Brazil Tax Reform Talks May See Lower Proposed Rate on Dividends

(Bloomberg) -- Brazilian Economy Minister Paulo Guedes plans to insist that the tax rate on dividends in a government reform proposal sent to Congress be set at 20%, but people close to him concede that negotiations with congress could see that come down to 15%.

Brazil's push to tax dividends has met such pushback from financial markets that the 20% rate proposed by the Economy Ministry could end up being lowered to 15%, according to a person with knowledge of the matter.

Latin America's largest economy is one of the few countries in the world where dividends are tax exempt, a situation that Economy Minister Paulo Guedes says benefits the only the richest.

“Nobody needs to be ashamed of being rich, but they need to be ashamed of not paying dividend tax,” Guedes said during an online event Friday. “Only Brazil and Lithuania have this deformation, which we are correcting.”

The income tax reform package sent to Congress two weeks ago calls for a 20% tax on dividends along with a 5 percentage-point reduction in corporate taxes in two years. Fierce criticism from financial markets, however, prompted the head of the lower house, Arthur Lira, to signal that Congress could reduce the proposed dividend tax rate to 15%.

‘Quite Moderate'

Last week, Guedes said the 20% rate was “quite moderate” and that complaints were “natural.” Ministry data show that 65% of the 360 billion reais ($69 billion) in profits and dividends received in 2019 went to only 21,000 taxpayers.

But the combination of political and scheduling pressures have opened up the possibility that the 20% rate may not stand. To build support for dividend taxation, Brazil's economic team is willing to lower corporate taxes faster than originally planned.

Along those lines, one possibility would be to reduce corporate income taxes by 10 percentage-points in the first year of the tax reform. That would be possible by scrapping exemptions for economic sectors such as the chemical industry. The end of special exemption regimes can be included in the tax reform proposal in coming weeks.

Guedes wants to use the money from the levy to finance President Jair Bolsonaro's new social program, which has been in the works since last year. The strategy was not well received by the Citizenship Ministry, which is in charge of the program, people familiar with the matter said. That's because the complicated negotiations could delay the flagship initiative, which needs to be ready by November, when emergency Covid payments are set to expire, they said.