At the outset of 2020, the Federal Government of Brazil, headed by President Jair Bolsonaro (an independent, but previously of the conservative Social Liberal Party), announced that reforms to the Brazilian tax system was one of its main priorities.
Changes to Brazilian tax policy have been debated extensively over many years without leading to any significant reform. However, Brazil may just find itself with the right political and economic context in which to finally turn the talk into a reality.
One potential tax measure that has caused some chatter is a wealth tax. The economic impact of Covid-19 has hit Latin American countries hard and Brazil is no exception. Naturally, the Government will be looking for ways to replenish its reserves though taxation and proposals for a wealth tax may now get the traction they previously lacked.
How does Brazil currently tax wealth?
There is no wealth tax currently in force. Individuals are subject to a number of taxes, including income tax, social security and inheritance and donation tax.
The main tax on capital and accumulated wealth is the Imposto sobre Transmissão Causa Mortis e Doação, Portuguese for "Inheritance upon Death and Donation Tax", or simply ITCMD. ITCMD is a State tax that is levied on inheritance/gift transactions at a maximum rate of 8 percent depending upon the legislation of each state of Brazil (26 in total). This tax is self-assessed and the taxpayer (the person receiving the inheritance or gift) is responsible for calculating their liability and reporting it to the administrative authority. The State Treasury must ratify any tax exemptions claimed.
Could a wealth tax be introduced?
Yes. The Federal Constitution of 1988 allows for the imposition of a tax over large fortunes (Imposto sobre Grandes Fortunas, or IGF). The Constitution of 1988 states that IGF must be implemented by a Supplementary Federal Law which requires a special quorum of one half of congressmen/women in both legislative houses to be passed. However, despite two parliamentary votes, IGF has never been implemented to date.
In 1989, a bill was approved in the Senate and forwarded to the Chamber of Deputies, but after an astonishing 11 years of procedures, it was rejected in 2000. That bill proposed a tax on net wealth above R$ 4 million (around £500,000 today) with progressive tax rates between 0.1 percent and 0.7 percent. The demise of this bill seems to have been heavily influenced by the abolition of wealth taxes across a number of European countries in the 1990s; capital flight and monitoring/collection costs were key factors to their downfall.
Eight years later, in 2008, there was another bill that made it through the Senate but was ultimately rejected. This bill sought to impose a tax on net wealth above R$ 10 million (GBP 1.25m) at a proportionate rate of 1 percent.
Research by Trench Rossi Watanabe, one of the largest law firms in Brazil, indicates that a total of 42 Bills of Law, which would have the effect of introducing a wealth tax, have been presented since 1988. Of those Bills, over half of them were presented in 2020 as a direct means of addressing the impact of COVID-19. Although the details of the Bills differ, the majority seek to impose a wealth tax on the value of assets over a certain value and at a specified date during the year.
Across the most recently presented bills there is a divergence of opinion in terms of tax basis, the rate of tax, the categorisation of tax payer (i.e. individuals and/or non-natural persons) and whether liabilities owed at the date of assessment can be used to reduce the value upon which the tax is levied.
Do wealth taxes work?
Only a few weeks ago Bolivian President, Luis Arce, announced that his country's tax bureau had collected twice as much as originally predicted through its wealth tax, which was imposed in December 2020. The tax yield from 203 millionaires with assets in excess of US$ 4.3million amounted to approximately US $ 32million, which is an objectively modest sum for a lower middle-income country.
As with any tax, there is a large administrative burden in assessing and collecting a wealth tax. There are often so-called "loopholes" which enable some to minimise their exposure through clever planning or, in some cases, by leaving the country.
France is a good example of a wealth tax gone bad. In the early 1980s the first French wealth tax (impôt sur la fortune) was introduced and excluding a few years during the presidency of Jacques Chirac in the mid-1980s, it stayed in place in one form or another until 2017 when it was abolished by current president Emmanuel Macron. The progressive rate changed over the years but the revenue collected was of a modest amount (somewhat less than 2 percent of France's total tax revenues for 2015). It led to an exodus of France's wealthiest residents – according to research, between 2000 and 2016, approximately 60,000 millionaires had fled the country.
Not only had France lost the opportunity to collect wealth tax from those who left, it further lost the ability to tax their income or to benefit from their wider economic stimulus. The wealth tax almost certainly cost France more than it ever yielded.
