Income Tax Reform stipulates an additional 1.5% rate for CFEM

Last Tuesday (08/03/2021), Congressman Celso Sabino (PSDB-PA) submitted an amendment to Bill of Law # 2,337/2021 (2nd phase of Tax Reform), putting forward a 1.5% increase in the Financial Compensation for the Exploration of Mineral Resources (“Compensação Financeira pela Exploração de Recursos Minerais” – CFEM) rate on iron, cooper, bauxite, gold, manganese, kaolin and nickel operations.
 
According to the novel wording, CFEM’s revenues will be fully transferred to the States and Municipalities, and no portion of such revenues will be transferred to the Federal Government. If the Brazilian Congress approves the substitute bill without amendments, the CFEM rate will rise from 4% to 5.5% on operations involving the above-mentioned minerals.
 
In a statement about the new substitute bill, Congressman Celso Sabino argued that since legal entities shall enjoy a corporate income tax (IRPJ) reduction by virtue of such reform, the CFEM rate increase would be a “fair measure”.
 
CFEM’s rate increase and the shift on the distribution of its revenues have been proposed as measures to counterbalance the tax reform impact on States and Municipalities’ finances.
 
However, besides increasing the cost incurred by mining entities, the proposed changes to the CFEM legislation also strike for being alien to the scope of Bill of Law # 2,337/2021, whose subject matter is the corporate income tax reform. Indeed, as already acknowledged by the Brazilian Supreme Court, the CFEM has a royalty  rather than a tax nature, being an “original public revenue” (ADI # 4,606; ADI # 6,233; and RE # 228.800). In this sense, if approved, questions may arise with respect to its constitutionality while introducing CFEM changes.