What Was the CPMF Tax in Brazil and Will It Return?

The Contribuição Provisória sobre Movimentação Financeira (CPMF), or Provisional Contribution on Financial Transactions, was a tax in Brazil first introduced in 1993. Although abolished in 2007, the concept of a tax on financial transactions remains a recurring subject in the country’s political and economic discourse. The tax was designed to be simple to collect by capturing a wide array of financial activities, and its legacy continues to influence discussions about tax reform.

How the Original CPMF Worked

The CPMF was levied on the debit side of nearly all financial transactions moving through bank accounts. This meant that funds leaving an account through a withdrawal, check, or electronic transfer were subject to the tax. Financial institutions were responsible for calculating and remitting the tax by deducting the amount directly from accounts. This process made the tax efficient and difficult to evade, as banks acted as collection agents for the government.

At its final rate, the CPMF was set at 0.38% of the transaction value. For example, on a transaction of R$1,000, the bank would deduct an additional R$3.80 for the tax. This applied to a vast range of activities, from cash withdrawals to large corporate fund transfers. The broad application ensured a consistent stream of revenue for the government to fund specific public services.

The revenue from the CPMF was primarily intended to support Brazil’s public health system and social security program. When reintroduced in 1997 after a brief hiatus, its purpose was to provide a dedicated funding source for healthcare. The tax also served a function for tax authorities, as the total CPMF paid by an individual or company could be cross-referenced with their declared income to flag discrepancies for audits.

The Abolition of the CPMF

The CPMF was discontinued at the end of 2007 after the Brazilian Congress voted against its renewal. The decision resulted from growing opposition from various economic sectors and the public. A primary driver of this opposition was the tax’s cascading nature, which created economic distortions.

The main argument against the tax was its “cascading effect.” Because the CPMF was applied at every stage of a product’s journey from raw material to final sale, the tax burden accumulated. A manufacturer paid the tax on payments to suppliers, a wholesaler paid it when purchasing from the manufacturer, and a retailer paid it again. This layering increased business costs, which were passed on to consumers as higher prices.

This structure was criticized for harming the competitiveness of Brazilian businesses. The tax was also blamed for encouraging financial informality, as individuals and businesses had an incentive to use cash and keep money outside the formal banking system. This undermined the tax’s efficiency and transparency goals, and widespread dissatisfaction led to the decision to let the tax expire.

The Debate Over Reintroduction

Despite its abolition, the idea of a financial transaction tax similar to the CPMF frequently resurfaces in Brazil during discussions on tax reform. Proponents argue that such a tax offers a simple way to generate substantial revenue. Its broad base means even a low rate can bring in significant funds, potentially allowing for the reduction of other complex taxes on production or payroll.

Supporters of a new transaction tax see it as a tool to formalize the economy. They contend that it is difficult to evade and applies to everyone who uses the banking system. The revenue could be used to offset the high costs of social security or to lower corporate taxes, which proponents believe would stimulate economic growth and reduce unemployment.

Opponents warn that reintroducing a financial transaction tax would bring back the same problems that led to its demise. They argue the cascading effect would again inflate costs for businesses and consumers, damaging economic efficiency. Critics also point out that such a tax can disproportionately affect lower-income individuals who conduct more frequent, smaller transactions. The existence of other financial taxes, like the IOF (Tax on Financial Operations), is also cited as a reason to avoid another layer of taxation.