Originally published in the February 26 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazilian Finance Minister Guido Mantega on February 21 formally announced a final, more aggressive tax reform proposal that the government plans to submit to Congress before the end of the month.
Many of the items announced a few weeks ago have been confirmed, such as the creation of a federal VAT (imposto sobre valor adicionado federal, or IVA-F) resulting from the merger of the fuel tax (CIDE-fuel), P.I.S. (Program for Social Integration contribution), and COFINS (Contribution for the Financing of Social Security), and the elimination of the tax war among Brazilian states by making the state VAT (ICMS) rules and rates uniform throughout the country and exempting interstate transactions from ICMS.
However, because of Brazil’s economic growth and recurring tax revenue records, the government has become more aggressive and now plans to make deep changes to some taxes. One example of this is the resurrection of a plan to merge the 9 percent social contribution on net income (CSL) into the corporate income tax. The merger would create a new income tax on corporate income.
Two other proposed changes include the elimination of a 2.5 percent payroll tax to fund public education (salário educação) and a reduction of the social security payroll tax from 20 percent to 15 percent. Both of those taxes are paid by corporate taxpayers (employers). The latter proposal could include additional rate cuts to trim the social security payroll tax to 5 percent within five years.
According to Mantega, the idea is to reduce the corporate payroll tax burden and motivate companies to hire more employees. He said it is possible that the elimination of the salário educação could be offset by the IVA-F, although the rate of that proposed tax has yet to be determined. Regarding the social security payroll tax reduction, Mantega said that should be a true tax break with no compensation by way of increases in other taxes.
David Roberto R. Soares da Silva