BRASILIA: Brazil will increase taxes on the financial income of thousands of companies, raising an estimated extra 2.7 billion rais ($857 million) in federal revenue this year as the government scrambles to meet its fiscal goal and regain investors’ confidence.
The Cofins tax rate on applicable revenue will rise to 4 percent and the PIS/Pasep tax rate will rise to 0.65 percent, the country’s tax agency said on Thursday. Both tax rates, which help fund the country’s social security system, were reduced to zero a decade ago.
The agency said that the new tax rates will be charged to about 80,000 companies in a bid “to avoid giving up important resources for social security.” The tax increase, which takes effect on July 1, will not be charged on financial institutions, the agency said.
After years of heavy spending and tax breaks that have threatened Brazil’s investment grade rating, President Dilma Rousseff started her second term in January by cutting expenditures and raising taxes on everything from fuel to cosmetics.
Faced with dwindling tax revenues, Finance Minister Joaquim Levy had warned on Tuesday that the government could further raise taxes to meet its primary surplus goal of 1.2 percent of gross domestic product. The primary surplus is a key gauge of the country’s financial health, representing public savings after expenditures and before paying interest on debt.
“The measures show that the government is doing more to meet its fiscal goal given the disappointing tax revenues,” said Carlos Kawall, chief economist with Banco Safra in Sao Paulo. “It will be difficult, but is not impossible to meet that goal.”
Brazil had an unexpected primary deficit in February, throwing into question the government’s ability to meet its fiscal target as the economy stagnates.
The new tax rates will apply to income including hedging operations and do not need congressional approval, the agency said.
Taxing hedge operations will hurt larger companies trying to protect their operations from a volatile exchange rate, said KPMG tax expert Marcus Vinicius Goncalves.
“The return of the tax is worrisome,” Goncalves said. “Hedge operations against currency volatility will lose their effectiveness.”
