Brazil’s Gambling Sector Faces Potential Tax Hike, Seeks Congressional Relief
As Brazil braces for a potential 50% tax increase on gambling, tax lawyer João Rafael Gandara advises the sector to rely on Congress to block the new policy.
Brazil’s online gambling sector has been shaken by recent news, particularly after the government decreed a provisional measure to increase the tax rate on Gross Gaming Revenue (GGR) by 50%. Despite a successful market launch in January, the sector has faced strong opposition from unions, political groups, and even banks. A tax increase on gambling could severely harm the growing sector.
With only six months of operation, the market has become an easy target for resolving budgetary issues, fueled by President Lula’s insistence that sectors like gambling do not pay enough in public contributions.
Upon the announcement on June 3, Brazilian gambling trade bodies denounced the proposed policy, warning it would boost the black market.
The policy change appears simple: the gambling tax rate will increase from 12% to 18% of GGR for all operators. However, the reasoning behind the change is complex, and the process for enacting the policy is uncertain.
João Rafael Gandara, a tax lawyer at Pinheiro Neto Advogados, suggests the policy may not even be approved, as it must be enacted within 60 days of the Senate releasing the bill. This deadline can be extended by another 60 days, totaling 120 days.
He also believes the sector could benefit from recent congressional pressure against large tax increases in the country.
Background
The government suggested changes to the country’s tax system in late May, announcing controversial plans to increase the tax rate on financial transactions (IOF) from 0.38% to 3.5%.
The IOF was introduced in Brazil as a monetary policy tool to help control financial markets. It is paid on foreign transactions such as loans, currency exchange, insurance, and investments, and is a major contributor to government tax revenue.
The measure immediately faced pressure from Congress, leading the government to quickly discard the decree to increase the IOF.
However, the current government, led by President Lula, plans to significantly reduce Brazil’s deficit by the end of 2025, before an election next year. Instead of increasing the IOF, the government sought help from the betting sector to fill a R$ 20 billion hole. Other sectors, such as agriculture, are also facing tax increases to help balance the budget.
Tax Increase Could Be Overturned
João Rafael believes the policy could be discarded if the provisional measures are not approved by Congress within a 120-day window. Despite not being formally voted on by Congress, the provisional measure took immediate legal effect in June. The tax rate increase will be implemented 90 days after the decree’s publication. If the measure does not become permanent after 120 days, all taxes collected after the 90-day mark must be returned to operators.
João Rafael cites recent examples where Congress acted quickly to reject provisional measures, offering a glimmer of hope for the gambling sector after the negative response to the tax increase and a general negative perception of the government’s fiscal policies.
“We had a recent precedent last year where the president of Congress made the immediate return [of a policy], saying, ‘there is no chance of being approved and I will not even initiate legal proceedings, therefore, we will immediately reject [that provisional measure].’”
“And that usually happens when he has a majority of Congress supporting him. That was [the result] the last time we had this type of problem.”
The policy in question was a provisional measure that limited companies’ ability to use tax credits and extinguished cash refunds of presumed credits.
Positive Signs for the Betting Sector
Recently, the Chamber of Deputies granted urgency status to a bill that would nullify the effects of the government’s decree on the IOF. This means it will not go through any parliamentary committees before being voted on.
This is a new indicator that Congress does not support the government’s tax increase efforts to reduce its deficit.
João agrees that the government is taking the wrong approach to eliminating the deficit by targeting a “clearly overburdened” gambling sector, which he believes is an “easy target” due to its current negative reputation.
“I think that all over the world, like in the US and Europe, governments are cutting expenses,” explains João. “The other [option] is to increase taxes.”
“The government needs to cut expenses and knows it is a difficult discussion [to have], so it avoids it and is actually targeting whoever it can. [Gambling is a] new sector and they are receiving a regular income, they are not the villains of the story.”
João says taxation is a particularly contested topic in Brazil, which continues to dominate national headlines.
Because the government’s tax increase policy is so controversial, he believes an effectively formulated response by the gambling sector could overturn the provisional policy.
“The [taxes] are really a controversial topic and I think the government will have a lot of difficulty [convincing] Congress,” he adds.
“So maybe if there is a very well-organized strategy, explaining to Congress that this type of taxation can really harm [the sector] and the government’s broader strategy, maybe they can get the policy rejected.”
Excessive Taxation Will Drive Out Businesses
João cites the Laffer Curve, a widely known graph showing that if a tax rate is too high, the resources collected will begin to fall as companies leave the country or consumers resort to illegitimate offers to avoid paying more for a product or service.
“There is a sweet spot,” says João. “If you go beyond that, you are no longer collecting taxes because either the companies have left the country or everyone is in the black market.”
“What the government should do is the opposite, presenting a reasonable tax so that they have that ideal collection and you have other companies entering [the market],” he concludes.
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