Originally published in the June 3 edition of World Tax Daily (Copyrights Tax Analysts)
The Brazilian government has backed away from its proposal to tax savings accounts — in part because of allegations that the proposed tax is unconstitutional.
Augusto de Aguiar, a tax consultant to the Senate, first raised the constitutionality issue on May 25. The government has since postponed the submission of its law project to Congress.
The proposal to tax savings accounts was announced on May 13 by Brazilian Finance Minister Guido Mantega and Central Bank President Henrique Meirelles. According to the government’s proposal, the income tax on savings accounts 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.).
The tax would not apply to savings account interest if the SELIC were at or above 10.5 percent p.a. As the SELIC rate decreases, the tax base subject to income tax would increase.
The tax base is a percentage (0 percent to 100 percent) of the 0.5 percent mandatory monthly interest applicable to savings accounts.
Analysts argue that a tax with a variable base that depends exclusively on the level of the SELIC rate would violate more than one provision of Brazil’s Federal Constitution, particularly articles 145 and 150.
Article 145, paragraph 1 of the Constitution provides for the constitutional principle of taxpaying capacity, under which a taxpayer must have the capacity to pay tax. In the case at issue, the paying capacity could be deemed violated because the smaller the taxpayer’s interest income (due to SELIC rate reduction), the greater its tax base and, accordingly, taxation would be.
Article 150, Item I of the Constitution prohibits the imposition or increase of a tax without a related (formal) law. The flexible tax base proposed by the government, in which the tax base (and corresponding taxation) would increase or decrease depending on the current interest rate, could also be deemed a violation of that provision because the interest rate dictated by the Central Bank, instead of a formal law, would determine the level of taxation on the taxpayer’s savings account. Ultimately, one could argue that the Central Bank would be responsible for determining the taxation of savings accounts because of its jurisdiction to establish the SELIC interest rate.
- Comments
In view of the 2010 general elections, the government may reconsider creating an income tax on savings accounts. Alternatively, the government may pursue reducing the taxation of financial investments, which are taxed as high as 22.5 percent of financial income. Proposals to reduce the taxation of all financial investments to 15 percent have been discussed, but no final decision has been formally adopted.
David Roberto R. Soares da Silva