Analysis of the Compatibility of the Exclusive Taxation Regime applicable in the Financial and Capital Markets and the Principle of the Economic Capacity

Abstract

Brazilian Constitution is the keystone for all Brazilian tax system. All other rules derive and are severely influenced by the Constitution. Non-compliance with the Principles set forth in the Constitution leads to unconstitutionality. Concerning Income Taxes, Brazilian Constitution provides that it must observe the “Economic Capacity” of the taxpayers and that it must be Progressive. This means that the applicable tax rate should be progressively higher as the tax calculation basis is increased. This is precisely what occurs with income derived from employment, as taxpayers are subject to a progressive taxation rate, ranging from 0% to 27,5%, depending on the economic capacity. However, when it comes to fixed income assets and variable income assets available in the financial and capital market, the taxation regime has specific rules that are often more advantageous in comparison with the income derived from employment relations or that adopt other criteria rather than the economic capacity. As per example, an investor accruing a large sum of money in a Certificate of Bank Deposit may be taxed at a 15% rate, a significant lower rate in comparison with the aforementioned 27,5% applicable to employment income. Hence, in principle, taxation in financial and capital markets seems to be incompatible with the Principle of Economic Capacity and Progressive Taxation. The purpose of our article is to study weather or not the taxation of financial and capital market instruments is compatible with the Constitution, notably in face of those two Principles or if, given the relevance in the economy of such instruments, such taxation could be accepted.