

It is already common sense that 2020 is the year that will change the world’s view of itself. Even when the Covid-19 pandemic passes – which is certain to happen – there is no doubt that it will leave its mark on relations between countries, between countries and their citizens and even on those between companies and their customers.
This statement may at first sound dramatic considering the evidence that the world has already experienced pandemics. This, however, is the first mobilization on an effectively global scale in a fully integrated world: in the past, a disease like the Spanish Flu was extremely aggressive but in a less connected world, and diseases like SARS and MERS, although more recent, had a more restricted spread. It can be said, therefore, that it is in this era that governments are learning to deal with an issue that touches everyone at the same time – not even wars have done that in that extension.
In Brazil this is no different. The country officially registered its first case in February and, considering the progressive deterioration of the social situation, in March it established a collective lockdown for an indefinite period, except for some essential services.
Immediate demands during the lockdown period
It is needless to say that the collective lockdown stopped the economy at the same time and at once. On the one hand, a rapid drop in revenues demanded companies to seek cash maintenance through lawsuits to postpone the payment of federal, state and municipal taxes. Layoffs, suspensions of employment contracts or reductions in workload became subjects of routinely internal meetings.
In turn, the federal government faced a real catch 22: while it should defend the financial health of companies (and thereby preserve jobs and avoid bankruptcies), it would need cash not included in the budget to fund its aid to the market.
At the present time, the government has taken the route of generating liquidity and not increasing taxes. Along with the National Congress, it approved tax rules as follows:
- Reduction to zero of the import tax rate of products related to the combat of Covid-19
- Reduction to zero of the IOF rate on loans of any nature contracted between April 3 and July 3, 2020
- Suspension of procedural deadlines at the Internal Revenue Service and administrative tax courts
- Deferral of payment of certain federal taxes (including employee’s severance fees – FGTS)
- Extension of validity of tax clearance certificates
- Suspension of collection acts made by the office of the Attorney General
- Approval of new rules to encourage the renegotiation of federal government tax debts
Although important, several companies have understood that the measures are still not enough and therefore have reached out to courts with further requests, like the permission to postpone the payment of other taxes not covered above and the authorization to withdraw escrow amounts deposited in legal proceedings. A certain increase of demands in the judicial courts is therefore expected for the upcoming months.
Potential future federal measures in the view of the National Congress
Extreme situations like that of the Covid-19 pandemic naturally open the door to different types of legitimate and doubtful opportunities in the tax policy arena. If, on the one hand, the pandemic has positively advanced some issues that would probably be mature in a few years, on the other hand it tends to postpone other discussions.
Tax reform is one of those good opportunities that can be missed. In a year of municipal elections, the goal of the federal government for 2020 was to move forward in the first semester with the discussion and approval of the constitutional text that establishes a single federal Value Added Tax in replacement for federal, state and municipal consumption taxes. Six months of negotiations would be expected to be seen with state and municipal governments, which to date estimated a concrete loss of taxation power – and, with the new rules, feared greater dependence on transfers from the federal government.
With a prioritized focus on health, it is natural that complex and controversial – and sometimes inconvenient – issues such as the reform of an entire tax system are left behind. If not approved this year, the subject would be resumed in 2021, a year in which not only the country will be facing the post-Covid-19 hangover but the current federal government will already be in its third year – and, with an eye on the presidential elections of 2022, possibly with less bargaining power or even without the intention to disagree on the subject. If this happens, a tax reform will be on the agenda of a new government starting in 2023.
That being the case, what would be expected for 2020 in terms of a new fiscal policy after the Covid-19 crisis?
In the case of tax collection in Brazil, the Federal Constitution establishes that a tax may only be collected as of the financial year following the publication of the law that created or increased it – this is the constitutional principle of anteriority, which guarantees security and predictability to the taxpayer. In relation to social contributions (of the same enforceability as taxes, despite different natures), this anteriority is only of ninety days.
This principle is the biggest obstacle to the federal government in a situation like the current one, in which immediate cash would not afford a gap until 2021. The most notable exception to the constitutional anteriority is the so-called compulsory loan – a cash that may be immediately collected but returned in future years to the same taxpayers. The Federal Constitution equals the compulsory loan to a tax and allows that exceptional charges to meet extraordinary expenses generated in cases such as the Covid-19 pandemic.
