Originally published in the July 20 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
A controversial law project currently under review by Brazil’s House of Representatives would create an extra tax on “extraordinarily high” profits realized by banks and other financial institutions.
The law project, proposed on February 28 by lawmaker Sandes Junior, uses certain indexes to determine what would be considered extraordinarily high profits, and would levy an 18 percent CSL (Social Contribution on Net Income) surcharge, payable once a year on the last business day of July, on those amounts.
The reference profit (that is, the profit deemed usual or fair for purposes of the tax) would be calculated by averaging the sum of Brazil’s GDP and the annual interest rate paid to savings accounts in Brazil. That average would then be multiplied by each bank’s net equity, and any profits in excess of the resulting sum would be considered “extraordinarily high” profits subject to the 18 percent CSL surcharge.
To illustrate the calculation of the CSL surcharge, assume the following (all figures are illustrative):
- Brazil’s 2006 GDP is 2.9 percent;
- interest paid to Brazilian savings account is 6 percent per year;
- Bank A’s 2006 profits is US $1 billion; and
- Bank A’s 2006 net equity is US $12 billion.
Using these figures, the reference profit would be determined by multiplying 4.45 percent (the average of the 2006 2.9 percent GDP and the 6 percent interest paid to savings accounts) by Bank A’s net equity of $12 billion, for a total of $534 million.
Bank A’s extraordinarily high profits would therefore be $466 million — $1 billion (Bank A’s 2006 profits) less the reference profit of $534 million. The CSL surcharge for 2007, assuming the tax existed, would total $83.88 million (18 percent of $466 million).
Junior maintains that bank profits have increased continuously over the years, even when Brazil’s economy has been stagnant, and that the CSL surcharge on bank profits is necessary to cover social security deficits arising from previous economic plans. He says the social security deficit at issue totals BRL 2.3 billion (approximately $1.17 billion) per year and estimates that the CSL surcharge would generate BRL 2.4 billion per year in tax revenues.
The extra tax on banks is a controversial idea and it would not be surprising if the project fails. Brazil’s financial system, particularly the Brazilian Federation of Banks, has strong lobby connections in Congress and for years has been able to keep taxation at relatively low levels, despite continuously increasing profits.
David Roberto R. Soares da Silva