Originally published in the December 14 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Senate on December 13 voted 45 to 34 to reject Constitutional Amendment Project No. 89/2007, which would have extended the 0.38 percent bank transactions tax (CPMF) through December 31, 2011. The government needed at least 49 favorable votes, in two rounds of voting, to approve the extension. It received the necessary votes in the first round, but fell short in the second round.
The CPMF is now set to expire on December 31, 2007, which means that as of January 1, 2008, it no longer will be levied on bank transactions.
The failure of the CPMF extension was a major defeat for President Luiz Inácio Lula da Silva. Many observers now say that Finance Minister Guido Mantega did everything wrong while negotiating with Congress for the extension, changing his arguments on an almost daily basis, which gave Congress the impression that the government did not actually need the tax. It is even possible that Mantega will resign as finance minister.
The government now needs to take two immediate steps: It must amend the 2008 budget, which relied on the CPMF extension even before it had been put to a vote in Congress, and it must devise a plan to cover almost BRL 40 billion (approximately $22.7 billion) in tax revenue that it expected to receive from the CPMF extension. Regarding the second action, the government likely will increase some taxes that, while limited, do not require the approval of a formal law by Congress, such as the financial transactions tax (IOF, levied on credit, insurance, and exchange transactions) and the federal excise tax (IPI) for certain sectors.
The government also may increase the base of the 9 percent social contribution on net income (CSL). Although such an increase would require the passage of a new law, the increase can be implemented through provisional measures and become effective within 90 days. (Other taxes can be created or increased only if the relevant law is approved in the year preceding the tax’s, or tax increase’s, entry into force.)
It is likely that the government will again try to extend the CPMF by submitting another constitutional amendment project in 2008. But that would require months of negotiations in Congress because the project would again have to follow the entire approval process of two voting rounds in the House of Representatives and the Senate.
David Roberto R. Soares da Silva