In the UK, in the mid-1970s and against a backdrop of high inflation, rising unemployment and frequent strikes of some considerable magnitude, the then Labour party chancellor Denis Healey was committed to a wealth tax. However, it never came to be. Why? They found it impossible to draft a wealth tax, which would yield enough revenue to outweigh the administrative costs of collecting the tax and the political hassle. A common theme it seems.
Fast-forward approximately 45 years, a poll carried out by Ipsos Mori in October 2020 indicated that 44 percent of the British public were prepared to pay more tax in order to help plug the holes in the exchequer's budget. A wealth tax received the broadest approval with around three-quarters approving such a measure. On 9 December 2020, the Wealth Tax Commission published its report into whether a wealth tax is desirable and deliverable in the UK. It proposed a one off 5 percent levy on personal net worth in excess of £500,000 with the payment to be spread over five years.
This report was not commissioned by the incumbent Conservative government. Chancellor Rishi Sunak said that such a measure was "unconservative" and that there is not now and never will be a time for a wealth tax. Accordingly, it is most unlikely that the UK will find itself implementing a wealth tax anytime soon.
Mishcon de Reya's analysis of the Wealth Tax Commission's report can be found here.
Alternatives to a wealth tax
There are many, but the easiest to implement is a rate increase to one or more of the current taxes business and/or individuals pay.
Many wealthy Brazilians have stepped up their efforts to support social causes during the pandemic. They are concerned about the future of Brazil, but worries about corruption mean few believe that a higher tax yield, through a wealth tax or otherwise, would result in an improvement for the country's poorest citizens. Philanthropy and social endeavours will continue, but mindful of looming demands from tax authorities and declining social standards, wealthy Brazilians and their families may look to relocate to countries where the tax regimes and societies are more stable and transparent.
In the last year, one citizenship and residence advisory firm announced that it had observed a 150 percent+ increase in calls form Brazilians seeking relocation advice.
Economic uncertainty has led a number of EU countries to lower their standards in order to attract wealth. While it is possible to establish residency in select European countries for investments under €1million, the wealthiest individuals still tend to favour the UK.
In Portugal, for example, non-EU citizens wishing to relocate can make entrepreneurial investments between €500,000 and a reduced option at €350,000. The UK, however, is focused on attracting high net worth individuals, which is why the minimum amount for an investor visa is GBP 2 million (approximately R$ 15,775,000).
What advantages does the UK offer?
The UK tax code provides a preferential tax regime for those who are UK resident but have a foreign domicile. Although there have been a number of changes to the rules in recent years, in particular in 2017, it still remains a very attractive proposition for non-UK domiciled individuals coming to live in the UK from abroad.
Non-domiciled individuals resident in the UK may choose, on an annual basis and for up to 15 tax years, to be taxed on the "remittance basis". The remittance basis of tax restricts the UK tax liability to UK source income and gains, plus any non-UK source income and gains brought into (remitted) to the UK. Thus, any non-UK income and gains retained outside the UK (for instance in an offshore bank account) will not be taxed. This is a major tax incentive for those with significant sources of income outside the UK, or those that (subject to anti-avoidance provisions) can legitimately arrange their affairs such that income is payable outside the UK.
Non-domiciled individuals also have the advantage of beneficial treatment for UK inheritance tax purposes. Only assets situated in the UK are subject to UK inheritance tax for such individuals; non-UK assets are exempt. Inheritances of UK situated assets from one non-domiciled spouse to the other are completely free of UK inheritance tax. As the rate of UK inheritance tax is typically 40 percent, this means that non-domiciled individuals receive a significant benefit.
The reality is that it is not just about tax. There are also a number of other factors that make the UK more attractive as a destination for wealthy individuals, such as economic and political stability, world-class schools and access to financial markets.
Finally, while the challenges facing society, not just because of the pandemic, become more complicated, there are more and more opportunities to deal with them. The UK has a long history of helping to shape and develop the philanthropic landscape and, as a result, advice and support in bringing about a change to local and global communities is plentiful.
What next for Brazil?
It is highly likely that the Brazilian government will seek to shore up public finances stricken by the pandemic with higher taxes on the wealthy. Whether this is in the form of a wealth tax remains to be seen, as too does its impact in tackling inequality.
Wealthy Brazilian's won't begrudge paying more taxes to help the country recover from the effects of the pandemic, but corruption and uncertainty in the tax and legal landscape is likely to bring the topic of relocation the fore.
An efficient collection of a wealth tax would place a significant demand upon the Brazilian tax authorities to implement both effective inspection and control, and, as a direct consequence, will increase substantially the draw on the public purse.