Brazil plans to revise its dividend taxation in line with OECD models, increasing personal income tax exemptions and implementing minimum rates for high earners. While aiming to boost fiscal health, experts warn this could lead to higher inflation and tax burdens on dividends without addressing corporate tax rates adequately, challenging the overall economic landscape.
The Brazilian government is considering aligning its dividend taxation with the OECD model. This approach entails taxing dividends in conjunction with corporate income taxes. This initiative is part of a broader income tax reform aimed at raising the personal income tax exemption threshold to R$5,000, projected to result in a revenue loss of approximately R$35 billion. To counter this, the government plans to implement a minimum tax rate of up to 10% for individuals earning over R$50,000 monthly.
The intent behind this reform is to create a collective taxation framework for income, impacting both the companies distributing dividends and the shareholders receiving them. Currently, high-income individuals in Brazil pay less tax compared to salaried workers, as corporate taxes are often overlooked. Consequently, the overall tax burden on the wealthy might be higher than it appears when accounting for corporate taxation.
Experts, such as Daniel Loria, highlight the various models employed for taxing dividends as well as the uncertainty regarding how Brazil’s tax authority will apply OECD principles. Typically, countries impose taxes on dividends but provide tax credits for corporate taxes already settled. In Brazil, dividends could face taxes of up to 27.5%, with potential credits for corporate income taxes paid. However, tax lawyer Helena Trentini noted that many OECD nations are shifting away from this model toward a split-rate system.
For example, Ireland taxes corporate profits at 12% while dividends are taxed at a significantly higher rate, showcasing a contrasting method to the more balanced 15% tax in Lithuania. Many countries aim to reduce corporate tax rates to stimulate economic activity, which could conflict with Brazil’s goals of increasing tax revenue amid reform discussions. The existing corporate tax rate in Brazil stands at 34%, relatively high when compared globally.
Experts also argue that the current taxation model can distort economic activities and that the proposed tax changes run the risk of imposing substantial burdens on dividend distributions without accompanying reductions in corporate tax rates. Moreover, concerns have arisen regarding potential reductions in dividend distributions, which could complicate revenue generation through dividend taxation.
Historically, Brazil’s corporate tax structure has stemmed from a reform in 1995 that merged dividend and corporate income taxes, simplifying enforcement while claiming to exempt dividends. However, many now contend that dividends are effectively taxed at the corporate level, challenging the constitutional basis of taxing them again at the personal level.
The discussion around the increased IRPF exemption threshold also highlights fears of public finance risks due to uncertainty in congressional responses and opposition to tax increases. The proposed changes could further complicate economic stability, impacting the Central Bank’s inflation strategy and stimulating middle-class consumption in an already tight labor market, which could escalate inflation. Economists have expressed skepticism about the net effect of these planned reforms on fiscal health and economic activity moving forward, suggesting inflationary pressures remain a concern.
The Brazilian government’s proposed alignment of dividend taxation with the OECD model aims to streamline tax collection and increase revenue. The plan’s implications include raising the personal income tax exemption threshold while implementing a minimum tax for higher earners. However, fiscal experts warn that these changes may result in unintended consequences, such as inflation and a distorted tax burden, leading to further complications in both public finances and corporate reinvestment strategies. Experts urge caution as the prospect of increased taxation without concomitant reductions poses significant economic risks.
Original Source: valorinternational.globo.com
