Originally published in the March 27 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
With Brazil’s 2008 tax reform bill now under consideration in Congress, President Luiz Inácio Lula da Silva’s Workers’ Party has indicated that it is willing to reopen discussions about the creation of a Large Fortune Tax (Imposto sobre Grandes Fortunas, or IGF).
Brazil’s Constitution of 1988 provided for the creation of the IGF, but the tax was never implemented. The constitution stated that the IGF was to be implemented by way of a complementary law, which requires a special quorum in both the Chamber of Deputies and Federal Senate.
In its 2003 tax reform proposal, the executive branch sought to eliminate the complementary law requirement and implement the IGF through ordinary law, which requires only a minimum quorum of 50 percent of the members, plus one vote. However, the 2003 tax reform did not go as planned, and the discussion of the IGF was put aside.
Even earlier, in 1989, former President Fernando Henrique Cardoso, then a senator, tried to implement the IGF for taxpayers with personal wealth of approximately BRL 940,000, but the proposal never became a reality.
Now the Workers’ Party says it will support a plan to implement the IGF, although no clear proposal has been made to define what would constitute a large fortune for purposes of the tax. Some party members have suggested that BRL 1 million (approximately $575,000) in personal wealth should be the starting point to trigger the IGF. The party’s plan is to include a complementary law project in the tax reform bill to create and regulate the IGF.
The tax is a controversial topic, not only because the definition of a large fortune is complex, but also because the tax appears to be an ideological component of the Workers’ Party platform.
Establishing the tax rate could also pose a problem. The 1989 proposal called for a minimum rate of 0.3 percent and a maximum rate of 1 percent. So far, no reference to the tax rate has been made in the new proposal. If the tax is too high, wealthy individuals would find ways to transfer their wealth offshore (for example, by creating offshore structures or trusts). The tax also eventually would hit the middle class, which does not have sufficient wealth to go offshore. However, if the IGF is too low, it would be useless in terms of tax revenue and probably would not justify the costs of monitoring and auditing taxpayers.
Therefore it is likely that, once more, the IGF will not fly.
David Roberto R. Soares da Silva