Revenue says it is necessary to apply the principle of prudence in the reform of the Income Tax

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A IRS said that it is necessary to adopt the “principle of prudence” in the tax changes proposals for the Income tax of companies and individuals. Earlier, the agency, after criticism, released the data that supported the tax reform proposal sent by the federal government to the National Congress, which showed a revenue gain of R$ 6.15 billion with the accumulated impact of the changes from 2022 to 2024.

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“Considering that such estimates are intended to support decision-making within the scope of tax policy, and that these decisions will directly impact the achievement of the fiscal result targets provided for in the Budget Guidelines Law, it is imperative to apply the principle of prudence”, he says the tax authorities, in a note.

In 2022, the last year of Jair Bolsonaro’s government, the total gain expected from the reform of income taxation is R$ 2.47 billion, different from that disclosed by the Ministry of Economy two weeks ago, when the project was sent to Congress.

At the time, the government informed that the impact would be practically neutral (with no increase or decrease in collection) with a positive balance of R$ 900 million. For 2023, the expected impact is an increase of BRL 1.6 billion and, in 2024, another BRL 2.08 billion.

The risk of an increase in the tax burden has been the biggest criticism of the business and financial sector since the project was launched. The expectation is for a broad change in the project in the opinion of the rapporteur, deputy Celso Sabino (PSDB-PA). Sabino spent yesterday in meetings with the technicians of the Revenue to close the preliminary opinion that should be presented tomorrow to the party leaders.

The impact forecasts and the calculation methodology were presented this Monday, 12, by the Internal Revenue Service after the agency was charged for not having passed the projections and for having wrongly calibrated the IR rates for companies, mainly. The criticism came from the private sector and also from within the economic team with what they call “collection rage”.

The growth in revenue is mainly due to the taxation of dividends and the end of the possibility for companies to deduct from the tax to pay Interest on Own Capital (JCP) – an alternative way of remunerating shareholders. The data does not separate the impact of change in each modality. In 2022, the impact of the new rules is positive in BRL 19.42 billion for the public coffers, in 2023 in BRL 57.68 billion and, in 2024, BRL 61 04 billion.

This is the most controversial point of the project. Companies want to withdraw this proposal from the text, but Economy Minister Paulo Guedes assured interlocutors this Monday morning that he continues with the plan to return to the charge, which has been exempt since January 1996. The government proposed a 20% rate on the distribution of profits and dividends.

Revenue forecasts also increase with changes in the rules for payment of Income Tax for financial investments, with an expected increase of R$ 14.19 billion in 2022, R$ 80 million in 2023 and R$ 50 million in 2024.

The biggest reductions in revenue will come from the cut in rates of Corporate Income Tax (IRPJ) and Social Contribution on Net Income (the two taxes levied in Brazil on corporate income): expected drop of BRL 18 .52 billion in 2022, BRL 39.25 billion in 2023 and BRL 41.53 billion in 2024. The Revenue also estimates that the revision of the Income Tax for individuals will contribute to a reduction of BRL 13.50 billion in taxes paid in 2022, BRL 14.46 billion in 2026 and BRL 15.44 billion in 2024.

In the projection released today, the government included in the account R$ 880 million of revenue forecast for the measure that allows taxpayers to update the property by paying a rate of 4% on the difference in value. For 2023, the Revenue estimates a reduction in tax collection of BRL 2.45 billion and BRL 2.03 billion in 2024 with this change.

Profit remittances abroad

The taxation of dividends and the end of the deduction of Interest on Equity will have an impact on the remittance of profits abroad, which will contribute to increase the federal collection by R$ 3.6 billion in 2022, R$ 11 billion in 2023 and R$ 11.6 billion in 2024, according to data detailed on Monday by the Internal Revenue Service.

The taxation of charges on the distribution of companies here in Brazil abroad is seen by analysts as detrimental to investments. In a note released today, the Revenue defends the taxation of profits and dividends and says that the national tax system has a large gap in the taxation of income from capital, as currently there is no tax burden on the distribution of profits and dividends.

“In this sense, the proposal represents a major advance in terms of equity and progressivity (penalizing the rich more), as it establishes the payment of taxes on this broad economic base, especially when considering that this source of funds is heavily concentrated in the upper strata of income,” says the document.

According to Revenue calculations, approximately 70% of the volume of profits and dividends were declared by taxpayers who are among the 1% with the highest income among the taxpayers.

The calculation methodology used to estimate the impact of taxation on dividends and interest on capital used the database formed by information contained in the Income Tax Returns of Individuals, among other data.

It was adopted as a premise that the taxation of dividends will change the behavior of taxpayers, in order to reduce the volume currently distributed.

The Revenue assesses that companies will try to reduce as much as possible the increase in their tax burden, while observing their distribution needs. To reflect this change in behavior, the Revenue adopted hypotheses of reducing the distribution of dividends according to the size of the paying company.

Small companies will reduce distribution a lot, while large companies will reduce the reduction. A small company usually has a lean corporate structure, with the majority partner being the one who decides on the distribution of dividends and also the biggest beneficiary of these resources. In addition, small companies are less likely to be selected to undergo a tax audit.

For the agency, these characteristics allow the change in the behavior of this type of taxpayer, in the sense of reducing the distribution of dividends, to be very relevant. On the other hand, a large company has a large number of shareholders, with specific rules regarding the minimum remuneration of shareholders pre-established in the bylaws.

In addition, publicly traded companies are supervised by the Brazilian Securities Commission (CVM), evaluated by the market for their degree of transparency, closely monitored by the tax administration and are more likely to be selected for a tax audit. “These characteristics significantly limit the possibility of reducing the distribution of dividends”, he points out.

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