What Brazil’s coming elections mean for tax and transfer pricing

By Francisco Lisboa Moreira, Bichara Advogados, São Paulo

On October 28 Brazil will decide its next president for a 4-year term. There are two candidates in the second round of elections, namely, the two individuals that received the most votes in the first round, given that none could obtain over 50% of the valid votes: Jair Bolsonaro, the leader in the polls, currently at 59%, and Fernando Haddad, with the remainder of 41%.

Despite the debates and political turmoil, both candidates agree that tax reform will be a building block for the next government. Both argue that the current tax system is broken because compliance burdens are high and tax is not charged efficiently.

Single federal tax

Regardless of who is elected, the first step towards a solution may be a move to a single federal tax on goods and services – the “Imposto sobre bens e serviços”, a proposal advanced by Bernard Appy of the CCIF (Centro de Cidadania Fiscal).

The proposal aims to consolidate five separate taxes, the PIS, COFINS, IPI, ICMS, and ISS.

Brazil dividend withholding tax?

In Brazil, discussion of the taxation of dividends is alive and well. According to several studies, income taxation in Brazil is regressive as the higher the income, the lower the effective tax rate.

Wealthy individuals hold large positions in stock and, because dividends are subject to a 0% withholding tax, the largest portion of their income is not taxed.

Brazil began exempting dividends in 1996 to encourage foreign investments. As the country is now running a deficit, taxation of dividends is being considered as a good way to tax income.

Also, such a tax may be a relatively easy to put in place –  a provisional measure issued by the executive branch would start the legislative process and since half the current House of Representatives is being replaced, approval the bill would not result in public criticism for many congressmen.

Brazil’s transfer pricing fixed margin method

Of course, a big question remains on the internationalization of the economy, including tax policy.

Brazil’s Workers Party (PT) has always pushed for protection of the tax base, supporting measures such as the transfer pricing fixed margins methods (including Brazil’s unique position of not accepting paragraph 2 of article 9 of the OECD Model Convention), Brazil’s worldwide  taxation regime, and its high taxation of the importation of services.

Paulo Guedes, who will be Finance Minister this January should Bolsonaro win, has stated several times that the Brazilian economy must be competitive again and has advocated reduced taxes on payroll and the industrial and commercial chains of production.

Wages earners, financial transactions

Other relevant items being discussed include a reduction/exemption on income tax for wage earners under 05 minimum wages (approx. US$ 1,500), an increase in inheritance tax (nowadays a state tax, at a maximum rate of 8%), and the return of the CPMF, a levy on each financial transaction made, which may be of .05% or even higher.

A wealth tax (“Imposto sobre Grandes Fortunas”) is another point of discussion. However, it would be difficult to see a political scenario for its approval.

The consensus is that the current tax system needs to be reformed. The major difference is on how and where.

The views expressed here are solely of the author.