Bolsonaro Trims Down Long-Awaited Income Tax Reform Proposal

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

A long-awaited proposal to overhaul Brazil’s income tax system was made less ambitious than originally planned amid changes ordered by President Jair Bolsonaro.

The proposal, which was delivered by Economy Minister Paulo Guedes to Congress on Friday, is part of a broader plan to simplify a system deemed as one of the world’s most complex. While it pledges to not increase the overall tax burden, it’s expected to bring in 1.8 billion reais ($365 million) to government coffers in the next three years.

Bolsonaro allowed a 20% tax on dividends, but ordered the creation of an exemption for small companies. He also vetoed suggestions to eliminate exemptions for the so-called LCA and LCI notes after complaints from the agricultural and real estate sectors, which obtain financing through these bonds.

Brazil’s Tax Reform Delayed as Bolsonaro Hesitates on Dividends

The president, who is up for re-election in 2022, also demanded benefits for individual taxpayers. For that, it raised the threshold for paying taxes to a monthly income of 2,500 reais from 1,903 reais, higher than the 2,400 reais planned by Guedes and his team. Tax deductions for expenses with healthcare and education, which were supposed to be eliminated, were raised.

The overhaul will reduce taxes for more than 30 million Brazilians, Guedes said after delivering the proposal to lower house head Arthur Lira. According to the minister, Bolsonaro wanted the exemption range for taxpayers to be even higher, 3,000 reais, but was convinced that there’s no fiscal room for that.

The proposal also reduces corporate taxes to 10% from 15% in two years and sets a 15% single tax for funds and fixed income instruments.

Lira said the reform won’t increase the country’s overall tax burden, but it does bring small gains for the government. The expectation is that it adds 900 million reais in revenue in 2022, 300 million reais in 2023 and 590 million reais in 2024, Special Tax Secretary Jose Tostes said at a press conference Friday.

Income tax reform is one of five chapters of a larger overhaul of Brazil’s tax code that the government is rushing to approve before next year’s presidential election. The first part of the reform, which dealt with the unification of levies on consumption, has yet to advance since being delivered to Congress in July of last year.

Brazil Has Six-Month Window to Pass Public Sector Reform

For the next steps, the government also plans to turn a tax on industrialized goods known as IPI into a selective levy that would only be imposed on products with a negative impact on public health or the environment. The plan also includes a new debt renegotiation program to help companies and individual taxpayers.

Lira said the whole reform could be approved by the end of the years in both houses.

“Congress can’t hinder economic and job growth,” he said.

©2021 Bloomberg L.P.