Government Studies Revision of Income Tax Deductions and Exemptions

With the intent of increasing tax revenue and making the new fiscal framework sustainable, the Ministry of Finance is preparing new initiatives.

Among the measures under consideration is a review of the deductions and exemptions of the Individual Income Tax. The government aims to tax profits and dividends distributed by companies and the taxation of closed-end investment funds.

A source with knowledge of the matter said that the Income Tax agenda is “complicated” and therefore has not been publicly addressed yet. According to this same source, the goal is for these actions to be presented in a more structured manner in the Income Tax reform.

Another initiative under review is the reassessment of tax deductions for health expenses. President Luiz Inácio Lula da Silva criticized this measure in December 2021, stating that “it is the poor who do not have specialists, it is the poor who do not have health plans (…) who are paying for the treatment that we have.” The mechanism allows taxpayers to use proof of certain expenses, such as medical and educational costs, to reduce the taxable income, which tends to benefit mainly higher-income individuals.

Income Tax deductions have been the subject of debate among various previous governments.

The administration of former president Jair Bolsonaro considered limiting the deductions for medical expenses, but the idea did not advance. Another point that was studied and did not proceed was the possibility of eliminating the standard 20% deduction for taxpayers who file simplified Income Tax returns.

The government has already estimated a revenue loss of 51.1 billion reais with tax-exempt income in the Individual Income Tax, in addition to 31.3 billion reais in deductions for the fiscal year 2024 in the budget guidelines law.

In addition to these measures, the government is considering implementing periodic Income Tax collection.

Through the so-called come-cotas, from exclusive investment funds, which currently pay the tax only at the time of redemption. To announce these measures, the secretary of the Federal Revenue, Robinson Barreirinhas, stated that the government was working on additional revenue measures, which align with the government’s direction of not creating or increasing taxes, but rather targeting those who are not paying but should.

The former Minister of Economy, Paulo Guedes, also attempted to approve the taxation of dividends, but the Income Tax reform sent to Congress by the then head of the economic area ended up stalling.

The Ministry of Finance stated that it would not comment on these studied measures. The government has indicated that it will focus on a reform of the Income Tax after the consideration of a tax reform on consumption, which is currently under discussion in Congress.