Economy Ministry and Central Bank don’t see eye to eye on new tax

. Sep 11, 2019
Brazil new tax on financial transactions

CPMF. These four letters almost sound like a dirty word to Brazilians. The acronym describes a now-defunct tax on financial transactions, which could be making an unwelcome comeback. Conceived as a temporary fix to the federal budget, the CPMF existed for 11 years and became a trademark symbol of the scorching tax burden in Brazil. But even if people loathe this tax, Economy Minister Paulo Guedes is keen on bringing it back to life, in order to help the administration curb the deficit. 

</p> <p>But the push for a new version of the CPMF (to be called the Financial Transaction Tax, or ITF) is not only set to drive Brazilians angry, it is also a direct clash with the Central Bank&#8217;s agenda to modernize the country&#8217;s financial system.</p> <p>The federal administration reportedly <a href="">wants</a> to slap a 0.4-percent tax on cash withdrawals and transfers—combined with a 0.2-percent tax on debit and credit card transactions (to be paid by consumers <em>and</em> merchants alike). As intended, the ITF rate would rise with time—and the government is making no illusions that it would be a temporary fix. The new tax would come to stay.</p> <h2>Why the new tax?</h2> <p>To compensate for the new levy, the Economy Ministry intends to reduce duties on corporate payroll tax from 20 to 13 percent—and even abolish social security taxes, depending on the rates Congress chooses. In an interview with financial newspaper <em>Valor</em>, Mr. Guedes also talked about reducing the cost of hiring new employees, a move he hopes will reduce unemployment rates.&nbsp;</p> <p>“The ITF is ugly, annoying, but it has generated good tax revenue and that’s why it lasted for 11 years. Depending on the tax brackets, it could generate roughly BRL 150 billion yearly,” said Mr. Guedes.</p> <p>According to the Senate&#8217;s website, the old CPMF generated BRL 223 billion in tax revenue between January 1997 and December 2007—not counting a previous similar tax applied in 1994. In 2007 alone, revenue totaled BRL 37.2 billion. The potential to boost the amount of money the government collects from tax is considerable, taking into account the fact that CPMF contributions rose 216 percent between 1998 and 2006, while revenue from other taxes grew 78 percent over the same span.</p> <p>According to the association of credit card companies, credit and debit card transactions accounted to <a href="">24.3 percent of the Brazilian GDP</a> as of Q1 2019. Ten years ago, that share was 11.4 percent.</p> <h2>What’s wrong with the ITF?</h2> <p>Mr. Guedes is proposing to replace a tax paid by companies alone (and based on their profits) for a new contribution that affects consumers as well.</p> <p>The first piece of criticism of the new ITF tax is that it represents a <a href="">proportionally heavier burden on the poor</a>. But, according to Agostinho Pascalicchio, an economics professor at Mackenzie Presbyterian University, the problem with the “new CPMF” is its cumulative effect on the productive chain.</p> <p>“It is a harmful tax which causes inflation and structural imbalances in the economy. Goods of consumption, and even food products, are the ones taking the biggest blow resulting from a domino effect,” he told <strong>The Brazilian Report</strong>. “The tax is coming at a moment of very low inflation, which is probably why the economic team is considering it.”</p> <p>He also believes that talking about the creation of such a new tax amid <a href="">debates on tax reform</a> aimed at simplifying the current system creates even more confusion and mistrust in the Brazilian economy.&nbsp;</p> <p>An August 2019 <a href="">poll</a> shows that 78 percent of Brazilians didn&#8217;t want the return of a financial transaction tax. And House Speaker Rodrigo Maia has already said Congress may block the initiative, as we explained in our <a href="">September 11 Daily Briefing</a>. Part of the reason for the CPMF being so disliked is the fact that it was created to fund the healthcare system—but only BRL 33.5 billion of the money raised was actually used for this end.</p> <h2>Backfiring</h2> <p>On another front, the Central Bank keeps moving forward with its agenda of modernizing Brazil’s financial system. One of the newly announced measures is the creation of a <a href="">system for instant payment methods</a>, in the vein of QR-Code transactions. The idea is to make the money available for companies and individuals immediately, on a 24-7 basis, and reduce costs. Currently, bank transfers are only carried out during business hours, and often involve fees from financial institutions. When operational, the new system could reduce the use of cash by 30 percent.</p> <p>“For the recipient, fewer middle-men means fewer costs in comparison to other payment methods. (&#8230;) As sales revenues will be immediately available, companies’ cash flow management may be optimized, decreasing their need for credit,” <a href="">said</a> the Central Bank.</p> <p>The measure would be particularly beneficial for fintechs, which have been investing heavily in new payment methods and are known for their tariff-free policies.</p> <p>However, if the ITF moves forward, professor Agostinho Pascalicchio sees a chance that it could actually pose an incentive for currency transactions—as a way to evade the taxman.</p> <p>In an article published in newspaper <em>O Estado de S. Paulo</em>, former Central Bank chairman Affonso Celso Pastore highlighted the dangers of these informal transactions. “Taxing financial transactions creates an incentive for the multiplication of cash under the mattress, increasing—instead of decreasing—informality.”</p> <p>Quoting a study by economist Felipe Restrepo, he explains that these practices may impact the overall offer of credit, as it can reduce amounts available for bank deposits. According to Mr. Restrepo’s analysis, a 0.56-percent tax would reduce credit for the private sector by 3.6 percentage points of the GDP.&nbsp;</p> <h2>Alternative ways</h2> <p>Economists <a href="">consulted</a> by newspaper <em>Folha de S. Paulo</em> agree with the idea of lowering payroll tax, but believe it is time to actually cut taxes in a broader fashion, instead of just changing the source of revenue. Instead of a CPMF, they propose a reduction in contributions for the “<a href="">Sistema S</a>”—a group of nine entities related to social assistance and professional training funded by the government and professional associations—or even contributions to social security itself, which form the bulk of payroll taxes.</p> <p>In the case of Sistema S, the government has already slashed its funding by 20 percent.</p> <p>Flávio Rocha, owner of retail giant Riachuelo and leader of a group of business owners called Instituto Brasil 200, supports a single tax on financial transactions, but in a different format. He believes in a smaller rate (just 0.1 percent), incurring on a much larger base—in his view, diminishing the tax burden and fiscal evasion.&nbsp;</p> <p>“We are suggesting that we tax not the generation, consumption or storage of wealth, but its flow. It would make us leave a tax base of BRL 2 trillion to reach BRL 1.5 quadrillion, which is the total payment volume Brazil generates, according to the Bank for International Settlements,” he said, adding that, under this system, a worker earning the minimum wage (BRL 1,000) would have only BRL 1 of his paycheck collected by tax authorities.</p> <hr class="wp-block-separator"/> <p><em>This content has been updated.</em>

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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