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Provisional Measure (PM) 1034/2021 would increase the social contribution tax on net income for Brazilian financial services entities from July 1, 2021 to December 31, 2021. Brazilian financial services entities should be prepared for the higher rate.

On March 1, 2021, Brazil's president issued PM 2034/2021, which would increase the social contributions tax on net income by five percentage points for insurance companies, banks and other financial services entities. The new tax rates would apply from July 1, 2021 to December 31, 2021.

For insurance companies, reinsurance companies, broker dealers and securities distributors, the applicable rate would increase from 15% to 20%. For Brazilian banks, the PM would increase the tax from 20% to 25%. With those increases, the combined nominal corporate income tax rate due on Brazilian income would increase from 40% to 45% for insurance companies, reinsurance companies, broker dealers and securities distributors, and from 45% to 50% for banks.

Both the House of Representatives and the Senate need to approve the PM within 60 days for the tax rates increase to apply. Once approved, the increased rates would apply as of the first day of the fourth month following the date of its publication, i.e., July 1, 2021, through December 31, 2021.

If enacted, the social contribution tax calculations will likely be regulated by resolutions to be issued by the Brazilian tax authorities.

Brazilian financial services entities may want to revisit the deferred taxes recorded in their balance sheets, considering the realization period and the increased tax rate. Those entities also should consider the effect the rate increase will have on the following matters:

• 2021 revenue and expense projections
• Corporate restructuring (e.g., carve outs of revenue streams and expenses)
• Foreign tax credits, if applicable, for foreign shareholders

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