Brazil’s Economy Minister intends to cut US$7.6 billion in subsidies to lower corporate income tax

RIO DE JANEIRO, BRAZIL – According to the government’s initial draft, the Corporate Income Tax rate would drop 5 percentage points – from 25% to 20% – in two years, half in 2022 and the remainder in the following year.

The economic team intends to start a political war between the thousands of Brazilian companies and a fraction of large companies in the beverage and petrochemical product sectors.

The goal is to reach a higher reduction in Corporate Income Tax (IRPJ) for all companies in Brazil linked to a significant cut in tax subsidies (revenue that the federal government waives) that are used only by a few large conglomerates.

Given the productive sector’s opposition to the government’s bill to tax the dividends paid by companies to their shareholders, Minister of Economy Paulo Guedes has determined that his team will prepare a list of subsidies that should be included in the Income Tax reform bill sent to Congress two weeks ago.

According to the government’s initial draft, the Corporate Income Tax rate would drop 5 percentage points – from 25% to 20% – in two years, half in 2022 and the remainder in the following year.

However, the Minister is conceding that the portfolio miscalibrated the cut. According to sources, Guedes had been set on a 5-point reduction in one go, starting in 2022.

Now the Minister is considering a substantial cut in subsidies to offset for an even higher drop in the rate. According to the Ministry’s assessments, the removal of R$20 (US$3.8) billion in subsidies could pave the way for a cut of 7.5 percentage points, a scenario in which the corporate income tax rate would drop to 17.5%.

This value is defined today as the most feasible by government technicians. But Guedes has talked about trying to cut up to R$40 billion as early as this year. In this case, it would be possible to reduce the corporate income tax rate for all companies by up to 10 points in one shot – to 15%.

Negotiations

With this move, Guedes wants to convince the national GDP that taxing 20% on dividends that are currently exempt would not imply an increase in the tax burden for companies. To this end, the plan is to include the cut in subsidies in the draft reform bill to be reported by deputy Celso Sabino (PSDB-PA), preferably before the July recess.

In practice, the government would also seize the opportunity to comply with the obligation to cut tax benefits determined by the so-called emergency PEC, passed early this year.

In the government’s sights is again the Special Regime for the Chemical Industry (Reiq), which the government tried to extinguish this year, but Congress renewed it until 2025.

Other special regimes will also be attacked, but the S System should not be included this time, since the Economy relies on this partnership to launch the Productive Inclusion and Qualification Bonuses (BIP and BIQ) – initiatives that are being conceived to reduce unemployment and qualify workers who neither study nor are active.

Knowing the historical difficulty in overturning subsidies in Congress – and the Reiq is the most recent example – the economic team will bet on the narrative war: with less tax for all on the one hand, and huge benefits for a few companies on the other.

Guedes does not give up on taxing dividends at 20%, nor the end of Interest on Equity (IOC), another way used by companies to remunerate their shareholders with a reduction in the tax payable. According to him, the taxation of profits and dividends and the end of IOE would correct historical distortions of income taxation in the country.

Executive president of the Brazilian Chemical Industry Association (Abiquim), Ciro Marin criticized the government’s move. “I was perplexed with the matter coming back to the debate now. We believed this was totally settled. We worked through dialogue and we talked with all the leaders in Congress, including government leaders. It was an almost 90-day task, very well negotiated,” he said, about how he managed to keep the program that grants incentives to the sector.

The government’s plan was to use the end of the Reiq as compensation to subsidize diesel and cooking gas, but legislators vetoed it. “The long cycle industry needs a long term strategy and cannot be subject to the moods of the government on duty.”

The Brazilian Association of Soft Drink Industries (Abir) was also reached, but did not reply to a request for comment.