In a press conference held on January 2, Brazil’s Finance Minister Guido Mantega and Planning Minister Paulo Bernardo announced new measures to compensate the loss of the 0.38 percent bank transactions tax (CPMF). CPMF expired on December 31, 2007 after the Senate has rejected its extension to December 31, 2010.
The measures include not only cuts of investments and expenses, but also the increase of some taxes, namely the financial transactions tax (Imposto sobre Operações Financeiras, or IOF) and the 9 percent social contribution on net income (CSL) for financial institutions. According to Mantega and Bernardo, the new measures will not interfere in the country’s continuing economic growth, but they are necessary to maintain fiscal balance and achievement of budgetary surpluses.
In terms of expense reductions, the executive branch plan to reduce expenses and investments in all three powers (Executive, Judiciary and Legislative) in the amount of BRL 20 billion (app US$ 11.3 billion) during 2008.
As for the tax increases, the government will increase IOF rate by 0.38 percentage points, wherever applicable. IOF is levied on a great variety of transactions, such as currency exchange, international purchases with credit cards, insurance, loans, home and auto financing. No increase will apply to IOF levied on financial investments or deposits in, and withdrawals from, bank accounts. The rate increase will be implemented by means of a decree issued by president Luiz Inácio Lula da Silva. The increase should have immediate effect.
The government also announced a rate increase from 9 percent to 15 percent to the CSL due by financial institutions. The increase will exclude any other corporate taxpayer and will be implemented by means of a provisional measure issued by president Lula da Silva within the next few days. The measure will have to be reviewed and approved by Congress, which at this moment is not willing to be held responsible for confirming any tax increase proposed by the government, particularly in a (municipal) election year. The increase, however, will have to wait 90 days after its publication to become effective due to constitutional requirement in this sense.
Ministers Mantega and Bernardo expect to collect BRL 10 billion with IOF (BRL 8 billion) and CSL (BRL 2 billion) rate increases, which along with the BRL 20 billion in expense savings, would total BRL 30 billion. This sum is close to the BRL 40 billion expected for CPMF revenue in 2008. The government expects to raise the remainder BRL 10 billion by means of an increase in ordinary tax revenues in 2008 due to the country’s expected economic growth. In 2007, the country’s growth of 4.7 percent was responsible for more than BRL 15 billion in extra tax revenues. For 2008, the government estimates that Brazil will grow between 5.2 and 5.3 percent.
David Roberto R. Soares da Silva