Brazil Withdraws Payroll Tax Cuts

Brazil Withdraws Payroll Tax Cuts

In a key policy this year, the Brazilian government has concluded that in order to meet the fiscal target of this current year and maintain balanced accounts, they must cut R$42.1 billion from their planned expenses in 2017. This will impact almost all major multinational companies operating in Brazil. This decision was made with keeping the fiscal prudence in mind, as the government was keen on cutting the budget deficit.

On March 29, the Finance Minister Henrique Meirelles stated that the government plans to remove the payroll tax cut across 50 out of the 54 selected business sectors that were earlier exempted.  This tax cut is expected to increase the government’s revenue by R$4.8 billion.

In 2011, the government intervened and bailed out businesses that got hit by the global economic slowdown. To accomplish this, they introduced payroll tax cuts to select 54 business sectors. This decision helped approximately 40,000 companies in Brazil.  Henrique Meirelles explained that this was done to stimulate the economy and to create jobs. However, by doing this the government lost R$69.2 billion in tax revenues between 2012 and 2016.

The government has now decided to do away with tax benefits to 50 out of the selected 54 business sectors. The remaining four sectors that will continue to benefit from the payroll tax cuts are:

  • Construction and infrastructure companies
  • Rail and subway transportation companies
  • Highway bus transportation companies
  • Communications firms

Business representatives of the affected sectors were critical of this decision. They expressed their disappointment and cautioned the government of the negative impacts that would not only increase costs, but also hurt the economy. Many economists have also criticized the government on this. They suggested a gradual removal, versus an immediate elimination of the tax cut across 50 business sectors.

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