Brazil’s Proposed Reform: Aligning Dividend Taxation with OECD Standards

Brazil plans to revise its dividend taxation in line with OECD models, intending to raise the personal income tax exemption threshold to R$5,000. This could lead to a R$35 billion revenue loss, counteracted by new taxes on high earners. The potential impacts on public finances, double taxation concerns, and inflation risks have sparked considerable discussion among experts.

The Brazilian government intends to align its dividend taxation with the model utilized by the Organization for Economic Cooperation and Development (OECD). This approach combines taxes imposed on companies with taxes on dividends and is a significant aspect of broader income tax reforms scheduled for presentation to Congress. A focal point of the proposal is to increase the personal income tax exemption threshold to R$5,000.

The anticipated exemption adjustment may result in a revenue loss of approximately R$35 billion, prompting the government to propose a minimum tax rate of 10% for individuals earning over R$50,000 monthly. This rate will encompass all forms of income, including dividends. According to a government source, “It is very common for countries to assess taxation collectively, considering both the entity paying the income and the recipient.”

Currently, individuals with high incomes in Brazil contribute relatively less in taxes compared to salaried workers, who face source taxation. Experts, however, reveal that when evaluating corporate taxation concurrently, the tax burden on the affluent is greater than it appears. Tax expert Daniel Loria, from Loria Advogados, noted, “There are several possible models,” indicating uncertainty about how Brazil’s tax authority will integrate OECD regulations into the proposed reforms.

Traditionally, countries tax dividends while providing credits for corporate taxes already incurred. In Brazil, this structure could entail a tax of up to 27.5% on dividends under individual income tax; however, this would include credits for corporate taxes already paid. Helena Trentini, a tax lawyer, explained that OECD nations are leaning towards a split-rate system, where corporate profits and dividends face different tax rates, citing Ireland and Lithuania as examples of diverse approaches.

In this context, the Brazilian government aims to bolster tax revenues to offset losses incurred from the exemption threshold increase. However, there exists a danger that the reform may impose dividend taxes without following global trends of lowering corporate tax rates. Currently, Brazil’s corporate income tax is at 34%, significantly higher compared to nations such as the U.S., the U.K., and the Netherlands, which impose rates around 25%. Trentini cautioned, “If you add dividend taxation to the existing 34% corporate tax rate, the result would be a completely distorted tax burden.”

The impact of the proposed tax changes on government finances remains uncertain. The concern is that many corporations might cease dividend distributions due to the heightened taxation, complicating revenue collection. Experts note that Brazil’s high corporate tax rate is a legacy of reforms from 1995, which integrated dividend and corporate income taxation, resulting in a misunderstanding of the actual taxation of dividends.

Tax attorney Tiago Conde Teixeira criticized the government’s plan to tax dividends individually, labeling it as “double taxation,” as it taxes the same income at both levels. Conversely, a split-rate system could better incentivize reinvestment by allowing corporations to reinvest profits tax-free while imposing taxes only on distributed dividends.

Implementing the proposed increase in the IRPF exemption threshold could jeopardize public finances, especially amidst uncertain congressional outcomes. If revenue generation from new taxes fails to compensate for losses, broader economic implications could arise. Experts warn that increased disposable income from tax cuts may elevate consumption and potentially intensify inflation in a robust labor market.

Furthermore, fiscal strategist Felipe Salto suggested that even with offsets for lost revenue, the strain of new taxes may primarily fall on wealthier demographics, impacting economic demand positively yet contributing to inflationary pressures overall.

The Brazilian government is planning to revamp its dividend taxation system, aligning it with the OECD model as part of a broader income tax reform. This initiative aims to increase the income tax exemption threshold while managing the potential fiscal impacts of revenue shortfalls. The reform raises concerns regarding double taxation, corporate tax incentives, and the potential inflationary effects of increased disposable income. Understanding these changes and their implications is essential as Brazil navigates its tax structure adjustments.

Original Source: valorinternational.globo.com