Seen by some as a way to distribute income more fairly in Brazil, the Imposto sobre Grandes Fortunas splits opinions, which is one of the reasons why it has not yet been enforced. In this article we will introduce you to Brazilian equivalent of the Wealth Tax.
What is the Brazilian Wealth Tax
The Imposto sobre Grandes Fortunas, IGF, is the Portuguese translation for Wealth Tax. The IGF has been foreseen by the Federal Constitution since its promulgation in 1988, but it has not yet been regulated. According to Brazilian law the government may put it into effect at any moment via a complementary law (Lei Complementar).
The Wealth Tax in Brazil is surrounded by many controversies and debates. Some sectors of the economy like banks, some industries and a share of the most wealthy population are against it. On the other hand some groups defend its implementation as a way to lower economic inequality in Brazil.
Concept of the Brazilian Wealth Tax
The main intention of the IGF is to charge additional taxes to the wealthy in Brazil. The taxes, once collected would then be reinvested in areas where public investments are critically needed especially in healthcare.
The existing complementary law project, proposed to the Senate in September 2011 and currently being analyzed by the Senate’s Social Affairs Commission, defines as taxable all individuals who hold equity that add up to more than BRL 2.5 million. The specific rates for each range of patrimonies would be:
- 0.5% on equity between BRL 2.5 million and BRL 5 million
- 1% on equity between BRL 5 million and BRL 10 million
- 1.5% on equity between BRL 10 million and BRL 20 million
- 2% on equity between BRL 20 million and BRL 40 million
- 2.5% on equity over BRL 40 million
The same law project also includes additional penalties which can be applied in cases of delay or any attempt to falsify the income statement.
In addition, the law project states that some taxes can be deducted from the IGF, as long as they were already paid the year before the IGF payment is due. These taxes are:
- Imposto Territorial Rural (ITR)
- Imposto sobre a Propriedade Predial e Territorial Urbana (IPTU)
- Imposto sobre a Propriedade de Veículos Automotores (IPVA)
- Imposto sobre a Transmissão de Bens Inter-vivos (ITBI)
- Imposto sobre a Transmissão Causa Mortis e Doação (ITCMD)
Wealth Tax Controversies
Critics of the Wealth Tax project are critical about several aspects of it, which partly explains why IGF has not yet been regulated and applied to Brazilian citizens. Some say that the name of the tax itself can be considered populistic propaganda, as a tax on the wealthy would grant support from the majority of the population.
One of the biggest problems concerning the enforcement of this tax is how to actually define what can be considered a large fortune and consequently what can be taxed. Critics defend that almost every person that owns real estate could be considered a holder of a large fortune, when compared to those living with a minimum wage. Also, those who chose to build funds for their retirement could also be taxed, even though they do not have a luxurious lifestyle.
The definition of what would be used as the calculation basis is also controversial. Critics claim that the bureaucracy and effort to calculate each individual's wealth would not be compensated by the collected amount, since it would be hard to classify real estate, pieces of art or goods used in professional activities.
Also, implementing the IGF could cause a “Depardieu effect”. The French actor and entrepreneur Gerard Depardieu asked for Russian Citizenship to avoid having to pay the French Wealth Tax. In other words, there will most likely be flight of capital from Brazil, resulting in a reduction of investment, leading to deceleration of economic growth.
There is also a reluctance to approve the Wealth Tax in Brazil because it could be a catalyst for boosting tax evasion and concealing assets, as taxpayers would avoid declaring their equity, fearing the tax. Moreover, these taxpayers consider it unfair to focus on their entire equity, as they have already paid taxes while accumulating it.
Supporters of the Wealth Tax
Those defending the implementation of IGF in Brazil claim that instead of driving capital away from Brazil, it will increase the flow of investment, as the financial resources in Brazil would be larger due to the tax collection.
IGF supporters also state that there would not be a conflict with any other existing taxes, since its calculation basis would be on the total value of assets, not on any profit that was made.
As for the difficulty in calculating the total value of one’s equity, the supporters defend the use of electronic recording of transactions provided by banks as a possible solution.