Federal Taxes in Brazil
Federal taxes account for over two thirds of total revenue collected by Governments in Brazil; besides the Federal taxes, Brazilians have also to pay State and municipal taxes.
According to article 153 of the Federal Constitution, the Union is allowed to create the following taxes: Income Tax (both individuals income tax and corporation income tax), Importing Tax, Exporting Taxes, Tax on Industrialized Products, Tax on Credit and Insurance, Rural Property Tax, and Taxes on Large Fortunes.
Of these, the tax on Large Fortunes is the only one which was not created yet; it depends on the proposal and approval of an specific law (there are debates in Congress whether or not the large fortunes would fleed the country as soon as the bill starts to be voted). A law shall determine, among other points, how to define large fortunes, how much tax should be charged, how often the charge would occur, and so on (there is a heritage tax in Brazil, which is of competence of the States; this tax could play the role of a large fortune tax, however, very little of this tax is collected).
See composition of federal revenues in 2007 and 2008.
Article 149 of the Constitution states that "the Union shall have the exclusive competence to institute social contributions, contributions of intervention in the economic order and contributions of interest of categories of employees or employers".
Based on this article, the Union has created several contributions (contributions today represent a bigger share of total revenues than taxes).
Today, the two most important social contributions are CSLL (Social Contribution on Net Profits) and Cofins (Contribution for Funding of the Social Security). These contributions should be destined exclusively to payment of social security and social assistance.
Contributions of intervention in the economic order are fewer. Today, the most important such contribution is CIDE (Contribution of Intervention in Economic Domain), which is applicable in every commercial transaction involving fuel (gasoline, fuel oil, ethanol, etc).
"Contributions of interest of categories of employees or employers" refers mostly to fees paid compulsorily by corporations to their respective "S Systems". There is Senac (National Service of Commerce), Senai (National Service of Indutries), Sebrae (National Service for Small Business) and several others. The money should be used to improve the economic performance of each system; for example, Senai maintains recreational and training centers for people who work in the industry (President Lula often mentions that he started his metal worker career thanks to Senai), Sebrae maintains advisory for potential entrepreneurs, etc.
Articles 157 - 162 of Constitution state that Union, States and municipalities shall share part of the revenues that each party collects.
So, for example, even though the Union is allowed to create and collect income tax and industry tax, a total of 47% of these taxes must be shared. A fraction of 22.5% constitutes the Fund of States (FPE) and is shared among States, in proportion to population; a fraction of 21.5% goes towards the Fund of Municipalities (FPM), and is shared among municipalities, in proportion to population; and a fraction of 3% goes towards a Fund for Development of North, Northeast and West-Central.
As the revenue to these Funds come from the richer States and municipalities (as they are related to income and industrial production) and the proceeds of these Funds go majoritaly to the poorer (more populated) communities, the Funds act as a kind of income distributor.
The FPE and particularly the FPM constitute important source of revenue for the poorer States and municipalities. Actually, for most of the smaller cities in the North and Northeast of Brazil, where there is little industrial activity, the FPM and the social security payments account for nearly the totality of funds which are injected into the local economies.
As the Union is supposed to share taxes, but is not supposed to share contributions, in the past few years the Union has preferred, when necessary to activate the economy, to reduce taxes and preserve contributions.
For example, in 2009, to respond to the world crisis, the Government reduced the tax on industrial production of cars; in 2008, the personal income tax was lowered by increasing the exemption and low taxation brackets.
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