International Tax Newsletter - August 2024

Government says it will present income tax reform proposal within 60 days

The Finance Minister, Fernando Haddad, announced that the government will present a proposal to reform the Income Tax (IR) to the National Congress within 60 days.

According to the minister, the intention of the proposal is “not to balance the books” of the Budget, but rather to be a measure that will “complement” the new rules on consumption.

“All the measures that have been taken so far are aimed at rebuilding the base, but with a view to stabilizing revenue. It will be no different with Income Tax,” says Haddad.

The minister also adds that “any future increase in Income Tax will be offset by a reduction in consumption tax. Our idea is that the tax reform, as a whole, will be neutral from a revenue collection standpoint.”

Regarding the changes that the IR reform intends to bring, it can be said that its objective is to implement taxation on dividends, which are currently exempt.

Despite this, the version to be sent to Congress should be smaller, since the idea is to increase the rates of Interest on Equity (JCP) and Social Contribution on Net Income (CSLL).

It is worth remembering that the former government, through the then Minister of Economy, Paulo Guedes, sent a proposal in an attempt to achieve a similar proposal to the Legislature, focused on the return of dividends.

At the time, the text was approved in the Chamber of Deputies, but stalled in the Federal Senate, where it remains currently stalled.

Senate approves payroll re-taxation from 2025

On August 20th, the proposal that establishes transitional rules for the end of the payroll tax relief for 17 sectors of the economy was approved. From now on, the matter will be sent to the Chamber of Deputies for analysis. 

In a symbolic vote, the approved project maintains the payroll tax relief for these sectors in full this year and provides for a gradual re-taxation between 2025 and 2027. 

Starting in 2024, there will be a gradual resumption of taxation, with a rate of 5% on the payroll. In the years 2026 and 2027, 10% and 20% will be charged, respectively. It is important to highlight that during the entire transition, the 13th salary payroll will continue to be fully exempt. 

It is also worth mentioning that for municipalities with up to 150 thousand inhabitants, the resumption of social security contributions will also happen in a staggered manner, that is, by the end of 2024, it will be 8% and the following year, the percentage will be 12%. In 2026, it will be 16% and in 2027 it will reach 20%.

Last year, the National Congress approved the maintenance of the payroll tax relief, however, the current President of the Republic, Luiz Inácio Lula da Silva, vetoed parts of Law #14.784, of 2023.

As a result, Congress overturned the veto and the government had to appeal to the Supreme Federal Court (STF), giving a deadline of September 11th for both Congress and the Executive to reach an agreement on the relief.

Government may recover R$8.5 billion in forgotten bank accounts to cover payroll tax relief

As it was previously announced, the Senate approved on August 20th, the proposal that establishes the transition rules for the end of the payroll tax relief for 17 sectors of the economy and the gradual re-taxation starting in 2025.

To make the exemption viable in 2024 and the gradual re-taxation in the following years, the bill foresees that the government can recover funds forgotten in bank accounts by Brazilians, found by the System of Receivables (SVR), to reinforce the National Treasury's cash flow.

This is just one of the measures included to compensate for the loss of revenue with the payroll tax relief for the sectors this year.

It is not yet known exactly how much money could be raised by the SVR, but there are currently R$8.5 billion of Brazilians forgotten in accounts.

The proposal also foresees improving the time for the transfer of judicial deposits unduly retained by Caixa.

Still thinking about making payroll tax relief viable, the bill authorizes the transfer of amounts abandoned in judicial accounts – the Labor Court alone has already identified R$3.9 billion that could be transferred.

Social Contribution on Net Income and Interest on Net Equity: government sends proposal to Congress with adjustments to rules

Finance Minister Fernando Haddad said that the government should send a bill to the National Congress (PL) with adjustments to the rules for the Social Contribution on Net Income (CSLL) and Interest on Net Equity (JCP).

The approval of these measures will be necessary if measures to compensate for the reduction in wage taxes in sectors of the economy do not generate sufficient revenue to neutralize the fiscal effect of the benefit in the coming years.

The bill should be sent to the Legislature together with the Annual Budget Law for 2025, which must be submitted by the 31st of August.

According to Haddad, “if the measures announced by the Senate are not sufficient, the budget law must provide for what the compensatory measures for the reduction in taxes would be for the following years.”

The minister also adds that the initiative will not be submitted as compensatory measures, but rather as a bill, and that it may not be approved if the projections of the Federal Senate are confirmed.

It is worth remembering that the Federal Senate approved the Bill (PL) that provides for the gradual withdrawal of the payroll tax relief and indicates sources of compensation for the period of validity of the benefit.

• According to the text approved by the Senate, there are:
• Compensation and repatriation of resources abroad;
• Exchange and tax regularization of resources;
• Updating of real estate assets;
• Renegotiation of debts of companies with fines from regulatory agencies;
• Use of money “forgotten” in the financial system and resources from judicial deposits without ownership.

It is also important to note that during the processing of the project, the government negotiated an increase in CSLL if the expected result was not achieved, but the idea did not move forward.

In addition, an increase in JCP taxation was included in the text, but it was also withdrawn before the vote.