Global Tax Alert (News from Americas Tax Center) | 16 Month 2015

Brazilian tax policy likely to increase taxes on financial institutions and high net worth individuals

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Budgetary (or policy) trends in Brazil are likely to result in targeted tax increases. A tax on the profits of firms in the financial sector is due to increase by a third, and high net worth individuals are likely to be subject to higher taxes on dividends and wealth.

Recent tax policy trends in Brazil are likely to increase taxes on financial institutions, dividends and high net worth individuals.

First, a tax on the profits of firms in the financial sector is due to increase by a third, from 15% to 20%. This increase is scheduled to go into effect on 1 September 2015, and will likely affect the financial industry significantly.

Second, high net worth individuals are also likely to be subject to higher taxes on their wealth. Specifically, there are discussions in the Brazilian Congress around targeting dividends, as well as proposals for a federal wealth tax. At the state level, lawmakers are looking to increase state transfer taxes. Along with the focus on financial institutions, these policy initiatives are likely to accelerate as the Government faces pressure to shrink its budget deficit.

Background

In an effort to reduce Brazil's federal budget deficit, the Government has proposed two provisional measures containing approximately BRL80 billion (approximately US$25 billion) of budgetary cuts to certain social benefits programs. Because of the strong reaction from unions and even from the President's own party, Partido dos Trabalhadores (PT), it is not expected that Congress will approve much more than BRL60 billion (approximately US$19 billion) of the proposed cuts. As such, the Government will continue to seek additional sources of new revenue.

PL 1485 – Taxation of dividends

Among the possible sources of new revenue, the Brazilian Congress is currently focused on the taxation of dividends. On 12 May 2015, the Congress undertook the consideration of PL 1485, which would:

  • Revoke the regulations around Interest on Net Equity (INE), which would prevent taxpayers from deducting INE payments
  • Revoke all exemptions from taxation for dividend payments, which would subject all dividends paid to individuals and corporations to tax
  • Impose a 15% withholding tax (WHT) on dividends received by nonresidents from Brazilian companies (25% WHT applies to residents of “favorable tax jurisdictions”)

The Government claims that the imposition of a WHT on dividend payments would be similar to the WHT regimes imposed by most countries. The Government also argues that the current exemptions sharply increased the utilization of tax planning designed to take advantage of the exemptions, asserting that the amount of exempt income has grown at a rate almost double that of taxable income. In addition, the Government argues that the shareholders receiving dividends are more likely to benefit from these exemptions than are the employees of the businesses.

While the ruling PT party has yet to release its annual legislative agenda, there is a high likelihood that PL 1485 will be included in the document. Proposals to tax dividends are not a new phenomenon in Brazil, but the proposed PL 1485 does seem to have a chance of being enacted. Any proposals that are ultimately enacted will apply only to profits generated in the year after enactment. All changes will respect treaties, as a principle.

PM 675/2015 – Increased social ontribution tax on net profits for financial institutions

The proposal of PL 1485 comes shortly after the enactment of a Provisional Measure 675/2015 (PM 675/2015) that raised certain corporate taxes on financial institutions. Specifically, the social contribution on net profits (CSLL) for financial institutions has been raised from 15% to 20%. While this tax increase has been enacted, it still must be approved by the Congress or the law will expire. This approval is likely to be contentious due to the current friction between the President and the chairmen of both the Senate and the House of Representatives.

Given the growing profits of financial institutions in a time of economic difficulty, there should not be much resistance against the approval of PM 675/2015.

PLP 130/2012 – Wealth tax

Since the adoption of the Brazilian Constitution in 1988, there have been several attempts to impose a tax on high net worth individuals. Most proposals have called for a flat tax on the value of the assets exceeding a certain threshold, declared on an individual's annual tax return. The PT is currently sponsoring PLP 130/2012, which proposes an annual tax of 0.5% to 1% on estates that exceed the threshold of approximately BRL14 million. The calculation would be based on the individual's net worth (i.e., assets less liabilities).

There is substantial pressure against PLP 130/2012. However, given the economic realities in Brazil, the taxation of large estates will remain in the political discourse.

Proposed increase of inheritance and gift taxes at the state level

At the state level, there are discussions to increase the transfer tax (ITCMD) imposed on the asset transfers due to death and donation. As this proposal calls for amendments to state taxes, each state would need to implement new laws. Currently federal law limits the rates to 4%. There are discussions to increase the rate to 15% or possibly to 30%, allowing more flexibility for the states.

Regardless of any change in rates, states are actively looking to increase revenue from the ITCMD by changing their approach to enforcement. Enforcement of the ITCMD by the states has historically been weak. However, most states are entering into cooperation agreements with the Federal Revenue Service (RFB) in order to gain access to federal income tax returns. Access to these returns allows the states to determine when an individual receives donations or inheritances since taxpayers must include this information on a federal return for purposes of calculating the taxpayer's net worth for federal purposes. This increase in cooperation has resulted in a more efficient enforcement by the states, which has increased revenue from the ITCMD.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Serviços Tributários S.S., Business Tax Services, Sao Paulo
  • Eneas Moreira
    +55 11 2573 3117
    eneas.moreira@br.ey.com
Ernst & Young LLP, International Tax Services, Washington, DC
  • Cathy Koch
    +1 202 327 7483
    cathy.koch@ey.com

EYG no. CM5611