Analysis: Brazil’s ‘super-rich’ enjoy 60% income tax exemption; other taxpayers only 25%

RIO DE JANEIRO, BRAZIL – In Brazil’s social-tax pyramid, the wealthier someone is, the higher the portion of income is exempt from taxation, according to Federal Treasury data.

A single Brazilian last year declared having received the sum of R$1.3 billion (US$250 million) in tax-free profits and dividends, according to public data released by the Federal Treasury.

This taxpayer is part of a group of 3,000 millionaires who, according to their own statements, have an annual income of R$150 billion, of which R$93 billion are tax exempt for individuals, because they are dividends.

While 99% of taxpayers receive an average standard exemption of 25%, at the top of this pyramid 60% of income is not taxed, according to simulations made by economist Sergio Gobetti on the impact of the return of taxation on profits and dividends provided for in the income tax reform bill sent to Congress.

In the specific case provided in the example starting this article, exemption reached 95% of income.

Currently, profits and dividends received by company shareholders are exempt in Brazil. The government’s bill aims to charge a 20% tax rate. There would be a single exception: people earning up to R$20,000 per month from small and medium-sized companies.

The bill has been poorly received by companies, which are pressing for changes. The main argument is that companies already pay a high income tax on profits before they are distributed to shareholders and that, with the new bill the tax burden would reach 43% (adding the tax levied on individuals and companies).

The Treasury says it is incorrect to add the 20% on the distribution of dividends to what is already levied on companies, since they are different taxpayers.

Model

According to Gobetti, even considering the average amount of taxes on profits collected at the corporate level, around 24%, the average effective tax burden on the income of the “super-rich” reaches 20%, well below the rate in developed countries where the average is double that.

However, several recent studies show that it is inadequate to consider that all taxes collected at the corporate level are effectively levied on the income of partners. In many cases, the cost of corporate income tax is passed on to consumers or to the companies’ workers.

“For this reason, international studies have recommended reducing taxes levied on company profits and increasing taxation on individuals, in a progressive way, weighing more heavily on the income of the wealthiest,” Gobetti says.

According to him, this is the prevailing opinion in the world today, including in international organizations such as the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD).

For tax specialist Eduardo Fleury, partner at FCR Law, the dividend taxation bill was too cumbersome. “In fact, we should have reduced the corporate tax rate much more to partially offset the taxation on dividends,” he says.

He advocates exemption when the distribution is made from company to company and also for remittances abroad. “Will the government use the increased revenue to distribute income or on current expenses?”, he asks.

Débora Freire, a professor at the Federal University of Minas Gerais (UFMG), draws attention to the fact that the Brazilian tax system is very regressive (those who earn less pay proportionally more), given the high participation of indirect taxes in the tax burden, that is, on consumption.

She recalls that, with exemptions and deductions (such as spending on health and education), the top of the pyramid ultimately pays less tax than most taxpayers. The main exemption is the non-taxation of profits and dividends.

Since 1996, these gains have not been taxed on individuals. “This is a distortion that we need to correct so that our system is a little more fair.”

Source: O Estado de S. Paulo