The government of President Luiz Inácio Lula da Silva agreed on Tuesday to withdraw a proposal to tax offshore investments from a pending provisional decree. The government’s House whip, José Guimarães, said the administration will resubmit the proposal as an ordinary bill.
The Finance Ministry is working on the proposal and intends to present it by Monday, when the provisional decree in question expires. Getting the approval of Congress, however, is not a given since there are more downsides than upsides to the government’s proposal.
In late April, Lula signed a decree that slightly raised thresholds for individual income tax exemption, up to a monthly income of BRL 2,112 (USD 435) — while taxing capital income from offshore financial investments owned by resident citizens, including investments made through offshore companies, trust funds, and other formally constituted entities located in tax havens. Taxing individuals’ investments abroad is necessary to offset the impacts of broader tax exemptions.
Experts in the Finance Ministry estimate that raising the threshold for income tax exemption will have a negative impact of BRL 3.2 billion (USD 663 million) on public accounts in 2023, BRL 5.88 billion in 2024, and BRL 6.27 billion in 2025. At the same time, the government estimates that taxing investments abroad could raise BRL 3.25 billion in 2023, BRL 3.59 billion in 2024, and BRL 6.75 billion in 2025.
Currently, overseas investments can be taxed as income (recurring gains from dividends, shares, interest, or property rentals, for example) or as capital gains (sale, redemption, or liquidation of assets). However, this only effectively happens upon the sale or maturity of assets and when taxpayers bring their money to Brazil.
If Congress passes the new bill, Brazilian investors residing in the country would have to declare and pay taxes annually on income obtained abroad, whether or not they bring that money into Brazil.
Back in June, experts told The Brazilian Report that there were more downsides than upsides to the government’s proposal and that some of the suggested changes are far from what could be considered reasonable — as it also creates questionable anti-deferral rules for taxing legal entities controlled abroad and includes trust funds as taxable investments. That is highly debatable as the trustee of such funds is the one who really holds power over the investments, not the fund creator (settlor) nor the beneficiary.
In closed-door meetings with government leaders, House Speaker Arthur Lira stated that taxation along the lines suggested by the government would cause a significant evasion of resources and would reduce the intended collection, in addition to highlighting that some points, such as taxation on the variation exchange rate, needed to be better explained. It is not yet known how many of the suggestions made by members of Congress will be accepted by the Finance Ministry in the new bill.
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