Tax reform removes speculators from the stock exchange and benefits long-term investors – Prime Time Zone


A 20% tax on dividends takes away the attractiveness of those looking to earn on top of the distribution of profits, but boosts the appreciation of companies that need capital to expand operations

Amanda Perobelli/ReutersTaxation of dividends distributed by companies was proposed by the Ministry of Economy and maintained in the report by deputy Celso Sabino (PSDB-PA)

The preliminary report of the tax reform, if approved as it is, will impact the behavior of Brazilian investors and drive away, at least in the first few months, speculators from the stock market. At the same time, the changes tend to increase the internal application of capital by companies listed in the Stock Exchange Brazilian, the B3. In the medium and long term, these investments will reflect the valuation of companies — and more money for those who have their shares in their hands. The 20% tax on dividends proposed by Ministry of Economy and maintained by the rapporteur of the text in the Chamber, deputy Celso Sabino (PSDB-PA), is the central point of this change in the market flow. The tax should strengthen other types of investments, such as real estate funds — whose taxation was overturned by the rapporteur — and fixed income — which once again becomes attractive with the movement of higher interest rates by the Central Bank. Other tax-free investments for real estate and agribusiness, distributed by the LCA, LCI, CRA and CRI alphabet soup, have also become more attractive.

Since 1976, companies listed on the Brazilian stock exchange must distribute at least 25% of their annual profit — also called a dividend — to shareholders, but some opt for higher rates, reaching up to 90%. For financial analysts and tax law specialists, the new load of taxes it will lead companies to reduce this percentage to the minimum and discourage investors who seek to profit from this sharing of profits. “Short-term sentiment is negative and should lead to a stock market crash with many investors selling their positions,” says Joni Vargas, partner at Zahl Investimentos. “This combined movement of taxation of dividends and the increase in the Selic makes investors look for a safe haven for their resources, such as the fixed income, until they understand this new reality.” The increase in dividends should have a greater impact on small investors who see the Stock Exchange as a way of accumulating savings on top of these dividends, and who will now have to give up 20% of the total as a form of tax. “It hurts in the pocket and also in the ear. There is a whole psychological aspect behind this percentage of taxation”, says Alexandre Motonaga, professor at Fundação Getulio Vargas (FGV).

For those looking for the long term, however, the taxation of dividends should be turned into profit. The value that companies will no longer distribute will be incubated in their operations — which can be transformed into an increase in hiring, the acquisition of machinery or the expansion of production units. These improvements lead to increased productivity and, consequently, value in the financial market. “The investor who seeks growth through the appreciation of assets will have a smaller impact with taxation,” says Fernando Scofano, a securities consultant at K1 Capital Humano. The move will especially favor companies in segments that need large investment capital to expand or maintain operations. Technology companies, which traditionally take years to turn their operations into profits — see Tesla — tend to benefit greatly. The advantages also come in handy to the expansion process of the giants of the retail and the massive technological investments made by financial institutions. On the other hand, shares of companies that are good dividend generators and are mature enough not to require large investments, such as electric companies, will not suffer the consequences of this change in the flow of money.

The changes maintained by the reporter can also influence the supporters of the day trade, stock trading technique in a short time span. Although most financial market experts do not recommend it, the practice has gained fame in recent years with the popularization of financial influencers on social networks. Sabino left in the report the economic team’s proposal for a 15% tax on fixed and variable income trading. The report, however, removes the taxation of come-quotas — as the anticipation of the taxation of Income Tax on investment funds is called — from real estate and agribusiness funds. For Frederico Bastos, professor of tax law at Insper, the rapporteur’s version meets most of the market’s demands and also brings a clearer wording than the original document drawn up by the Ministry of Economy. “The first proposal had more than 20 themes to be changed, while the new one focuses on five subjects, which generates greater investor optimism,” he says.

Understand the main points of the tax reform

There is still no forecast for the approval of the reform in the National Congress. The text is with the rapporteur, who can still make changes before presenting a final version. The bill has to be voted on later this year to be valid from 2022. The report on the second stage of the tax reform was presented on Tuesday, 13, to the leaders of Congress. The text was conceived on top of the original document delivered by the Minister of Economy, Paulo Guedes, to the president of the Chamber, Arthur Lira (PP-AL), at the end of June. Since 1996, dividends have been exempt from taxation in the country. Sabino’s proposal defines a 20% tax for micro and small companies that distribute more than R$20,000 per month. Last week, however, the congressman stated that he is studying to lower the limit to R$ 2,500. The changes should not have an effect on investments, as they target smaller companies.

Among the main changes, Sabino’s text proposed a 12.5 percentage point cut in the Corporate Income Tax (IRPJ). The measure foresees the reduction of the current charge from 15% to 5% in 2022 and 2.5% from 2023. In the original project, the economic team proposed two consecutive cuts of 2.5 percentage points in 2022 and 2023. The text maintains the additional 10% charge for companies earning more than R$20,000 per month and does not change the additional 9% tax on Social Contribution on Net Income (CSLL). In the current system, accumulated taxation reaches 34% for large companies. With the change, taxation would drop to 12.5% ​​of Income Tax, plus 9% of CSLL, totaling 21.5%. For companies with less than R$ 20 thousand in monthly income, the measure will reduce the tax from 24% to 11.5% in 2023. The congressman classified the text as “bold, but also coherent and prudent”. “The core of the project is exactly to change the spectrum of taxation in our country. We are giving relief, reducing the burden of those who produce and undertake in Brazil and offsetting this with the taxation of profits and dividends, a type of taxation applied throughout the world”, said Sabino.