CPMF: the most controversial and the most desirable tax?

Twelve years have passed since its extinction. Governments come and go and the CPMF (English acronym that means Temporary Contribution on Financial Transactions) is still desired and rejected with the same strength.

But why is a tax that is so easily implemented and has a low tax rate (it was 0.38% and a proposal is at 0.22%) so controversial?

At the time of its implementation (its initial purpose was to subsidize health), and also today (the proposal is that it would compensate for a reduction in corporate taxes and payroll taxes), the CPMF is defended on the grounds that it will be a tax to “compensate” for some “hole” in Federal government’s accounts or that it will eliminate existing distortions in the Brazilian economy.

A good example that justifies such defence is the following statement by Economy Minister Paulo Guedes “if the political class thinks that the distortions caused by this tax are worse than the 30 million unemployed, it’s for them to decide” (statement given after a meeting with the Deputy Chamber’s president, Rodrigo Maia from the political party DEM-RJ).

The current economic team defends the reduction of the tax burden on companies. Its implementation would require some sort of compensation, which could include the creation of a new CPMF (although under a different name: Financial Transaction Tax – ITF – Brazilian acronym). This line of thought cost the chair of former Federal Revenue Secretary Marcos Cintra.

Advocates of this type of tax justify that in terms of coverage, it is 100% and it would observe the constitutional principle of isonomy, i.e., treat equally the equals and unequally the unequal. Whoever transacts money through their accounts would be taxed. Those who have a lot of transactions and a lot of money would be taxed more than those who have less money and fewer financial transactions.

The critics, state that, although they value the purpose of decreasing the tax burden on companies (with a reduction in taxes on production and payroll), they consider the waterfall effect of such tax as prejudicial. The tax being cumulative is one of the main criticisms from such experts.

The institution of a new tax in the present scenario is bad as a principle. IOF (The Brazilian acronym for Tax on Financial Transactions) already exists and the tax burden is relatively high. Added to this is a complexity of ancillary obligations that require high investments in technological infrastructure and personnel. Therefore, discussing CPMF without a positive counterpart is useless.

In the context of a broad tax reform, discussing the CPMF or ITF, together with the decrease of taxes on production, trade and services, as well as on payroll, can be an alternative and a good incentive. Nevertheless, its creation is still unpopular.

Although the CPMF is an important tax from an economic point of view, and therefore desirable, its creation is very controversial. A tax reform proposal with an “ITF” is likely to be considered “stillborn”. It will no develop beyond the first meeting.

The plan from the government of introducing several reforms, not only tax, would not count with the creation of a new CPMF. Maybe it could be used as a bargaining chip to approve other reforms so these may be approved. The controversy continues.

By Alamy Candido, partner at Candido Martins Advogados

“I’m here to stay!”

The increasing CRI market

The Real Estate Receivables Certificate (CRI, in the Portuguese acronym) market has shown a strong growth in recent years. The volume of CRIs traded at B3 between January and September this year is 60% higher than the volume traded in the same period of 2018, according to B3 itself. It is also expected that the volume of this security in the market continues to grow next year.

This growth is due to several reasons, which include tax benefits to individuals (income derived from CRI is exempt from income tax to individuals), the low interest rate scenario in Brazil, the comeback of the real estate market and the recent movement by the Brazilian Securities Exchange Commission (CVM) in making the rules of using CRI as a guarantee more flexible.

In July, CVM published a decision allowing the use of CRI for reimbursement of expenses already disbursed from the real estate projects, and not just for payment of future expenses, which was already permitted.

Although the consultation that generated this decision by CVM was made by XP Investimentos, everyone benefits from it. This is another case where the technical area of CVM refuted such possibility and the CVM Board of Commissioners decided to move forward with the offer.

To support its understanding, the CVM Board of Commissioners argued that although it is possible to use CRI funds for the reimbursement of expenses, a time limitation is required. Therefore, it suggests that only expenses incurred in the 24 months prior to the termination of the CRIs public offering should be considered. They based this argument on the term provided for in Law No. 12,431/11.

In addition to the deadline, in order for the issuance of the CRI for reimbursement of expenses to stand still, it is also necessary that the expenses result from the acquisition, construction and/or renovation of the real estate properties. Expenses incurred indirectly to these activities, such as brokerage, registration, taxes or attorney’s fees in the preparation/negotiation of deeds are not eligible for reimbursement. In addition, it will be necessary to include in the term of securitization the details of these expenses and the individualized specification of each of the real estate properties linked to such expenses. All invoices, deeds and other documents evidencing such expenses must be presented to the trustee.

With these changes, the spectrum of use of CRIs is increased and a greater security for the market is ensured. The structure for reimbursement eliminates the risk of misusing CRI issuances since the destination will be known from the start.

By Julia Pinheiro, associate at Candido Martins Advogados