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Updates for the week: Tax Reform in Brazil

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Bruno Drummond comments on dividends taxation

Check out the complete recording of the interview on our Podcast (in Portuguese):

Dividend taxation is one of the topics touched upon in the text for the Income Tax Reform for individuals, companies and investments that is undergoing analysis by the Brazililan Congress.  It is expected that starting in 2022, dividend distribution in Brazil will be taxes at 20%.

In the premiere of “Updates of the Week”, Bruno Drummond, a partner at Drummond Advisors, talks about the possible impacts of the Tax Reform in Brazil on the taxation of profits and dividends, in addition to drawing a parallel with the rules currently in force in the United States.

According to Drummond, this change could be a positive one for Brazil.  “In my opinion, this type of tax is very positive for the framework of the economy.  I believe that it is very important to have a conversation and discuss this topic.  But I do want to make it clear here: I am not pro-taxation.  I only believe that dividends are a good place to absorb taxation.  In order to explain, I will need to bring  up a little history.

As a Brazilian who has been living in the United States for over 20 years, the businessman explains how dividends are taxed in the country. These taxes apply to both Americans and foreign investors. “For foreign investors, the rate is heavier than for local investors. For foreign investors from countries without a tax treaty with the US, the rate is 30%. As for investors from countries with a treaty, the rates are at 0%, 15% and 20% (the same values that apply to local investors)”, he says.

Drummond remembers that when he arrived in the United States, bringing the Brazilian experience in his bag, he found these rates very prohibitive. “At first I thought it was punitive to have such a high tax on a type of income that results from a return on capital investment. And over the years I’ve noticed that dividends play a fantastic role in the US economy,” he says.

The businessman explains that the first objective of the tax on dividends is to increase the liquidity of companies. With more liquid companies, there is a direct impact on reducing bankruptcies. “In this context, the investor or founder will have the intention to grow the business. He will have liquidity and be able to reinvest in the operation. The social role of the dividend tax is very conducive to the economy. That money that was previously trapped in the company can be reinvested. And if it is reinvested, it brings new products, employees, technologies”.

According to Drummond, the creation of this text in the USA in other frameworks so that economic developments can take place. There, small and medium-sized companies have an incentive to access the stock exchange. Thus, investors make gains from the stock’s appreciation. “Another side that is important to mention was that in the United States there was also a reduction in the costs of the real estate market. They reduced the initial payment amount. It went from 20% to 3% today. If you make a 3% down payment on a home purchase, you can finance the rest. All these frameworks, together with the taxation of dividends, made the economy flow independently and even in a complementary way in some markets. For example, if a founder is unable to withdraw dividends, he does not need a lot of money to buy his house because he has the ability to finance it. If someone who invested in a startup does not have liquidity, he also has the ability to go to a Stock Market and get a valuation of 10, 15, 20 times higher”, she explains.

Drummond states that the reform will bring benefits for Brazilians investing abroad and vice versa.  “In the proposal for the Brazilian Tax Reform, we found this idea of reducing corporate income tax and charging income tax on dividends. It is very important that deputies and senators observe how the taxation of dividends is essential for Brazilian companies to be competitive in a global environment”.

For the specialist, decreasing the effective rate and increasing the tax on dividends will bring an increase in production and active investment that will result in economic growth. This move is likely to distance foreign investors who are amenable to investment savings, but it will re-attract subsidiaries that are thinking about long-term investments. “On the Brazilian stock exchange, companies will likely reduce the amount of dividend tax so that the investor has the benefit of capital gain – which will make the exchange more mature. In Venture Capital, there will probably be a change, with more companies going on the stock exchange, that is, more IPOs, more investors, more individuals investing in the stock exchange. Small and medium-sized companies, on the other hand, will need better credit lines”, he says.

Bruno Drummonds ends by saying that he welcomes the change with optimism.   “I am looking at these changes with eyes wide open, when changing one aspect, the impact will be felt in various economic sectors.  There is a reason why this reform has not yet happened in Brazil as the dividend tax will have a direct impact on the legislators themselves. It will be an arduous process at first, but a positive one over time. The adaptation is expected to take place in a year or so, with a return to a normal environment of doing business in Brazil. Taxation will be a solution to other changes that must take place in the future.”

Written by Aline Ribeiro, Content Consultant at Drummond Advisors