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Payroll taxation: Is the existing model for technology companies enough?

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Tech payroll

Cristiane I Matsumoto and Mariana Monte Alegre de Paiva of Pinheiro Neto Advogados discuss the shortcomings of Brazil’s payroll taxation regime.

Payroll taxation in Brazil is burdensome because the social security contribution is levied at around 40% over the payroll. Besides the main contribution of 20% which is destined to fund the workers’ retirement, there are several other contributions levied on the same basis for financing other components. The result is that formal employment in Brazil is expensive, which contributes to the informal employment situation.

In August 2011, the Brazilian economy was still recovering from the 2008 global crisis and the federal government implemented measures to reduce the overall tax burden. Among those measures was Provisional Measure 540, which was passed into Law 12 456/2011. This law introduced tax incentives for export companies and the automotive market, as well as a more favourable payroll taxation regime for specific companies, especially for those in the IT sector.

The new regime allegedly favoured IT companies, at the time suffering financial distress, by stimulating their modernisation, thus reducing production costs.  The original 20% payroll levy was replaced by a social security contribution levied on gross revenues. The rate was set at 2.5% and the regime was in force until December 2014.

For IT companies with a large number of employees and a costly payroll, the new regime was positive because it substantially reduced payroll taxation – unless revenues earned were large. For companies with a smaller payroll and considerable revenues the new rules were mostly not so beneficial.

In August 2015, the federal government enacted Law 13 161/2015 rendering the new model optional and raising the rate from 2.5% to 4.5%. Nowadays, this new regime is only applicable to IT companies that really benefit from it. Voluntary adhesion is relatively low. Startups and fintechs, for example, normally do not benefit from the option model of Law 13 161/2015.

Information technology companies are at the core of our world’s innovation and all countries should establish specific taxation models adequate for new corporate structures and businesses thus stimulating investment in this market.

Brazil is yet to design a payroll taxation model that fulfils such goals. The replacement of the 20% payroll taxation with the prevailing 4.5% revenue taxation only applies to a small number of companies and is far from being a proper incentive.

Given this situation, it is crucial for IT companies to examine their payroll taxation in detail to ensure there are no inefficiencies and also to actively propose and discuss new social security taxation models that may effectively bring positive results for this sector and overall for the Brazilian economy.

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