Brazil’s new political establishment cracks down on tax incentives
Alessandra Gomensoro and Ricardo Cosentino of Mattos Filho discuss the new tax challenges affecting Brazil
At the end of the last decade, Brazil experienced significant economic growth, despite an international downturn.
This economic growth was driven largely by three pillars that included: fiscal benefits, tax reliefs and sectoral incentives to production. This ensured a national bubble of constant consumption and apparent economic growth.
However, Brazil’s political crisis destabilised the artificially created environment for such economic development. In particular, the state blamed tax benefits for cash shortages, triggering a backlash against such reliefs.
There is no doubt that some of the regional fiscal benefits were granted in legally unusual ways, so they should indeed have been revoked. But the removal of tax benefits effected not only companies that had obtained them irregularly, but also companies that had been legally enjoying the effects.
In tandem to the crisis among Brazilian states, the federal government also began to cut incentives already granted. One of the most symbolic cases include the resumed taxation on retail sales of electronic products, whose revenue, in practice, was not levied for Program of Social Integration (PIS) and Contribution for the Financing of Social Security (COFINS), and on the payroll.
Although the strategy of cutting down incentives is controversial because it discourages production and affects the entire economic chain, the cuts have been accepted due to the government’s desire to increase cash revenue.
In addition to the government continuing to cut incentives abruptly, which ultimately destabilises companies without being able to adjust their business plans to the new reality, it has been trying to find cash in the most peculiar and critical sector for economic growth: the export sector.
It order to ensure a surplus economy, it is necessary that exports outweigh imports. Precisely because of their importance to growth, exports and specifically exports revenues have special treatment in the Brazilian tax system, with immunities and exemptions that encourage those who carry out export activities.
Irrespective of this importance, the Federal Revenue Service of Brazil issued an interpretation for levying the Financial Transactions (IOF) tax if revenue from exports is kept abroad (even for a couple of days), instead of being immediately remitted to Brazil.
The interpretation of the tax authority, in addition to its detrimental effect to the exporting incentive policy, is illegal, and has been repeatedly dismissed by the Courts. However, the most striking factor is not the practical effects of this interpretation, but the government’s lack of preparedness to understand that certain sectors of the economy should be treated as a priority.
This volatility in carrying out a fiscal policy that achieves short-term goals causes insecurity, and compromises even more the development of the country. It is important to understand that the economic growth desired is only possible if the law and the commitments made by the government are observe without surprise to investors.
Alessandra Gomensoro - Partner, Mattos Filho
T: +55 21 3231 8222
Ricardo de Oliveira Cosentino - Tax lawyer, Mattos Filho
T: +55 21 3231 8112