Government Wants to Massively Raise Income Tax Exemption to R$4’990

By Xiu Ying, Contributing Reporter

RIO DE JANEIRO, BRAZIL – In the wake of the House of Representatives, the Federal Senate also intends to vote changes in the Brazilian tax system.

MDB leader’s bill in the Senate, Eduardo Braga (Amazonas State), increases the range of exemption from Personal Income Tax (IRPF) to five minimum wages (R$4,990.00).

To offset the drop in revenue, the bill ends the exemption that is given today for profits and dividends distributed by companies to their partners and shareholders.

Today, the range of exemption from income tax is up to R$1,903.98. From this amount, deductions are 7.5 percent, 15 percent, 22.5 percent or 27.5 percent on the value of the income.

The last rate is applied to those who earn more than R$4,664.68. With the change, it
is estimated that about 12.3 million taxpayers would be exempt. The increase of the exemption ranging to five minimum wages was a campaign promise from President
Jair Bolsonaro.

“My project proves that it is possible to increase collections,” says the MDB leader. According to him, the party with the most seats in the Senate will discuss economic issues in order to accelerate proposals after Easter.

The project expects net revenues ranging from R$26.8 billion to R$42.2 billion, to be shared between states and municipalities, since the IR is shared between the federal government and regional governments.

Under Braga’s project, taxation above five minimum wages would be unified at 27.5 percent, the maximum rate of the current schedule. To guarantee the principle of progressivity, taxpayers could deduct the part that is exempted up to five minimum wages. That is, the higher the income, the higher the effective rate.

Calculations made for the preparation of the project, which counted with Senate consultants, show that the person who has a monthly income of R$7.5 thousand would have their tax reduced from 15.9 percent to 9.2 percent. The reduction for those who earn R$10,000 monthly would be from 23.15 percent to 20.63 percent.

15 percent Tax on Profit and Dividends

The bill provides for a 15 percent tax on profits and dividends, at the same rate as today
on gains from most financial investments and on equity transactions.

Dividend is the payment that the shareholders of a company receive for the profit generated. Today, shareholders do not need to pay dividend taxes.

According to the project, micro and small entrepreneurs with annual dividend income and profits distributed below the exemption limit of the progressive table applied to labor income, in the amount of R$ 59,998.00, may have tax refunded.

The proposal also considers the reduction from 15 percent to 13.5 percent of the standard IRPJ rate. The additional 10% of IRPJ that exists today would fall to 7.5 percent. However, Social Contribution on Net Income (CSLL) would not be changed.

On the other hand, the tax benefit granted to companies in the payment of Interest
on Equity (JCP) would be extinguished, as well as exemptions granted to encourage
investors to choose financial assets. Alike dividends, interest on equity is also
a way of distributing a company’s profits among its shareholders.