If the State of Rio de Janeiro was a company, it was almost declared bankrupted. The State’s declaration of financial emergency was in June 2016, when it legally declared insolvent because of inability to pay debts. But in Brazil, only companies can be legally bankrupted.
It’s true that the State is insolvent because of the economic crisis and the reduction of tax collection. The most important State tax in Brazil is the ICMS – Imposto sobre Circulação de Mercadorias e Serviços, like the value-added tax, charged in Europe. According to Rio de Janeiro’s tax authorities, the total revenue from this tax in 2015 was 31.2 billion reais, with a real decrease of 9.4% compared to the total in 2014.
Rio de Janeiro also spent a huge amount of money with the World Cup and the Olympic Games and it is facing the drop-in oil royalties.
In addition to that, a report by the State Court of Accounts (TCE) indicates that the state government stopped collecting about 138 billion reais, in ICMS, between 2008 and 2013. The value is the result of the tax benefits that the Government granted to several companies and it represents more than the state budget for this year ($ 80 billion reais).
The result of the scenario we have just described is the difficulty in paying employees and maintaining essential services like health, education and public security.
Theoretically, a state cannot bankrupt because of its special attributions like the investment in health or education, for example. When the state invests in these areas it is not expecting financial returns. The companies aim profits, but the state must provide de population with dignity and human rights. Because of this difference, it is not possible to apply the bankruptcy legislation to Federated States in Brazil.
So, the solution to Rio de Janeiro’s insolvency is the Federal Intervention (when federal government takes control of the State), but before it happens, tax burden will increase and public investments will fall.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Gabriel Quintanilha is based in Rio de Janeiro. Gabriel has been an attorney at law since 2006. He is also Professor of Tax Law at Fundação Getulio Vargas – FGV and IBMEC. Author of books and articles published in Brazil.
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