Despite seeing little room for further tax increases, the government used the supplementary bill on reducing tax benefits to pick a fight with companies that adhere to the presumed profit regime. The bill, signed by the government leader in the Chamber of Deputies, José Guimarães (PT-CE), included an increase of 10% in the calculation base for IRPJ/CSLL under this regime.
The rule will only apply to the "presumed profit" percentages applicable to the portion of total gross revenue that exceeds the value of R$ 1,200,000.00 in the calendar year.
For example, in the provision of different types of services, the tax base with the measure, if implemented, would increase from 32% of the company's revenue to 35.5%. Corporate income tax (IRPJ) and social contribution on net profit (CSLL) will be applied to this larger base. The presumed profit varies according to the company's activity and is limited to an annual revenue of R$ 78 million.
Tax waiver or simplified collection alternative?
Unlike the Simples Nacional tax regime, which benefits micro and small businesses, the presumed profit regime is not formally treated as a tax incentive.
Strictly speaking, it would only be an alternative and far less bureaucratic mechanism for taxing profits, especially in medium-sized companies. It is quite common in the financial market, law firms, information technology companies, among a number of others.
Since this is not a tax waiver, there is no estimate of revenue loss from the measure in the Tax Expenditure Statement (DGT) published annually by the government. The DGT is the basis that guides the proposal to cut tax benefits formalized on Friday (29).
Nevertheless, there have been disputes among experts as to whether the presumptions currently considered are not being too generous to taxpayers, harming state funding and competition with companies that are required to pay taxes under the actual profit system.
Initial interpretations
Tax expert Breno Vasconcelos, a professor at Insper and partner at Mannrich e Vasconcelos Advogados, points out that the revenue limit that allows companies to use this simpler system has been criticized for several years for being too high and indirectly becoming a tax benefit.
“Moreover, another criticism lies in the fact that presumed profit ends up being a relevant factor, from a tax perspective, in the advantage of so-called ‘pejotização’ (the practice of hiring individuals as independent contractors to avoid labor laws). Combined with the exemption of dividends and the non-incidence of employer social security contributions, it completes the list of economic advantages of hiring a legal entity instead of hiring an employee (under the CLT labor law) for the same service,” he commented.
Vasconcelos believes that this discussion should be within the context of income tax reform, "not with yet another attempt to simply increase revenue to guarantee a primary surplus."
According to Daniel Loria, partner at Loria Advogados and former director of the Tax Reform Secretariat at the Ministry of Finance, the government sought a pragmatic solution. "Ideally, the tax regime should be revisited, trying to bring the tax base closer to the company's actual profit," he said, highlighting that PLP 182, in practice, for the first time, presents this simplified alternative as a tax expense.
Eduardo Natal, partner at the law firm Natal & Manssur Advogados and president of the Tax Transaction Committee of the Brazilian Association of Tax Lawyers (ABAT), emphasizes that presumed profit is a "method for calculating the tax base for Income Tax and not a tax incentive."
“Since it is an optional regime, it cannot be seen as a tax waiver. The company that opts for it may eventually have an advantage in calculating its taxes under this regime, but it may also not. I see this bill as extremely dangerous, precisely because of this issue, as it tends to generate enormous litigation,” he pointed out.
Elephant in the room or attempted fraud?
Sought for comment, the Ministry of Finance has not yet responded to the issue, which was not addressed in the explanatory memorandum of the PLP (Complementary Law Project), unlike another "jabuti" (an unrelated topic to the proposal) that tightened the noose on bets. The ministry also did not provide an estimated impact of this measure in isolation. In total, the proposed complementary law has a fiscal impact of R$19.8 billion in increased revenue.
A government source told JOTA that the measure is correct because, in practice, it increases taxation on the income of those who live off dividends and are currently undertaxed at the corporate level. This source points out that companies have the option of being taxed under the actual profit system if they believe that the increase in the tax base is significantly raising the tax payable.
Another source states that, in a context of creating a minimum tax of 10% on the super-rich and taxing dividends, there will be a significant increase in the tax burden for sectors that are "pejotized" (i.e., through the use of independent contractors).
Chances of advancement
Since it's still in its early stages, it's difficult to say whether the matter has a chance of succeeding. But it's clear that the topic will be the subject of much controversy and is a candidate to be the "elephant in the room" in the discussion of across-the-board cuts to tax expenditures.
Despite the Speaker of the House, Hugo Motta (Republicanos-PB), prioritizing this issue, cutting incentives will face a difficult path through Congress, as the CNI's statement criticizing the proposed tax increase has already made clear.
For now, in any case, the measure has already helped the government to finalize the budget bill, buying time so that new revenue-raising alternatives can be found by the end of the year, when the bill will be voted on – or even next year, during its implementation.