Originally published in the May 15 edition of World Tax Daily (Copyrights Tax Analysts)
Brazilian Finance Minister Guido Mantega and Central Bank President Henrique Meirelles on May 13 announced a proposal to tax the interest from savings accounts and fixed income investments. The proposed measures are designed to prevent the migration of large investors to savings accounts as interest paid through other financial instruments goes down.
Currently, interest earned in savings accounts is tax exempt in Brazil. The government plans to submit to Congress a provisional measure or law project that would impose income tax on interest earned in savings accounts with balances in excess of BRL 50,000 (approximately $24,000) per month.
The new tax would not affect most individual taxpayers. According to Central Bank data presented during the announcement, Brazil has almost 90 million savings accounts, 99 percent of which have balances smaller than BRL 50,000.
As proposed, the tax would apply as of January 1, 2010, giving investors more than six months to decide what to do with their savings accounts, Mantega said.
The tax would be progressive and would depend on the level of Brazil’s official interest rate (SELIC), currently at 10.25 percent per annum (p.a.). According to the government’s proposal, the tax would not apply to savings account interest if the SELIC stays at or above 10.5 percent p.a.
As the SELIC rate is reduced, the progressive tax would be triggered as follows:
- above 10.5 percent p.a. — zero tax;
- 10.5 percent to 10 percent p.a. — 20 percent tax;
- below 10 percent to 8.75 percent p.a. — 30 percent tax;
- below 8.75 percent to 8.25 percent p.a. — 40 percent tax;
- below 8.25 percent to 7.75 percent p.a. — 60 percent tax;
- below 7.75 percent to 7.25 percent p.a. — 80 percent tax; and
- below 7.25 percent p.a. — 100 percent tax.
The tax base is a percentage of the 0.5 percent mandatory monthly interest applicable to savings accounts.
To illustrate how the progressive tax system would apply, begin with a savings account with a balance of $100,000 in a given month in which the SELIC rate is 9 percent p.a. The investor is entitled to interest of $500 (0.5 percent of $100,000). Because the SELIC is within the third bracket, the tax base is 30 percent of $500, or $150. If the SELIC is reduced to 7 percent, the full $500 in the example above would be taxable.
Unlike other financial investments (for which taxation is final and not subject to adjustments in the taxpayer’s annual tax return), income earned in savings accounts would be considered ordinary income and would be subject to the personal income tax brackets (0 percent, 15 percent, or 27.5 percent). The tax would be due annually when the taxpayer files a tax return (by April). According to Central Bank data, about 891,000 savings accounts would be subject to taxation.
David Roberto R. Soares da Silva