Government will charge tax on applied funds that are currently taxed only when repatriated. The measure, which targets BRL 1 trillion in assets, aims to offset lost income tax revenue
The provisional measure (Medida Provisória/MP) that Brazil’s federal government edited on Sunday night targets more than BRL 1 trillion (USD 200 billion) in assets belonging to physical persons abroad, many of them in tax havens. In this way, the government wants to make up for the loss of revenue it will suffer following the new Income Tax exemption range which came into effect yesterday.
To specialists, the MP foresees correcting the “tax limbo” that exists in investments abroad. Presently, taxation is levied on values only when they are repatriated. Starting next year, income tax will be levied on revenue from applied funds every year. They say, however, that the change could lead to judicialization.
“The government is trying to ensure that these values held by Brazilians abroad, via offshore companies, will be taxed regardless of the availability of these values to physical persons, and illegality may occur. The total value is in the legal entity. If there is no income availability, there shouldn’t be any mention of Income Tax. We’re going to see a race to the Judiciary,” says Rafael Korff Wagner, a partner at Lippert Advogados and President of the Institute of Tax Studies and of the Special Committee on Tax Law of the Order of Attorneys of Brazil (Ordem dos Advogados do Brasil/OAB) in the Brazilian state of Rio Grande do Sul.
The MP increases the Personal Income Tax (Imposto sobre a Renda das Pessoas Físicas/IRPF) exemption range to BRL 2,640. Moreover, it determines two ranges of charges on earnings abroad: 15% on the annual portion of earnings over BRL 6,000 and below BRL 50,000; and 22.5% for earnings above BRL 50,000. Earnings below BRL 6,000 will not be taxed.
The rates are valid as of 2024 for financial investments, profits and dividends from controlled entities and resources in trusts. The latter are contractual entities governed by foreign law and establishing a legal relationship between the settlor (owner of the resources), the trustee (person or institution that manages the resources) and the beneficiaries (one or more persons appointed by the settlor to receive the assets).
Isonomy', says secretary
“Under the current regime, there’s no specific table for foreign investments, but a progressive one for the Income Tax that goes from zero to 27.5%. The MP creates a specific rule and reduces this rate to 22.5%. It will anticipate taxation, but with a more advantageous rate,” says Eduardo Zangerolami, a partner of Barcellos Tucunduva Advogados.
In a note, Brazil’s Ministry of Finance argued that the measure is recommended by the Organization for Economic Cooperation and Development (OECD) – and points out that developed countries such as Germany (since 1972), Canada (1975) and Japan (1978) have adopted this rule.
In an interview to Globonews, the ministry's executive secretary, Gabriel Galípolo, said that the MP creates "isonomy" between taxation of investments in Brazil and abroad:
“It [the MP] creates equality, because the Brazilian investor who is here already pays this type of Income Tax. The fact that you could invest money outside of Brazil in a structure that doesn’t pay taxes created two types of distortions: the first was that those who can pay more, pay less. And also: I rewarded those who took money from Brazil and invested it abroad. We are estimating more or less BRL 1 trillion [total value that may be taxed].”
The government calculates a potential collection of BRL 3.25 billion this year and BRL 3.59 billion in 2024. On the other hand, the loss of revenue because of the new Income Tax table will be BRL 3.2 billion this year, and BRL 5.88 billion in 2024.
Collection with the new taxation will occur this year, because the MP authorizes the updating of the values reported abroad to the market value on December 31, 2022. In this case, the Income Tax rate will be 10%. The tax must be paid by November 30, 2023.
Exchange variation
Experts raise doubts whether the measure will cover the loss of income with income tax.
“It's a pedagogical measure rather than a financial one,” says Wagner, from Lippert Advogados.
Luiz Gustavo Bichara, partner at Bichara Advogados, criticized the change for having been made through a provisional measure, without any discussion in Congress. He also criticized the taxation of values that have not yet entered the country being subject to variations such as the exchange rate.
“Historically, this was different from when the taxpayer brought in the money – because then you're sure of the amount. We are taxing values that may not even exist.”
Source: O GLOBO.