Market fears advance of tax reform in election year

The market fears the advance of the Income Tax reform in a volatile and uncertain international economic and electoral scenario in 2022. Abrasca (Brazilian Association of Publicly-Held Companies) stated that changes should jeopardize the next infrastructure auctions. Here’s the intact of the press release (128 KB).

The changes are discussed in a slimmer package of tax reform in the Senate, which includes taxing profits and dividends at 10% – a lower rate than the 15% foreseen in the bill passed by the House.

In addition, it reduces the collection of IRPJ (Corporate Income Tax) and CSLL (Social Contribution on Net Income) from 34% to 30%.

The market is convinced that there will be taxation of dividends and that it is necessary to proceed with PEC 110, which creates the added value tax. But he understands that there is no qualified discussion about the new rates and a correlation with international practices. The current text harms investments and limits growth, according to the note.

The text to reform the Income Tax is still stalled in the Senate. THE Power 360 found that the rapporteur Angelo Colonel (PSD-BA) has not had meetings with the Ministry of Economy to make changes. But an eventual agreement in the concerted effort of congressmen before the recess could move forward with the proposals, albeit without discussion.

The government is willing to negotiate with senators the creation of a new Refis, a program for the installment of tax debts of companies with the public sector.

The Senate President, Rodrigo Pacheco (PSD-MG) wants to include the tax discount for individuals, medium and large companies in the Income Tax reform project.

The text has already been approved in the House, but has been paralyzed in the Senate. A bill for the new Refis passed the Senate in August 2021, but did not advance in the House.

Abrasca believes that drafting a text that increases the tax burden, with the creation of dividends, will create an even more volatile scenario for the market. The measures should create asset insecurity.

IMPACT ON INFRASTRUCTURE

The entity stated that the Income Tax reform worries about the moment of uncertainty in the global scenario and the polarized elections in October.

“Aggravated by the international crisis, and contaminated by the bias of the elections, this is not the time to accelerate proposals that bring more insecurity to investment in Brazil. Changes of this magnitude need time and must be discussed transparently and responsibly.”he said.

One of Abrasca’s concerns is the creation of a 10% dividend tax, accompanied by a reduced corporate tax rate from 34% to 30%.

“These numbers indicate an increase in the tax burden. Furthermore, corporate taxation at 30% would remain much higher than the average for OECD countries, currently around 23%. Technical problems already identified, such as unconstitutional taxation of retained earnings and the treatment of tax losses, are not mentioned”said the association.

The infrastructure sector would be most impacted, especially the auctions and privatizations planned for the coming months, such as airports and transmission lines. Abrasca stated that the corporate structures and economic modeling for investments were prepared based on the current tax scenario.

“Thus, planning is jeopardized and will have to be redone, delaying investment decisions”declared the entity.

ECONOMIC SCENARIO

Abrasca argues that the war in Ukraine and the disorganization of production chains pressured commodity prices. According to the association, the situation “scare” and “strike” the capital market, “which literally closed in 2022”.

He stated that the sector contributed BRL 720 billion in 2021 to finance business development, while the public sector has limited resources in the face of a stuck budget.

“The increase in investment by the private productive sector since 2016 has been remarkable, rising from 15% to 18% of GDP [Produto Interno Bruto]already expunged factors that could distort the numbers, while public investments remained stagnant”said Abrasca.

The association said that the high inflation in the world and the escalation of the famine in supermarkets, gas stations and other sectors of the economy scares Brazilians. Companies face difficulties in passing on increased costs.

Food prices are impacted by the war, which has disrupted the production chain. In addition, power supply lines are under “strong stress” for the boycott of Russia, one of the world’s largest producers of oil and gas.

“Financial expenses skyrocket with the monetary tightening that the Central Bank has to promote to hold prices, which led interest rates to multiply more than four times in a year”he said.