calculation basis of income tax payable, since expenses with payment of interest on financing are now deductible from the tax to be paid. “A tax reform is proposed to push Brazilian companies into indebtedness, even without needing to”, assess the authors.
A point that the study reinforces is that the proposal to change the Income Tax “brought forth a monster” by being based on ill-founded theses and displaced from reality, without the slightest idea of the impacts of its implementation, and with the promise of lowering rates “In the case of taxation of large companies, the proposal of the Ministry of Economy was a joke, but the way the rapporteur found it verges on insanity”, criticize the economists.
For José Roberto Afonso, it is curious that the government has announced the proposal to reform the Income Tax as a measure that will stimulate business investment and the resumption of the Brazilian economy in the post-covid period, even though, at the same time, the most diverse sectors are positioning themselves contrary to the proposal.
Afonso, who is a researcher at the Brazilian Institute of Education, Development and Research (IDP), says that the underlying reason for such disastrous movements in the proposals of both the government and other political forces is the fact that the digital economy poses a completely new reality for the world and for the country. more relevant, carried out without respecting borders, with increasingly fluid employment relationships, and the physical production of goods will have much less economic importance than in the last century.
He said none of this is being considered in congressional reforms, but it will have many implications for the shape of the tax system. “Finding that goods will be able to sustain our tax revenue will be the direct path to big tax breaks”, he warns, noting that income taxation has to be articulated with income flows in the global economy so as not to promote the amplification of litigation in the courts .
Who wins and who loses with the Income Tax reform approved by the Chamber
All taxpayers will benefit to some extent from the correction in the Personal Income Tax (IRPF) table. For example: whoever earns R$3,000 now pays R$95.20 in tax per year. With the reform, you will be able to spend R$ 37.50.
Those who earn up to R$ 52,818 per year will not be affected, as they will be able to deduct 20% of their income in a simplified way, up to the ceiling of R$ 10,563.60. For those with income above that, there may be some loss due to the lower ceiling of the simplified discount (previously it was R$ 16,754.34).
There was no change.
Companies with sales of up to R$4.8 million earn, as they are currently taxed at around 12%. As the reform reduces the IRPJ and CSLL rates, but maintains the exemption for distributed dividends, the effective rate is now around 8% for service providers. The difference in taxation of these companies for an employee in the CLT will widen even more.
The final effect of the reform will depend on the tax benefits received and on the use or not of the Interest on Equity to remunerate shareholders and the size of the slice of dividends. In the case of a company without interest on equity and without other deductions, the rate currently at 34% on IRPJ and CSLL will drop to 26%. Thus, for every R$100, R$26 will be collected in taxes, and another R$74 will remain with the company. If the company distributes the dividends in full, the tax burden will end up increasing, as there will be a 15% tax rate on individuals on the R$74.