Brazil axes payroll tax cuts for businesses across 50 industry sectors


Despite the fragile state of the country’s economy, its Finance Minister plans to remove payroll tax cuts first introduced in 2011 to support businesses in 54 areas particularly hit by the global slowdown.

Brazil’s government has rolled back payroll tax cuts for businesses across 50 industry sectors in a bid to reduce its 2017 budget deficit.

Under pressure to avoid raising taxes, Finance Minister Henrique Meirelles announced he would lower tax benefits by $1.5 billion and remove payroll tax cuts first introduced in 2011 to support businesses in 54 areas particularly hit by the global economic slowdown. As a result, some 40,000 companies, many of them multinationals, were permitted to substitute a 20% payroll tax with a tax of between 1.5-2.5% on their gross revenues depending on the industry they operated in.

Now only four sectors – construction and infrastructure; rail and subway transportation; highway bus transportation and communications – will be allowed to keep the perk, mainly because they are labour-intensive, said Meirelles.

The move has sparked an angry reaction from business leaders, who warned that increasing their costs would only damage the already fragile economy. But Meirelles insisted that he was neither increasing an existing tax nor creating a new one.

“This is not considered an increase in taxes. What existed was a concern with generalised tax hikes. This did not happen,” he said, adding that, while the payroll tax cuts had been designed to stimulate the economy and help companies create new jobs, there was no evidence that this situation had taken place. In fact, the government lost $22 billion in tax revenues between 2012 and 2016.

“This programme generated fiscal losses for the government,” Meirelles said. “The original idea was that it would permit a recovery of the economy but it did not generate the expected results. Now we are eliminating these distortions.”

But economists criticised the government for removing the tax cut in one fell swoop rather than staggering it. Francisco Lopreato, a professor at the Economic Institute of Brazil’s University of Campinas, warned the impact would be “large” as a result.

“It’s easy to give candy to a child but it’s difficult to take it away,” he said. “This [tax cut] is already incorporated in company management. You can’t just take it away from one moment to the next when companies are fragile and demand is weak.”