Incentives on income as a determinant of the Effective Tax Rate: Commentaries

1. Introduction

The commentaries presented are part of the Revista Contabilidade & Finanças Special Edition, aimed at bridging the gap between academia and professional practice. Specifically, the following commentary analyzes the article titled “Incentives on Income as a Determinant of the Effective Tax Rate”, authored by Moisés Sousa, Rômulo Benício, and Robério França (2025). The document is organized into two sections: the first includes the remarks of Prof. Dr. Antônio Lopo Martinez, an integrated researcher at the Legal Institute of the Faculty of Law, University of Coimbra; the second features the observations of Prof. Dr. Alexandre Evaristo Pinto, a counselor at the Superior Chamber of CARF.

2. Comments by Antonio Lopo Martinez

Aiming to contribute to more effective tax policies in Brazil, this commentary analyzes a recent study on tax incentives, assessing its practical value and identifying key research questions for future investigation.

2.1 Study Context

The research article “Tax Incentives on Income as a Determinant of the Effective Tax Rate” by Sousa et al. (2025) examines the effectiveness of tax incentives in determining the Effective Tax Rate (ETR) of Brazilian companies within a high-tax environment. This study addresses a significant gap in academic literature, which has not sufficiently addressed how tax incentives impact corporate profit.

The study focuses on publicly traded companies listed on the B3 stock exchange in Brazil, using a sample of 392 companies and data collected from 2013 to 2022, resulting in 3,920 observations. The research employs various ETR metrics, including GAAP (Generally Accepted Accounting Principles), Current (effective tax rate on income calculated according to tax regulations), Deferred (effective deferred tax rate), Cash (effective tax rate on income paid), Cash3 (three-year average of the effective tax rate on income paid), and Sectoral (average Current ETR of companies in the sector) ETRs, to provide a comprehensive understanding of the relationships between tax incentives and ETR. A methodology combining descriptive statistics with unbalanced panel data regression models is utilized to analyze the data, considering the influence of variables such as company size, leverage, capital intensity, inventory intensity, and profitability.

The primary findings indicate significant variations across ETR metrics, revealing the complex relationship between tax incentives and corporate tax behavior. Notably, an increase in tax incentives corresponds to a higher tax burden for specific metrics like Cash and Cash3 ETR. In contrast, other metrics, such as GAAP and Current ETR, show considerable differences. This highlights the potential role of sector-specific factors and the regulatory environment.

2.2 Practical Relevance

This study offers several important practical implications for Brazil's businesses, policymakers, and investors (Figure 1). For corporate executives, particularly those managing large enterprises or those in sectors heavily burdened by taxes, such as transportation, the study emphasizes the importance of strategic tax planning. Businesses can use this study’s insights to reassess their fiscal strategies, considering the impact of different tax incentives on their ETR (Wu, 2024). By understanding that incentives could potentially increase tax payments in cash terms, executives can engage in more informed decision-making processes, aligning their financial strategies with fiscal policies to enhance profitability and ensure compliance.

For policymakers, the study’s findings underscore the complex relationship between tax incentives and corporate tax obligations. The evidence that larger and more profitable companies tend to pay less than the nominal tax rate of 34% suggests that current tax incentives may not be effectively targeted or optimized. This insight is crucial for developing tax policies that ensure equity and efficiency within the tax system. For example, understanding that incentives might inadvertently lead to higher cash taxes even when exemptions or reductions are granted can inform the restructuring of tax incentive policies to better stimulate economic growth without compromising government revenue (Stotsky, 2024).

Investors and financial analysts also benefit from the study’s insights. The ETR is a key indicator of a company’s tax efficiency and overall financial health. By revealing how fiscal incentives interact with company performance and industry sectors, investors can better assess the risk and potential return on their investments (Picas et al., 2021). Financial analysts can integrate these findings into their company valuations, offering more robust advice based on a comprehensive understanding of how tax incentives affect corporate fiscal performance.

Figure 1
Practical relevance

The study illustrates the importance of aligning tax policies with corporate governance principles and transparency. As global debates on tax fairness and business transparency intensify, the findings provide a critical backdrop for advocating stronger governance frameworks that ensure fiscal incentives are utilized as intended (Alimon & Azmi, 2023). By highlighting discrepancies between expected and actual outcomes of tax incentives, the study prompts a reevaluation of governance practices, encouraging businesses to adopt more transparent and accountable tax reporting methodologies.

2.3 Relevant Practical Issues Not Explored in the Article

While the research offers valuable insights, several practical questions remain unaddressed, presenting opportunities for future research (Figure 2).

One significant area for exploration is the long-term economic impact of tax incentives. The study focuses on the immediate impact of tax incentives on ETRs but does not explore the long-term effects of these incentives on economic growth, job creation, or innovation. Future research could examine whether companies receiving more tax incentives show better long-term performance, which is often the intended outcome of such policies (Feng, 2024).

