The Brazilian government is considering aligning its dividend taxation with OECD guidelines, encompassing company and dividend taxes. Key reforms include raising the personal income tax exemption to R$5,000 and introducing a minimum tax for higher earners. Experts predict implications for double taxation, fiscal stability, and inflation risks due to increased disposable income from tax cuts.
The Brazilian government is exploring a proposal to align its dividend taxation with the model of the Organization for Economic Cooperation and Development (OECD). This initiative, as conveyed by a member of the economic team to Valor, will incorporate both taxes paid by companies and those on dividends in a consolidated manner.
This adjustment forms part of a wider income tax reform the government plans to present to Congress. A significant aspect of this initiative is raising the personal income tax exemption threshold to R$5,000, which is projected to incur a revenue loss of approximately R$35 billion. To counterbalance this loss, the government intends to introduce a minimum tax rate of 10% on individuals earning more than R$50,000 monthly, covering all income types, including dividends.
“It is very common for countries to assess taxation collectively, considering both the entity paying the income and the recipient,” remarked the official. Currently, wealthy individuals in Brazil bear comparatively lower individual tax burdens than salaried employees, who are taxed at the source. This perspective acknowledges that when corporate taxes are factored in, the overall tax burden on high-income individuals may not be as favorable as perceived.
Tax experts provided insight into how OECD countries manage dividend taxation. Daniel Loria, a tax partner at Loria Advogados and former director at the Secretariat for Tax Reform, references potential models but expressed uncertainty on how Brazil’s tax authority would apply OECD principles. Generally, he explained, countries tax dividend distributions while providing credits corresponding to corporate taxes already paid.
However, changes in international practices show a shift towards a split-rate system. Helena Trentini, a tax lawyer and former OECD officer, highlighted this trend, noting varying corporate and dividend tax rates in countries like Ireland and Lithuania. The objective for many nations is to lower corporate income tax rates to promote economic activity while ensuring that any reforms do not impose additional burdens solely on dividends.
Currently, corporate income in Brazil is taxed at a total of 34%, which is significantly high compared to rates in the U.S., U.K., and Netherlands. Trentini cautioned that adding dividend taxation to this rate would create an extraordinarily high tax burden, one that does not exist elsewhere. The fiscal implications of these proposed changes remain ambiguous as companies may reduce dividend distributions.
Brazil’s existing high corporate tax rate is attributed to a reform in 1995 that merged dividend taxation with corporate income tax for simplification. However, experts contend that dividends are effectively taxed at the corporate level, challenging the notion that they are exempt. Tiago Conde Teixeira, a partner at SCMD Advogados, criticized the idea of taxing dividends at the individual level as double taxation, which he described as unconstitutional.
Trentini indicated that a split-rate system, unlike Brazil’s current model, would offer more incentives for reinvestment by lowering corporate tax rates, thereby fostering growth without immediate additional taxes on profits used for business expansion. Meanwhile, the proposal to increase the IRPF exemption threshold raises concerns regarding public finances, especially amidst opposition to tax increases from lawmakers.
Experts warned that buoyed disposable income resulting from tax cuts could potentially exacerbate inflation. Economists forecast that increased demand from higher middle-class consumption, alongside a tight labor market, may yield inflationary pressures. Consequently, even with measures intended to offset revenue losses, there is skepticism about their effectiveness and potential impacts on economic equilibrium.
The Brazilian government’s initiative to align dividend taxation with the OECD model reflects a significant shift aimed at reforming income tax structures. By raising the exemption threshold and implementing a minimum tax rate for higher incomes, the government is attempting to balance fiscal needs with economic activity. However, this approach raises concerns regarding potential double taxation and fiscal impacts on top-income earners, as well as challenges in mitigating inflation risks in a tight labor market. Such reforms will require careful navigation in congressional debates to attain both economic stability and equitable tax practices.
Original Source: valorinternational.globo.com
