BRAZIL - Pension funds in Brazil have slammed the latest change to Brazilian tax law, proclaiming the move as "unconstitutional", according to global consultant Watson Wyatt.
Pension funds have wrangled with the Brazilian government for years over the the legality of government tax claims on pension fund investment returns, claiming that they are tax-exempt and that the tax requirement results in double taxation since the applicable amounts are also taxed at distribution. In September the Brazilian government promulgated MP No. 2222 (Medida Provisória No. 2222), obliging all pension funds to pay 20% of investments returns as income tax starting 2000. The ruling included the popular PBGL plans - 401(k) type plans – previously tax-exempt.
Private sector pension funds can opt for an alternate tax formula whereby they would pay a tax of 12% on sponsor contributions instead of a 20% tax on investment returns. Funds that opt for this special system will be released from the past five years of tax debt, and will be allowed to pay the amount once or in up to six instalments, with a December 2002 deadline. In return, electing pension funds will have to drop any outstanding legal claims against the government.
The country’s Social Security Ministry believes the move will haul in about US$1bn for the government. However, the pension fund industry vigourously opposes the measure and it is expected that MP No. 2222 will become mired in the court system, said Watson Wyatt.
According to the firm, pension funds claim that this measure has been developed with “insufficient forethought, and provokes more questions than answers,” also alleging that the law is “unconstitutional.” The funds have so far avoided paying the taxes.
As an MP, the rule will expire unless enacted as a permanent law or renewed by the President after six months. Election year politics may be a factor in determining whether the measure becomes permanent.
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