Originally published in the May 12 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazilian Finance Minister Guido Mantega is finalizing a proposal that would regulate the use of personal service companies in Brazil and their applicable tax treatment. Before sending any law project to Congress, however, the government wants to hear what workers’ unions have to say.
The subject has been under discussion for over a year. In early 2007, upon reviewing Law Project 6,272, which eventually merged the Social Security Revenue Service with the Federal Revenue Department, Brazil’s Senate included an amendment to the project that sought to protect professionals and individuals that provide services through personal service companies rather than as individuals. At the time, the Senate included a proposition that required a decision from a labor court for revenue agents to recharacterize a service agreement as employment and to assess the corresponding social security taxes and personal income tax.
In some circumstances, the use of personal service companies allows individuals to save more than 50 percent in taxes as compared with employment or independent contractor taxation.
During debates in Congress, the government opposed the restriction, arguing that personal service companies have been used to bypass employment relationships and avoid the payment of social security taxes (on compensation and payroll). Tax agents should have the power to disregard service contracts if elements of an employment relationship are deemed to exist, and to assess not only social security taxes on payroll but also withholding income tax on compensation, the government argued. Corporate taxpayers, on the other hand, argued that tax agents’ practice of disregarding service contracts was unconstitutional because according to Brazil’s Constitution, only a labor court can determine if a given relationship is, in effect, an employment relationship.
Eventually both the Senate and the House of Representatives approved the Senate amendment that expressly removed tax agents’ power to disregard service contracts under the newly merged Federal Revenue Department. However, upon signature of the law (Law 11,457/2007), President Luiz Inácio Lula da Silva vetoed the Senate’s amendment and left the regulation of service companies for a future law. In the meantime, tax agents have been able to continue assessing personal service companies whenever they deem employment to exist.
The subject resurfaced recently when Mantega opened discussion with workers’ unions about the subject in order to propose a law project on the matter. Mantega’s idea is not to freely prohibit tax agents to assess personal service companies, but rather, to establish which types of professionals would be able to use such companies.
Mantega’s idea is to let artists in general, and some other professionals that provide services to different companies, use personal service companies without the risk of being harassed by tax authorities.
Antonio Neto, president of workers’ union CGTB (Central Geral dos Trabalhadores do Brasil), who has met with Mantega, is in favor of regulating the professions that could be eligible to use personal service companies.
Another meeting between the government and workers’ unions is scheduled for May 16, at which time the government will present the text of a legislative proposal on the matter. The proposal could be submitted as a law project, which would take more time but would allow for a thorough debate, or as a provisional measure with immediate effect.
David Roberto R. Soares da Silva