Brazilian Congress is only interested in 25% of the income tax reform this year

RIO DE JANEIRO, BRAZIL – Congress is willing to vote on 25% of the income tax reform draft submitted by the government. The other 75% is yet another of the Federal Treasury’s constant attempts to increase its control over taxpayers, according to a spokesperson for Chamber of Deputies president Arthur Lira’s liaison.

There is willingness to vote on changes in income tax for individuals and corporations, in addition to taxing dividends, provided there is no increase in the overall tax burden.

Upon hearing that Economy Minister Paulo Guedes would have a much bolder goal than this, the spoksperson recalled that the Minister does not have a vote in Congress. Lira sees in the income tax reform a chance to leave an economic legacy.

Some say that this doesn’t make the slightest difference for a government that is in its third year in office and undergoing a political crisis.

The most likely scenario is that only the benefits foreseen in the reform, such as the increase in the exemption range for individuals, will be passed by Congress by the end of 2021.

Corporate Income Tax

The Ministry of Economy may be willing to lower the corporate income tax rate by 10 percentage points even, if the government is unable to end subsidies and special regimes that consume R$40 (US$7.6) billion from public coffers annually.

Guedes’ plan is to include the end of these incentives in the income tax reform in the next few days. But the economic team knows the challenge of dealing with large companies with highly organized lobbies in Congress, particularly on the eve of an election year.

For the Minister, relieving the burden on companies so that they can invest is a priority above any other in the reform. The benefit may ultimately be achieved with the gain in tax revenue which the government perceives as something structural.

The Minister of Economy has said to contacts that the sharp increase in tax revenue due to the recovery of GDP favors the progress of the tax reform. According to him, it is easier to pass tax changes when the coffers are full. However, the Minister’s perspective is not shared by all members of his team.

An idea to anticipate money from the privatization of Eletrobras to mitigate the impact of the water crisis on electricity bills in 2022 has begun to spread in the Ministry of Mines and Energy – and to worry the Ministry of Economy.

This anticipation would force the Treasury to contribute money to the Energy Development Account (CDE) in the form of securitization of R$25 billion, which is expected to flow into the public coffers over a period of 10 years with the Eletrobras transaction. The idea smacks of a “fiscal trick,” which the economic team wants to steer clear of.

Living dangerously

The government has enough resources to finance the new Bolsa Família (Family Grant). However, the problem is that a permanent expense needs to be linked to a specific and permanent source of income, according to the Ministry of Economy.

This is why Guedes decided to link the social program to the tax reform – although the reform is “neutral,” as the government argues. Now the two issues are intertwined.

Upon hearing that this solution could hinder the implementation of the social program should the reform be delayed, one of Guedes’ aides says that life is hard and dangerous.

The new Bolsa Família needs to be ready to run as of November, when the payment of the emergency aid is scheduled to end.

With an eye on the 2022 elections, President Jair Bolsonaro is heading to Porto Alegre next week in an attempt to get closer to large entrepreneurs from the South. On the invitation list for the meeting are Rio Grande do Sul economy heavyweights such as Taurus, Tramontina, Grendene, Gerdau, and Marcopolo.

For the full picture, see our Brazil Tax Reform: Complete Guide.