Income tax: Haddad wants to comb out healthcare deductions, which amount to BRL 92.1 billion, but the task is complex

BRASÍLIA – The finance minister, Fernando Haddad, wants to comb through the health care deductions from the personal income tax (IRPF) to curb what he has classified as abuses. With no limits for this type of deduction, the minister asked to verify the information that even beauty treatments carried out abroad were included in this quota.

Experts say an overhaul is important, but a rewording of the IR rules would be needed, and that the discussion is more complex than it appears.

Calculations by the National Union indicate that for the calendar year 2020, total deductions for health care costs in income tax amount to R $ 92.1 billion. The legislation in force, in fact, does not set limits on the value of this type of deduction, while establishing some rules. Haddad’s interrogation also incorporated a moral component.

― The first step is to eliminate abuse. Whenever you don’t have a deduction limit, you don’t have a deduction limit, you identify an abuse. This is insignificant in the general proportion, but morally speaking it is important to curb it. Ethically speaking, you have to turn off this type of tap, because when something like this comes to the surface, it’s not pleasant for you to see a person who has gone to have a beauty treatment abroad deduct it from their personal income tax ― he said in an interview with the Brasil 247 portal.

Haddad didn’t specify what this fine-toothed comb would look like, but said — also referring to Bolsa Família’s cadastral review — that everything needs to be reviewed before cutting anything.

“We will put things in order and then discuss with Congress, as part of a reform, what is more appropriate to make the tax system more progressive,” he said.

A broad review of deductions to make the system more progressive is a necessity, according to the assessment of Tiago Barbosa, first vice president of the National Sindifisco. This involves a complete reformulation of the RE for individuals, with a change in the exemption range and the rates in the table, so that people with higher incomes pay proportionately more.

― The Union understands the need for a general overhaul of deductions so that the system becomes more progressive. Now, saying what the deduction limit for medical expenses should be or whether one should stay or not, is a difficult thing to give an answer, it must be in the context of the redesign of income taxation. There are exemptions that are specific to our legislation, such as profits and dividends, and this needs to be reviewed ― evaluate.

Igor Mauler Santiago, founding partner of Mauler Advogados, explains that the discussion on setting limits to health deductions clashes with a constitutional component:

― The imposition of quantitative limits on the deduction of healthcare costs would be harmful to the taxpayer and, moreover, unconstitutional, because income is precisely what is left over after the expenses indispensable for a dignified life for the taxpayer.

He says the OAB itself has already filed a direct unconstitutionality action in the Federal Supreme Court (STF) to lift the cap on the tuition deduction. There is currently a cap on deductible tuition fees, set at BRL 3,561.50 per year for the owner and each employee.

Guilherme Peloso Araújo, partner lawyer of Carvalho Borges Araújo Advogados, also underlines the risk of an unconstitutional amendment:

― The legislative provision, were this to happen, would have the effect of violating the constitutional notion of income and the principle, also constitutional, of ability to pay, of obliging taxpayers to pay the tax on their gross income, and not on the one available.

Maria Carolina Sampaio, head of the tax area and shareholder of GVM Advogados, however recognizes that the lack of limits for health deductions creates a ‘market’ for receipts, but believes that the solution is inspection:

― In fact, due to the lack of a deduction limit, many people make undue deductions, and there is even a ‘medical receipt market’. But capping, as many suggest, doesn’t solve this problem, it just hurts those with really high healthcare costs. In reality, the solution is inspection, which is already happening very effectively.

There is currently no cap on medical expense deductions on IR. Lawyer Bruno Minoru Takii, partner in the tax area of ​​Diamantino Advogados Associados, explains that it’s not just medical expenses that are deductible.

The legislation allows the deduction of expenses with compensation to healthcare professionals (doctors, dentists, psychologists, physiotherapists, speech therapists, occupational therapists) and hospitals, expenses with laboratory tests, radiological services, orthopedic devices and prostheses (orthopaedic and dental) and insurance expenses .

He also says there is a crossover in the accountability of health and revenue professionals and companies:

― All healthcare professionals and businesses based in Brazil are required to file the DMED annually with the Federal Revenue Service. This document must contain all the information on the services provided during the analyzed period. It is on the basis of this document, by automatically cross-referencing the information, that the Revenue Agency keeps the majority of IR taxpayers in the ‘fine mesh’.

In the case of payments for treatment abroad, as in the case reported by Haddad, the legislation allows the deduction of expenses. But, in this case, there is no way to compare the information provided by the payer and the service provider, but if the tax auditor finds an irregularity, he must summon the person to present evidence.

As far as aesthetic procedures are concerned, expenses with dermatologists, for example, are deductible. The Revenue Agency understands that the placement of a silicone prosthesis, for example, can also be deducted, provided that this is already included in the invoice issued by the hospital or doctor.

― As with other aesthetic procedures, they will be deductible if their aim is to prevent, maintain or restore the patient’s physical or mental health. The criterion is quite subjective, leaving room for interpretation by the tax auditor – explains Takii.

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