Originally published in the June 26 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Chamber of Deputies (lower house of Congress) is reviewing a law project that could reinstate the taxation of dividend distributions, which have been tax exempt since 1996.
Law Project 3007/2008, presented March 13 by lawmaker Chico Alencar, would make dividend distributions taxable at the beneficiary level.
The law project would require dividends to be added to the taxpayer’s taxable income at the corresponding tax rate. For individuals, dividends would be taxed at a rate of 15 percent or 27.5 percent, depending on the individual’s tax bracket. For corporate taxpayers, dividends would be added to gross taxable income and taxed according to the taxpayer’s specific tax regime (either the actual or the presumed income tax calculation regimes). Currently, taxes on corporate income can reach as high as 34 percent. For foreign beneficiaries, the law project creates a flat 15 percent withholding tax.
Alencar, a member of the Socialism and Freedom Party, says the dividend taxation of Brazilian investors would provide a measure of fiscal justice because it would put workers and capital investors under the same level of taxation. He says the current tax exemption benefits only the home countries of foreign investors because they usually are taxed on the total amount of (tax-free) dividends received from Brazilian companies.
Alencar says the new tax would benefit Brazil because dividend distributions paid abroad have increased significantly in the past few years. Citing data from Brazil’s Central Bank, he said Brazilian companies remitted $5.2 billion abroad in 2002, $16.4 billion in 2006, and $21.23 billion in 2007. He says Brazilian subsidiaries of multinational companies, such as automakers ($2.7 billion) and financial institutions ($1.4 billion), were among the largest dividend payers outside Brazil in 2007.
Alencar says the argument that foreign investment brings development to the country is not true, as evidenced by the ratio between direct foreign investment into Brazil and dividend payments to foreign investors. In 2007, he says, dividend payments abroad represented 87 percent of foreign investment into Brazil, while in 2006, the amount of new foreign investment was almost the same as dividend payments outside the country.
Alencar says he expects the law project to be approved by Congress. The law project is being reviewed by the chamber’s Commission of Finance and Taxation and Commission of Constitution and Justice. Because the commissions have conclusive powers, if they approve the law project, it will be forwarded directly to the Senate with no need for a vote by the full Chamber of Deputies.
David Roberto R. Soares da Silva