Why are Brazilian Dividend Declarations So Difficult to Predict?

December 22, 2021

One of the world’s largest emerging markets, Brazil, is one of the 5 nations worldwide that has a mandatory minimum dividend pay-out policy. The legislation specifically says that companies must pay a minimum of 25% of their profits to shareholders. However, a large number of Brazilian companies find loopholes to either not pay any dividend at all, pay less or pay at inconsistent intervals.

This is why, despite this law, it has been historically difficult to predict dividend pay-outs by companies in the nation.

Various Factors Impact Decisions for Dividend Pay-Outs

Taxes have been a primary factor in Brazilian firms’ dividend decisions. There are two options for cash distribution for firms, dividends and interest on equity. While the latter offers tax advantages, the benefits of dividends outweigh their tax implications, which then determines a company’s dividend policy.

Historical data also reveals that changes in tax legislations in the nation have had a significant impact on dividend pay-outs. Something that is also characteristic of Brazil is that rather than following target dividend pay-out ratios, Brazilian companies tend to base pay-outs to some extent on past payments.

Also, stock voting rights, privatisation, and changes in corporate governance laws, and provisions for dividend payments deductibility are other factors that influence these decisions.

The Impact of Corporate Taxation on Dividends

The taxation laws in Brazil vary from sector to sector and can be confusing for investors. Brazil is one of the few countries worldwide where dividends are tax-exempted. Brazilian Minister of the Economy, Paulo Guedes, plans to change this situation, since he believes that the current situation only benefits the richest in the country.

“Nobody needs to be ashamed of being rich, but they need to be ashamed of not paying dividend tax… Only Brazil and Lithuania have this deformation, which we are correcting,” Guedes said at an online event in July 2021.

The tax reform bill proposed by Brazil’s Ministry of Economy to Congress in June 2021 includes provisions for interest on net equity, corporate tax rates, profit distributions, and reorganisations. This is expected to impact inbound investments. A 20% withholding tax would be applicable on dividend distributions. However, Paulo Guedes is under political pressure to reduce this tax rate to 15%. It could even be cut to 10% if there is a double tax treaty between Brazil and the resident country of the beneficiary.

However, potential tax sparing clauses in the double tax treaties with Brazil won’t alleviate the tax burden overall, given the exemption of dividend income at the holding company level. For investors, this means a call for re-evaluating the structure of their investment in Brazil. Potential solutions could be investing in Brazilian subsidiaries, through interest-bearing debt instruments.

To get everyone on board, Brazil’s economic team is willing to reduce corporate taxes to a greater extent than the proposed rates. There are significant political factors at work here, along with lobbying by big companies. This is another reason why dividend forecasting is difficult for companies in the nation.

Corruption Levels and the Role of Business Elites

The country’s business elites have influenced politics since 2002, with right-wing presidential candidate Jair Bolsonaro’s win in 2018 being a recent example of this. Unfortunately, this encourages corruption, giving big businesses the leverage to influence the government in many ways. For example, in 2002, business elites were so disappointed at left-wing Luiz Inácio “Lula” da Silva being elected President, they stopped investing in the economy, leading to the collapse of the currency and stock market declines.

Now, companies that help Presidents get elected tend to be favoured more than others. Recently,conservationists have blamed the Bolsanaro government for favouring logging companies, which led to rapid deforestation in the Amazon and an increase in forest fires in 2019.

This type of favouritism gives companies room to get out of the mandatory dividend policy if they provide arguments that paying a dividend will put them in a financial crisis. The frequency and format in which they declare dividends are also open to manipulation.

Role of Commodity Prices

Brazil is one of the world’s top producers of commodities, ranging from soyabean and beef to sugar and bananas. It supplies crucial raw materials for advanced economies, with its huge iron ore deposits and deep-sea oil reserves. Due to this, commodity price volatility impacts companies’ bottom lines in the nation.

The country stands to gain from a strong revival in commodity prices. However, since 2020, Brazil has stopped behaving like a commodity economy. The country didn’t gain from the rise in commodity prices, with a decline in the Brazilian Real. Concerns over Bolsanaro’s right-wing populist measures raking up inflation and public debt have instead taken centre stage.

For investors, this represents a crucial factor to take into consideration. Brazil not showing signs of a classic commodity economy will have an impact on dividend projections.

Dividend Forecasting in Complex Emerging Market Environments

A faster-than-expected US Fed tightening cycle, slower growth in China, and the rising spread of the Omicron variant of the coronavirus are some of the risks that emerging economies like Brazil face. At the same time, Brazil stands to gain from two major global trends: the rise in commodity prices and economic reform. However, political uncertainty continues in the country.

Woodseer Global, through its hybrid machine intelligence + analyst approach, helps clients with real-time, accurate, and reliable dividend forecast data in a nation where the task has traditionally been extremely challenging. Investors are rediscovering emerging economies, and Woodseer is armed with the latest technology to help them cut through the noise.

Contact us to find out more about how we can help you with dividend projections.


With thanks to Matthew Riding & Josefine Olsen