President Luiz Inácio Lula da Silva will announce this week a landmark bill aimed at relieving the financial burden on Brazilian workers.
The new legislation aims to increase the income tax exemption threshold for employees earning up to R$5,000 per month.
This project is consistent with Lula’s campaign promises and represents a legislative attempt to benefit nearly 30 million Brazilians, according to the National Association of Federal Revenue Auditors (Unafisco).
According to local media outlet InfoMoney, the announcement will be made at the Planalto Palace, and while this is a welcome step for many, it still needs to be approved by the National Congress before it can be implemented.
Understanding the proposed tax changes
Income tax exemptions in Brazil are now limited to those earning up to R$2,824 per month.
If the law is passed, the exemption threshold will be dramatically increased to R$5,000, which means that workers earning less than this amount will no longer be subject to direct payroll tax deductions.
This reform intends to ease the financial hardship that low-income people face by increasing their take-home pay and, as a result, their purchasing power.
The bill introduces an “exit ramp” mechanism aiming to guarantee fairness; those making between R$5,000 and R$7,500 qualify for a partial decrease in taxes paid.
This step-by-step reduction in duty aims to circumvent sudden financial impacts for individuals stepping into increased earning brackets.
Filers earning more than R$7,500 will still be subject to the maximum income tax rate of 27.5%, demonstrating that higher salaries continue to contribute fairly.
Financing fiscal reform
This bill has substantial financial repercussions, with a projected reduction in government revenue of R$27 billion.
According to Reuters, the Brazilian government intends to introduce tax measures aimed at high-income individuals and cash moved overseas to compensate for this loss.
Two key sources of revenue have been identified to assure fiscal sustainability in the face of these changes.
The first source is a levy on profits and dividends distributed to foreign parent companies or owners. Some transactions that were previously excluded now have a tax rate of 10%.
The Brazilian government hopes to both raise tax receipts from companies and close loopholes of companies moving funds outbound by taxing funds on the way out.
Second, it is anticipated a new tax on those earning more than R$50,000 a month (around R$600,000 a year).
This concept would apply a 10% withholding tax on profits and dividends paid more than this threshold and would work as a pre-payment of tax obligations in the upcoming years.
This plan seeks to impose a minimum tax on annual revenues over R$600,000 beginning in 2027, encompassing a broader range of income sources such as capital gains and other exempt income.
Furthermore, tax breaks will be implemented for those who get profits from companies, taking into consideration the taxes already paid by these businesses.
The political landscape ahead
Political observers are closely monitoring responses from labor unions, corporate leaders, and other policymakers heading into the announcement.
If the new regulation passed, the changes would transform Brazil’s tax code, pushing it towards increased fairness at the expense of higher-income earners and businesses.
With the claim of high inflation, the approval or not, of this bill will depend not only on its content but also on party politics in the National Congress.
Overall, this announcement represents a step forward in fighting economic inequality in Brazil and a step forward for enhancing public welfare in a country characterized as one of the most unequal in the world through progressive taxation.
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