Telecommunications
Tax Reform Handbook: What matters for LatAm TMT
We present frameworks to estimate impacts of the Fiscal Reform, by breaking down: (a) taxes on revenues, (b) taxes on income and (c) sector specific taxation
Quantifying the most meaningful changes that the Brazilian Tax Reform could bring to LatAm TMT:
- Taxes on revenue, based on the proposal to merge multiple taxes into a single value-added
tax system. - Taxes on income, based on the proposals to end the interest on capital (IOC) fiscal benefit, balancing it with scenarios for stable or lower corporate taxes rates.
- Sector and Regional specific taxation. Most of our companies are subject to sector benefits, which may or may not be included in the Tax Reform, and may significantly offset some of the aforementioned impacts.
1. A single tax on revenue; how high could it go?
Key factors we are monitoring: one of the parts of the Tax Reform aims to simplify the complex Brazilian indirect tax system. It was discussed in Congress and was centered on two amendments proposals, Proposal to Amend the Constitution (PEC) 110/2019 and PEC 45/2019. Both of them consolidate the existing federal and state taxes (IPI, PIS, COFINS, ICMS and ISS) into a value-added tax system (to be called IBS). Thus, we expect only one to prevail.
2. Taxes on Income - IOC cancelation; will corporate tax follow along?
Another part of the Brazilian Tax Reform should impact income taxes, interest on capital (IOC) and taxation on wealth. The relevant themes for TMT are:
(1) the elimination of the Interest on Capital (IOC) tax benefit and
(2) a possible lowering of the corporate tax rate from 25% to 20%, which is being discussed as a way to minimize the negative effect of (1).
3. Sector and Regional taxation: complexity can be good
End of the Payroll Exemption - limited impacts on Software
Within the tax regime changes, one of the potential discussions could orbit around the payroll exemption benefit that is widely used by Brazilian Tech companies. The payroll exemption was extended until the end of 2023, but Brazilian authorities are discussing its future:
- There is a bill project in Brazilian Senate proposing the extension of the benefit until 2027.
- Mr. Haddad, the Brazilian Minister of Finance, stated that he has plans to address the matter during the second phase of the fiscal reform.
- The government is also studying a non-linear exemption of payroll, benefiting lower salaries.