Although legal, a compulsory lending is an abnormality in the tax system. For the federal government, this is a trap: despite being quickly collectable, the need to return it in the future – with proper financial updates – evidently turns it into a financing that will compromise future budgets. For the taxpayer, there is the obvious surprise of the immediate and burdensome commitment of a current budget – and, in the past, the cases of devolution were long-term and with remunerations incompatible with the inflation of the times.
The current pandemic scenario has already created a tendency to its imposition. Late in March, Complementary Law 34 was presented to the National Congress suggesting a charge on Brazilian legal entities with a net worth of R$ 1 billion (approximately US$ 200 million) of up to 10% of their net profits calculated in 2019. If the loan were approved, the Ministry of Economy would define the percentage applicable to each economic sector, and the payment would be made from thirty to ninety days after the publication of the law.
According to Complementary Law 34, the amounts by the government would be returned to the financing companies within four years after the end of the public calamity situation related to Covid-19. The refund would be made in up to twelve monthly installments according to budget availability.
In addition to the natural restriction that this theme has for society in general, the draft of Complementary Law 34 was object of formal rejection in a letter to the House of Representatives signed by national confederations such as Health, Transport and Financial Institutions. They argue for the presence of confiscation, the lack of equality among taxpayers and the inexistence of a relationship between the amounts charged and the wealth that companies may necessarily have.
The political and economic environments do not seem to favor an approval of the project, thus, as they do not seem to favor the approval of another project under discussion: the tax on large fortunes.
Like the compulsory loan, the tax on large fortunes has never been well received by society, but its potential implementation has also been discussed by some parliamentarians since March.
Unlike the compulsory loan, however, this controversial tax was never effectively levied in Brazil, and for clear reasons: not only does it generate irrelevant revenue for the government budget, but it also applies to relevant (and often illiquid) assets that have already been subject to income tax to add to the taxpayers’ equity – in addition to tending to generate capital departure. Entities that represent tax auditors, however, defend the creation of the tax on the grounds that, although irrelevant, the corresponding collection would have the function of “social justice”.
A few projects for implementing the tax have been presented to the National Congress in recent years, but the Covid-19 crisis brought six new projects to the table. The most complex and relevant proposal – and the most advanced in the discussions – is described in Supplementary Law 183, of 2019, which determines the calculation of the amount through the application of progressive rates of 0.5% to 1% on higher net assets as from R$ 22.8 million (approximately US$ 5 million) held by Brazilian individuals or estates (in relation to the equity they hold in Brazil and abroad) and by nonresident individuals, estates or legal entities (in relation to the equity they hold in Brazil) .
The project allows the reduction of the calculation base by amounts corresponding to the taxpayer’s work instruments, intellectual or industrial property rights and small value assets – and even previously paid taxes on real estate and vehicles that are part of the taxable assets that are part of the fortune range.
When considering the history of resistance of the National Congress, it would be argued that this would be one more tax not to advance in the corresponding discussions. Considering the current demands for cash and the politically correct approach of the tax in a Covid19 situation, however, it would not be a huge surprise if the project moved towards the start of collection in 2021. This is a matter to be monitored.
In the case of fiscal policy with less hurried planning and more in line with world standards, the federal government and the National Congress could seek reinforcement of cash in legislation focusing on dividend taxation – an issue that, after all, has been on the table for years and has gained more strength in the last presidential elections, when all the candidates brought the topic to their speeches.
Arguments in favor of this tax range from a vision of social justice to an alleged alignment of investments in Brazil to the profile of member countries of the Organization for Economic Cooperation and Development (OECD), which mostly tax dividends and, at the same time, allow lower corporate taxation – 23.7% on average.
Taxation in this sense would correspond to a paradigm shift: the Brazilian government has maintained dividends exempt from income taxation for more than twenty-five years under the argument of attracting investments, while maintaining the most onerous corporate taxation. It seems quite natural, therefore, that a potential revocation of the current exemption should be accompanied by a reduction in the corporate income tax burden, currently in force at the rate of 34%.
Brazil has almost thirty draft bills dealing with the taxation of dividends in the files of the National Congress. The vast majority of these projects are quite simple, just removing the current exemption to impose different rates (from 15% in exclusive taxation at source to 27.5% as an ordinary income), without any reference to corporate taxation, with no provision for the treatment of credits or discussion on the avoidance of double taxation – exceptionally, Bill 1952, of 2019, proposed to reduce corporate taxation to 29%, but still insufficient to neutralize the proposed dividend taxation.
