Phelippe Toledo Pires de Oliveira, Lecturer at IBMEC Brasília1
Tax amnesties have been a common feature in the Brazilian tax landscape. In addition to a permanent voluntary disclosure regime under article 138 of the Brazilian Tax Code, legislators frequently pass temporary tax amnesties in which eligible taxpayers are given reductions in their tax liabilities under particular conditions. Brazil has also adopted offshore voluntary disclosure regimes, consisting in a temporary tax amnesty for taxpayers who held undeclared assets abroad.
Offshore voluntary disclosure regime (“RERCT”)
Brazil implemented an offshore voluntary disclosure regime for the first time in 2016. Introduced by Law No. 13,254/2016, the regime – known as “RERCT” – was meant to ease the political transition in the context of a gradual move towards tax transparency after the implementation of the US’s Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS). The program was also expected to raise revenues to cover a growing budget deficit2.
Taxpayers who came forward and disclosed unreported assets held abroad were subject to favorable conditions to the extent that such assets did not derive from illicit activities. Those conditions consisted in paying reduced tax and penalties (15% tax and a 15% penalty) and immunity from potential crimes such as tax evasion, money laundering and non-authorized entry and exit of foreign currency in the country3.
Under normal conditions, back taxes are subject to a 27.5% top marginal bracket for individual income tax or a 34% corporate income tax rates4. Moreover, if the tax administration issues a tax notice, a penalty is normally imposed. Penalties in Brazil vary according to the type of infraction but could reach as high as 225% of the unpaid tax in cases of deliberate misconduct, fraud or simulation coupled with taxpayers’ uncooperative behavior5.
The program was somehow successful as revenues from the program exceeded expectations. The original regime raised R$ 46.8 bi (approx. USD 9 billion) in revenues6. Given its success – and possibly lobbying from taxpayers who missed the opportunity – the government considered extending the program and eventually, Law No. 13,428/2017 was implemented to make this happen.
The 2017 extension provided a similar framework but with somewhat less favorable conditions. The exchange rate used for foreign currency purposes was higher. In addition, instead of a 15% penalty, taxpayers had to pay a 20.25% penalty (the 15% tax rate remained the same). Yet, unlike the original program, its extension raised R$ 1.6 bi (approx. USD 0.3 billion), much less than expected7.
Attempt to implement a new offshore voluntary disclosure regime
Recently, there have been talks of a new offshore voluntary disclosure program underway with a new proposal being discussed in Congress. Proposed by the Senate’s speaker, Rodrigo Pacheco, Bill No. 798/2021 contains less favorable conditions than its previous versions. To benefit from the new regime, taxpayers would have to pay a 15% tax plus a 25% tax penalty, which is slightly higher than previous8.
The Ministry of Finance calculates that the new proposal can raise approximately R$ 1.6 bi (equivalent to USD 0.3 billion), which is the same amount raised in 2017 when the RERCT was extended. But that amount is just an estimate as it is always difficult to anticipate who is going to adhere to such programs. And though the amount is not significant, it can help to reduce Brazil’s current budget deficit.
Similar to the 2016-2017 offshore voluntary disclosure programs, taxpayers can only benefit from the program to the extent that their assets did not derive from illicit activities. However, unlike the previous programs that barred politically exposed persons (PEPs) – those who hold relevant public functions and their family members – from participating, the new proposal is expected to allow them to participate.
The proposal is currently under discussion in the Senate’s Committee for Economic Affairs, where it is expected to be voted in the near future. If approved in the Senate, however, it still has to go through the House of Representatives and then signed into law by the President. In the context of a growing budget deficit, the proposal may gain impetus and pass quickly through the houses.
Briefly, Brazil implemented an offshore voluntary disclosure regime of unreported assets held abroad in 2016 with an extension in 2017. Currently, a new regime is under discussion in Congress with basically the same framework but slightly different provisions. The regime is expected to provide extra revenue, which is convenient for the government, especially in the context of its current budget deficit.
However, it is important that Congress and the government carefully consider not only the revenue-raising function of the proposal, but other implications too. Programs like these can affect tax morale as currently tax-abiding citizens may see those programs as unfair for benefiting mostly rich taxpayers that failed to disclose their foreign accounts, assets and income held abroad to the tax authorities.
Moreover, literature suggests that repeated tax amnesty programs may adversely affect future tax compliance from taxpayers in anticipation of a new program9. If that is correct, unless accompanied by greater enforcement, a third offshore voluntary disclosure regime could encourage taxpayers to run the risk of evading taxes and hiding their assets in hopes they can later settle their tax bill with reductions.
Last but not least, the fact that the new proposal intends to allow PEPs to participate also raises the question whether a new offshore voluntary disclosure regime is not earmarked for a particular group of taxpayers: a few politicians, high-level government officials and their family members who were barred from participating in previous initiatives.
- Tax attorney at the Office of the Attorney General for the National Treasury in the Brazilian Ministry of Finance. Ph.D at the University of São Paulo (2013-2017). Postdoctoral researcher at the Vienna University of Economics and Business (2021-2022). Lecturer at IBMEC Brasília. ↩︎
- Reuters, Brazil sets dates for amnesty window to offshore assets (15 Mar. 2016), available at: Brazil sets dates for amnesty window to offshore assets | Reuters (last accessed 5 September 2023). ↩︎
- Available at: https://www.planalto.gov.br/ccivil_03/_ato2015-2018/2016/lei/l13254.htm. ↩︎
- Corresponding to 25% Corporate Income Tax (IRPJ) and 9% Social Contribution Tax on Income (CSLL). Because both taxes have similar tax basis, they are normally considered together for the purposes of calculating taxes levied on corporate income. ↩︎
- Article 44, paragraph 2o, Law 9430/1996. ↩︎
- Reportedly, when the bill was approved in the Senate, it was expected to raise R$ 11 bi (approx. USD 2.1 billion). In this regard, see Reuters, Brazil sets dates for amnesty window to offshore assets (15 Mar. 2016), available at: Brazil sets dates for amnesty window to offshore assets | Reuters (last accessed 5 September 2023. ↩︎
- For more information, see https://www.poder360.com.br/economia/repatriacao-arrecadou-r-16-bilhao-governo-chegou-esperar-r-132-bilhoes. ↩︎
- For further detail, see PL 798/2021 – Senado Federal (last accessed 5 September 2023). ↩︎
- See Baer, Katherine Tax amnesties: theory, trends and some alternatives/Katherine Baer and Eric Le Borgne – Washington, D.C: International Monetary Fund, 2008, pp. 2-3. Available at: https://www.elibrary.imf.org/display/book/9781589067363/9781589067363.xml?rskey=0vf4Vr&result=1 (last accessed 20 September 2023). ↩︎