In addition to the broader tax reform, involving taxes on consumption, there is also a discussion about several changes in income tax for individuals and businesses. The main points of the proposals are as follows:
Increase in the exemption threshold Both PEC 45/2019 and PEC 110/2019 propose an increase in the income tax exemption threshold for individuals. The idea is to reduce the tax burden on the lower-income segments of the population. PEC 45/2019 proposes an exemption threshold of up to five minimum wages, while PEC 110/2019 proposes a threshold of up to two minimum wages.
Reduction of tax rates The proposals also envision a reduction in income tax rates for individuals and businesses. The goal is to lower the tax burden for higher-income individuals and companies, ultimately enhancing the competitiveness of the Brazilian economy. PEC 45/2019 proposes a single rate of 25%, while PEC 110/2019 proposes a rate of 20%.
Elimination of deductions for medical and educational expenses PEC 45/2019 proposes the elimination of deductions for medical and educational expenses in income tax. This measure is controversial since it can directly affect families with healthcare and educational expenditures. However, the proposal includes the creation of a reimbursement system for these expenses, which could benefit lower-income families.
Elimination of presumed and arbitrated profit regimes The tax reform proposals also contemplate the elimination of the presumed and arbitrated profit regimes. Currently, these regimes are used by smaller businesses with fewer tax obligations. However, the complexity of these regimes generates additional costs for companies. The proposal is for all companies to be taxed based on actual profits, a more simplified regime.
Simplification of depreciation rules The tax reform proposals also aim to simplify the depreciation rules for company assets and assets. Currently, depreciation rules are complex and can lead to tax distortions. The idea is to make the rules simpler and fairer, reducing the complexity of the tax system.
Creation of a tax on dividends PEC 110/2019 proposes the creation of a tax on dividends, which are profits distributed by companies to their shareholders. Currently, these distributed profits are tax-exempt. The proposal aims to achieve greater tax fairness, as distributed profits are a form of shareholder compensation and should be taxed similarly to salary income.
Taxing dividends is a contentious issue and is under discussion in the tax reform proposals in progress in the National Congress. Currently, profits distributed by companies to their shareholders are exempt from income tax. However, PEC 110/2019 proposes a 20% tax on dividends.
The idea behind taxing dividends is to achieve greater tax fairness. Distributed profits are a form of shareholder compensation and should be taxed similarly to salaries. Additionally, taxing dividends could generate more revenue for the government, which could be used in areas such as healthcare, education, and infrastructure.
It is important to note that taxing dividends is not a novelty in other countries. In most developed countries, dividends are already subject to taxation, often at higher rates than those proposed in Brazil. Taxing dividends is seen as a way to make the tax system fairer and more balanced, as wealthier shareholders are the primary beneficiaries of the current exemption in Brazil.
PEC 110/2019 proposes a 20% tax on dividends distributed by companies. However, there are discussions about how the taxation would be implemented and what the impacts would be on companies and the overall economy. Some criticisms of the proposal include:
Harm to companies Taxing dividends could reduce the profits distributed by companies to their shareholders, potentially affecting investor interest in participating in companies. This could have negative impacts on the economy as a whole, as companies need investments to grow and create jobs.
Double taxation Taxing dividends also faces criticism regarding double taxation. This is because, in many cases, companies already pay taxes on profits before distributing them to shareholders. Therefore, taxing dividends would be a form of cascading taxation, which could harm the economy and investor interest.
Alternatives to taxing dividends Some argue that there are alternatives to taxing dividends that could achieve greater tax fairness. For example, PEC 45/2019 proposes the creation of the Goods and Services Tax (GST), which would unify various consumption taxes. This change could reduce the tax burden on companies and generate more revenue for the government, which could be used for investments in areas such as healthcare and education.
It is worth noting that this proposal still needs to be discussed and approved by the National Congress to take effect. Furthermore, there is the possibility that some changes may be made during the legislative process.