Early in April, the beginning of the upward curve of the pandemic in Brazil, the Senate hurriedly voted to vote on a new bill (Bill 766), which intended to authorize the federal government to unilaterally revoke the exemption from dividends paid to individuals, attributing to the Federal Revenue the power to institute a progressive rate for this ordinary income starting in 2020.
The Bill was unprecedentedly absurd in authorizing the government to repeal a rule created by the National Congress: in the case of repeal, the National Congress itself should do this, and not delegate its own responsibility. The Bill was at the same time doubly unconstitutional: on the one hand, for violating the principle that a tax may only be levied from the year following that in which it was created or increased and, on the other, for attacking the principle of isonomy by focusing taxation only on individuals – the law cannot be a source of privileges and/or losses to taxpayers, but an instrument for equal treatment.
The Bill was removed from voting and there is currently no further discussion on this specific issue on schedule, but that does not mean that the matter will not return to the agenda at any time. For now, it remains clear (along with the discussion regarding the taxation of large fortunes and even concerning a compulsory loan) that the great risk in a Covid-19 era is that the rush to obtain cash tends to attract speedy and opportunistic rules.
Potential future measures in the view of tax auditors
At the end of March, entities linked to federal and state auditors released a joint document with their views on measures that should be taken to aid the pandemic fight in Brazil. As they claimed, “taxpayers and sectors with contributory capacity were identified, either because of the accumulated equity, or because, despite the crisis, their activities and revenues tend to be maintained or even increased, with a greater contribution for the benefit of the society as a whole.”
Some of the suggestions go through measures currently discussed in the National Congress, such as the creation of a tax on large fortunes and of a compulsory loan (for 2020, on the same basis taxable by the tax on large fortunes and on distributed dividends). Some other suggestions, however, innovate with the following measures:
- Total exemption for micro and small companies electing the simplified taxation regime (SIMPLES)
- Reduction or elimination of fees for the so-called Professional Training System S
- Payroll exemption
- Use of the exchange rate of December 31, 2019 for the calculation of taxes on imports
- Temporary tax (social contribution) of 20% on all financial income
- Additional tax of 15% on profits (CSLL) and 4% on revenues (COFINS) – both from financial institutions
- Temporary 10% tax on export exchange contracts closed above R$ 4.45 (approximately US$ 0.90)
- Increase to 30% in the taxation of estate and donation tax (Tax on Transmission Causa Mortis and Donation – ITCMD)
The tax auditors estimate that these measures would generate R$ 234 to 267 billion (approximately, US$ 47 to 53.5 million) between collections and exemptions, but stress that they should also be added to their previously existing demands, such as the end of the dividend income tax exemption, the update of the individual income tax rate table and the revocation of the tax immunity to the export of primary and semi-finished goods.
Actions by States and Municipalities
More relevantly, Brazilian states collect value-added tax (ICMS) on the circulation of goods (and certain services) and vehicle ownership tax (IPVA), as well as municipalities charge service tax (ISS) and real estate taxes (IPTU / ITR). Neither states nor municipalities are authorized by the Federal Constitution to institute compulsory loans on pandemics.
Because they are authorized to collect a relatively limited number of taxes, the actions of the 26 states (and the Federal District) and 5.5 thousand municipalities in resolving the crisis generated by Covid-19 tend to be equally restricted – and, in practice, they have been uneven. Among the states, so far eight have published restricted exemptions in terms of products linked to the pandemic – Rio de Janeiro, for example, only granted exemption from ICMS for operations with alcohol gel.
It is to be expected that important exemptions will be considered during the crisis, such as, for example, IPTU exemption for real estates used in commercial, industrial and service activities that are closed during the lockdown. ICMS and ISS will have their payments naturally reduced due to less commercial activity and services, but it would also be possible to discuss a wide tax exemption in order to maintain a minimum health in economic activity with a focus on the future resumption of activities.
The future
Considering the different realities between States and municipalities, it is not expected that they will take joint and/or relevant measures in tax exemptions. It can be speculated, however, that those wealthier and more affected will take the lead in this regard, as is the case in São Paulo and in Rio de Janeiro.
It is from the federal government that the biggest measures are expected. They have been an important aid in that first month of the official declaration of the pandemic, but companies have demanded more speedy actions – and these actions will go through a formula that considers helping the population and the economy as a whole, the temptation to increase taxes and the duty to deviate from speeches that prioritize opportunities at the moment over a future and sustainable commitment for the country.