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