The issues at stake for Brazil’s software industry in 2024

The Brazilian IT industry achieved growth last year, mainly driven by the software segment, and while the outlook is positive, certain issues raise concerns.

According to preliminary estimates by the Brazilian association of software companies, ABES, this segment alone may have grown by around 15% compared with 2022, boosting the IT sector as a whole.

ABES represents around 2,000 companies, which account for approximately 85% of revenue in the software and IT services sector.

Another double-digit jump is expected in 2024, although the sector must also deal with issues related to tech regulation and taxes. From a macro standpoint, the boom in AI and the demand for cloud services, combined with falling interest rates, are seen as tailwinds for software companies.

In this first of a two-part interview, Jorge Sukarie, board member of ABES and president of software firm Brasoftware, talks about the payroll tax exemption policy and the pending issues of the tax reform.

BNamericas: The government has been insisting on ending the payroll tax exemption policy, despite its defeat in congress and the extension of the policy by lawmakers. What do you think the outcome will be? On the one hand, there is a debate about fiscal and social security sustainability, and on the other are the claimed positive impacts of the measure on job creation.

Sukarie: It's important to highlight the success of this program, which sometimes seems to be a forgotten somewhat.

It seems to me from the statements that I had the opportunity to see from [finance minister Fernando] Haddad, that he doesn't have a clear vision, the same vision that we have, of the impacts of the exemption.

As you know, the program has been going on since 2011. It started during the Dilma Rousseff government, through a proposal negotiated between the business sector and the executive branch. The sectors involved, which are known to generate and work with extensive workforces, were seeking an alternative to collect their employees' social security contribution on a basis other than the payroll.

[By alleviating payroll costs] the objective was to encourage hiring, mainly the formalization of jobs. We had a lot of informality, which we saw drastically reduced in the sector in the last 12, almost 13 years. And there was a lot of job creation.

What really surprised us was that the executive branch followed the entire discussion in congress on the extension of the measure throughout the last year.

It wasn't a bill that appeared out of nowhere. The discussion of the [extension] the exemption began in 2022. It was very strange for us, the finance minister appeared in the last month of the year with an argument that there was no debate, that the extension wasn't provided for in the federal budget. There was senate approval, President Luiz Inácio Lula da Silva’s veto, and then the presidential veto was overturned with a large majority.

To our surprise, at the end of 2023, after the veto was overturned, the provisional measure 1202/23 appeared, with a proposal to reinstate the payroll tax, albeit gradually. This proposal ends the tax exemption policy.

BNamericas: What does the sector want to happen?

Sukarie: We hope that a consensus will be reached so that the exemption will at least be maintained for the period for which it was approved in congress [until December 2027] and that the government then brings in a long-term proposal that we can discuss – a new scenario for the taxation of employees' social security contributions that could eventually be extended to other sectors.

Our expectation is that what was discussed, what was approved and what companies planned to do in terms of investment will be maintained – and we should open a debate with the government through a bill or another broader legal instrument on the subject, at least to allow companies to make long-term plans without the constant fear of the rules of the game being changed.

BNamericas: Despite the alleged merits of the program, it was always considered a temporary policy. The exemption wasn’t supposed to be permanent, but has been extended several times. Do you accept that at some point this policy may end, or is does the sector think it should become permanent?

Sukarie: It would be very arrogant to want the exemption to be maintained just for these 17 sectors.

It was conceived as a temporary program in the search for a definitive solution, which could have come with the pension reform, but it didn’t happen. We know that the definitive solution isn’t easy, but we missed an opportunity there to find a solution.

I think that we have a new opportunity with the second phase of the tax reform, focused on income and property, to find a source of financing for social security. But as it stands, we have to have the payroll exemption.

Eventually, we can think about some sort of property taxation that will generate a source of income for social security and then we won't need to charge as much to companies that create jobs.

BNamericas: In addition to the payroll tax issue, the tax reform is another crucial topic for the sector.

Sukarie: The reform proposal, as approved, may not be the best in the world, but it’s a reasonable. Just by not having different taxes in the country's tax code seems to me that it should create conditions to address some of the problems.

But we also highlight a series of concerns and points that aren’t very clear, such as the impacts of companies that are in Simples Nacional [the simplified tax regime for SMEs]. In our sector, specifically, the vast majority are micro and small companies opting for the Simples taxation model despite this regime being left out of the tax reform.

Another thing is the rights to the tax credits to be created with the reform, the deadlines and rules for obtaining them. And another concern that the government put on the table was that you could only request the credit if your supplier had collected the tax. That is, you’re transferring the State's obligation to collect the tax to the taxpayer.

I can't keep asking my lawyer, who gave me an invoice, to give me proof of tax payment. I can't be a tax inspector. I think that has to be clear.

Another concern is the selective tax, initially expected to be levied only on alcoholic beverages, cigarettes and products harmful to health. Then it became a tax on goods and services that are harmful to health or the environment.

A plastic bottle of mineral water is harmful to the environment, so technically, we can charge the selective tax on it.

BNamericas: Does that impact the software sector?

Sukarie: Not specifically. But take artificial intelligence, for example. Can it be considered harmful to society in some way? Some might think so. When the text of the law becomes too open, generic, we start having these problems.

Starting this year, we’ll discuss the complementary laws and regulations of the reform. Last week, 15 working groups were formed with members of the federal, state and municipal governments to debate these complementary laws.

We hope to be able to contribute some suggestions. The concept of the tax reform was neutrality in terms of tax collection, which doesn’t mean that some will pay more so that others can pay less.

Trade and industry will certainly benefit greatly. And service sectors, like ours, should have an increase in taxation, which will be paid by the consumer in the end.

If software becomes more expensive, what impact will that have on national industry, on the country? This is a concern.

Supposedly, software may cost more, but laptops, which are an industry product, will cost less. Calculating roughly, the end consumer could continue spending the same because computers have become cheaper and software has become more expensive.

But I don't know if those who sell laptops will lower their prices. But we do know that those who sell software will have to increase theirs to adjust their margins. That’s a challenge.