Haddad evaluates measures to curb abuses in interest on capital

According to Haddad, large companies have used the system to artificially reduce profits and pay less income tax. “Take this interest on equity scandal, for example. Billions are drained from public coffers to benefit half a dozen companies that do tax engineering on top of a legal device that is currently being abused. And so it goes. This is the black box that exists in Brazil, it is the largest black box in Brazil”, declared the minister upon returning from a meeting at the Superior Court of Justice (STJ).

Currently, there are two ways for companies to distribute part of the profit to shareholders. The first takes place through dividends, required by the Corporate Law, in which the company pays Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) on profits, but the investor pays nothing. The Income Tax reform, to be discussed in the second half, intends to tax dividends for individuals and reduce taxation on companies.

The second occurs through interest on own capital, of an optional nature, in which the company does not pay IRPJ and CSLL, but the investor pays 15% Income Tax withheld at source. Interest transfers to investors are considered as expenses and deducted from profit.

The mechanism was created to attract investors in the stock market and facilitate self-financing with the partners’ resources, by encouraging the distribution of profits by the companies. According to Haddad, however, several companies are artificially zeroing out profits to turn them into interest on equity.

“There are companies, to give you an idea, that are no longer making a profit. There are very profitable companies that do not declare a profit and, therefore, do not pay Corporate Income Tax. What did they do? They artificially transformed profit into interest on equity. They pay neither as a legal entity nor as an individual”, explained Haddad.

At the end of March, when announcing the new fiscal framework, the Minister of Finance declared that the government intends to review tax incentives to reinforce cash between R$ 110 billion and R$ 150 billion per year from 2024. According to him, the government do not intend create taxes or increase rates, but fight tax loopholes and reverse exemptions.