Brazilian banks will be subject to a higher Social Contribution on Net Income beginning March 1, 2020. Brazilian banks should prepare now for the higher rate, which could include corporate restructuring and analyzing the effect of the increase on foreign tax credits. 

Through Constitutional Amendment (EC) No. 103, known as the Pension Reform, published on November 13, 2019, Brazil increased the Social Contribution on Net Income (CSLL) rate applicable to banks from 15% to 20% beginning March 1, 2020. After the increase, the total nominal tax rate on the income of Brazilian banks will go from 40% to 45% (income tax and CSLL).

The increase will not apply to other types of Brazilian financial institutions, such as securities distributors and broker dealers.

Brazilian banks should apply the CSLL 15% tax rate until February 29, 2020, and the 20% tax rate beginning March 1, 2020. The Brazilian tax authorities will issue regulations on the method for calculating the CSLL and the adjustments to be made in 2020. The regulations will provide much-needed guidance, as many Brazilian banks received assessment notices when the CSLL rate was previously increased in 2015.

Brazilian banks should revisit the deferred taxes recorded on their balance sheets, considering the realization period and the tax rate increase. The adjustment of deferred taxes may affect Brazilian banks’ profits and losses in 2019 because of the recognition of income and expenses arising from this adjustment.

Additionally, to prepare for the new CSLL tax rate, Brazilian banks should consider:

• Reviewing 2020 revenue and expense projections
• Corporate restructuring
• Analyzing the effect of the increase on foreign tax credits (e.g., US)

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