How Brazil’s social security reform will impact on taxation
Ariane Costa Guimarães and Isabel Bueno of Mattos Filho provide an insight into the tax aspects of the social security reform in Brazil.
During the first week in August 2019, Brazil’s House of Representatives passed a social security reform in the second round of voting. The next stage is for the Constitution Amendment Bill to go to the Federal Senate for voting. Before being deemed approved and becoming effective, the Bill must be analysed by the Committee of Constitution and Justice, and pass two more rounds of voting by the Senate, before finally being promulgated by the National Congress Board.
The social security reform introduces substantial changes to the Brazilian government accounts, with greater emphasis on retirement rules, and has the goal of reducing expense. In this sense, the Amendment Bill reasserts rules for the financial and actuarial balances, which will affect Brazilian taxation as regards social security. It is expected that within the medium term, the country will see a reduction in the fiscal burden, particularly as regards social security contributions.
As well as the aspects mentioned above, the social security reform also deals with specific amendments relating to tax.
The social security reform continues to require employers to provide details of the calculation basis used for social security contributions , as regards the payroll or any other income paid, which are due or credited as a result of their employment relationships.
At the moment, the Brazilian Federal Constitution allows for different rates for social security contributions (payroll), COFINS (income) and CSLL (profit) in three specified situations: as a result of the economic activities performed, according to the intensity of use of employees, with greater rates, or according to the company’s size and structural conditions. The wording under discussion in the National Congress maintains the above, but also includes a prohibition on substituting other items for the social security contribution (on the payroll), such as income (the existing social contribution on gross income) or rural production (FUNRURAL). Any substituted contributions in force on the date of the promulgation of the social security reform, however, are maintained: this means that an eventual reduction of the payroll needs to be approved before the social security reform in order for it to remain valid.
The social security contributions due by the employer and the employee cannot be the subject of default, for example by postponing the terms of payment of tax, or by paying in more than 60 monthly installments. A complementary law will be required to stipulate the modalities and facilitation of payment. In Brazil, during times of tax and financial crisis, dividing the amount of overdue taxes into up to 120 installments is common, and is provided for by specific laws. At the same time, the government grants tax amnesties for fines and interest due, depending on the way the taxpayers intend to pay. This kind of stimulated payment in instalments will be prohibited, since the government’s aim is to have more foresight as regards the public budget, and specifically in relation to social security.
The reform includes another tax component, in this case, in relation to social security: the establishment of rates for contributions on profit for financial institutions. This amendment has no relation to the social security reform, but despite that, the provision was included in the amendment and for this reason may be discussed in the Supreme Federal Court because of the absence of a connection with the subject of the reform. In fact, it is a constitutional permission-based rule that financial institutions pay a 15% contribution on profit, while other taxpayers pay this tax at a rate of 9%. Under the social security reform, until the enactment of another law, the social contribution on net profit (CSLL) will be raised to 20%. The increased taxation of financial institutions has been the subject of discussion for many years, and the Supreme Federal Court must analyse the constitutionality of selecting this industry as a target for increasing the CSLL, since this industry does not have the greatest profitability in the market.
Another indirect impact on taxes is the fact that a union cannot decouple the income from social contributions (COFINS, CSLL and social security contributions) from social security. As things stand, the Federal Union (DRU) can detach up to 30% of the amount collected through these taxes for paying other expenses, such as external debts. Under the reform, 100% of the income must be spent on social security, social assistance and health. In our view, this reinforces the coupled condition for the social contributions.
Finally, the human resources departments of companies must be prepared to apply the new rates included in the social security reform, based on the figures below: a discount of 7.5% from employees who earn no more than the minimum wage; 9% from employees who earn an amount between the minimum wage and BRL 2,000 ($500); 12% from salaries between BRL 2,000.01 and BRL 3,000; and 14% for salaries of BRL 3,000.01 upwards.