A significant part of the world´s population has historically been excluded from the financial system. In Latin America, where almost half of the population remains unbanked, this phenomenon is even steeper.
The World Bank, through its Global Findex Database 2017, reports that despite the evidence of significant growth on the financial inclusion levels in Latin America over the past few years, there remains a large gap between poor households and their access to financial services.
Digital technologies are an essential tool in bridging this gap as disruptive solutions brought forward by fintechs are allowing more people, who are traditionally excluded from the banking system, to integrate into the financial community. Increasingly, they can send and receive digital payments by using mobile phones; access credit through peer-to-peer platforms and hold digital accounts, and therefore can benefit from the new opportunities.
While the Government and Congress struggle to keep up with the pace of the digital revolution, the Central Bank of Brazil (BACEN) has surged ahead by creating a regulatory sandbox that allows fintechs to operate and test their products with the Brazilian market. BACEN has also recently passed regulations addressing credit fintechs, by setting forth a legal framework specifically designed to cover ‘light’ financial institutions such as direct lending companies (SCDs) and peer-to-peer lending companies (SEPs).
In spite of BACEN’s regulatory guidance, the Brazilian tax authorities have remained silent concerning the tax treatment applicable to fintechs. This has expectedly opened debates on whether or not they should be subject to the same tax treatment applicable to traditional Brazilian financial institutions, which despite generally being more burdensome and regulated (i.e. requiring compliance with ancillary obligations), can provide for some benefits, such as taxation over the financial spread and withholding tax (WHT) exemption on financial income.
In practice, Brazilian fintechs are experiencing a tax sandbox, even though this is a likely unintended move by the Brazilian tax authorities, who so far, have not followed the more structured actions taken by BACEN to leverage the positive effects of technology into the financial industry. As expected, one of the key challenges of Brazilian fintechs is to properly fit in the general tax regimes (lower rates) applicable to corporate entities, while benefiting from special regimes of taxation over the financial spread afforded to financial institutions.
Digital technology continues to transform the levels of financial inclusion in Brazil and the tax system should not be a hurdle for this transformation process. Reasonable tax regulation, backed by the lessons learned from the current tax sandbox, should provide more legal certainty to market participants, and thus leverage the social and economic gains associated with the growth of financial inclusion in Brazil.