Another practical issue not fully explored is the impact of fiscal incentives on the tax compliance of Brazilian companies. Previous literature has suggested that fiscal incentives may encourage companies to engage in tax avoidance or evasion. This issue is particularly relevant to Brazil, where tax evasion and avoidance are significant problems that undermine the effectiveness of fiscal policies (Costa & Klann, 2023). Therefore, future research could analyze the impact of fiscal incentives on the tax compliance of Brazilian companies and provide recommendations for minimizing the risk of tax avoidance or evasion.

The study also does not adequately address the implications for small and medium-sized enterprises (SMEs). The focus on publicly traded companies listed on the B3 stock exchange excludes a significant portion of the Brazilian business landscape. Extending this research to include SMEs could provide a more comprehensive picture of how tax incentives affect the broader economy, particularly given that SMEs often face different challenges and may respond differently to tax incentives compared to larger corporations (Twesige et al., 2020).

One significant practical issue that has not been addressed is the comparison of the effects of tax incentives across different countries. The study focuses exclusively on Brazilian companies, but a cross-country analysis could provide valuable insights into how different tax regimes and economic environments influence the relationship between tax incentives and ETR. For instance, comparing the effects of tax incentives in Brazil with those in other emerging markets like Mexico, China, or India could highlight universal principles and country-specific nuances in tax policy effectiveness (Fernández-Rodríguez et al., 2021).

Furthermore, the study does not explore the potential impact of tax incentives on income inequality. Tax incentives can exacerbate income inequality by benefiting large corporations and high-income individuals at the expense of small businesses and low-income households. Future research could examine how the distribution of tax incentives across different company sizes and sectors affects overall income distribution in Brazil, providing crucial insights for policymakers aiming to balance economic growth with social equity (Silva et al., 2020).

Lastly, the research could benefit from a more detailed analysis of industry-specific tax incentives. Different sectors of the economy may respond differently to tax incentives due to their unique operational characteristics, regulatory environments, and market conditions. A more granular analysis of how tax incentives affect specific industries could provide targeted insights for both policymakers and corporate strategists, allowing for more effective and efficient tax policies tailored to the needs of different economic sectors (Ririn Riani & Aam Slamet Rusydiana, 2022; Sonjaya & Noch, 2024).

Figure 2
Practical issues not explored

In conclusion, while this study provides valuable insights into the complex relationship between tax incentives and ETRs in Brazil, there are numerous practical issues that warrant further exploration. Addressing these areas in future research would not only enhance our understanding of corporate tax dynamics but also provide more comprehensive guidance for policymakers, businesses, and investors in navigating the complex landscape of tax incentives and their impacts on economic development and social equity in Brazil.

2.4 Conclusion

To summarize, Sousa et al. (2025) have shown the intricate relationship between tax incentives and the Effective Tax Rate (ETR) of Brazilian companies. The results reveal substantial inconsistencies across different ETR metrics. The research findings indicate that tax incentives can lead to entirely unanticipated results: additional cash paid in taxes despite exemptions or reductions. This highlights the complexity of fiscal policies and demonstrates their influence on corporate tax practices also. A strategic approach to taxation planning and the review of existing tax policies for their effectiveness in achieving desired objectives are all necessary here.

In the future, it will become essential to investigate the long-term impacts of fiscal incentives on the Brazilian economy. Future studies should consider how these incentives affect not only companies' tax compliance, potentially influencing behaviors of tax evasion or avoidance, but also income distribution in the country, since poorly targeted incentives can exacerbate social inequality. Additionally, including Small and Medium Enterprises (SMEs) in future analyses can offer a more comprehensive understanding of the effect of these incentives on the economy as a whole, given that SMEs may react differently compared to large corporations. Finally, comparative analyses between countries and sector-specific investigations can provide valuable insights for the development of more effective and equitable fiscal policies.

3. Comments by Alexandre Evaristo Pinto

3.1 Study Context

Tax-accounting research has become increasingly relevant in Brazil as accounting information is used to determine the tax base and inform business decisions aimed at potentially reducing the tax burden (Pinto et al., 2020).

Considering that accounting can be understood as an applied social science designed to capture economic events, measure them, and disclosure the resulting information to support decision-making by its various users (Szuster et al., 2013), it is natural that the tax information presented in financial statements serves as a key source for analyzing the tax burden incurred by entities. This analysis is particularly valuable for fiscal policymakers and legislators.

Among the most explored topics within tax-accounting research is the study of the “effective tax rate” (ETR). While tax legislators set nominal tax rates on corporate profits to collect revenue according to firms’ ability to pay, the determination of the ETR provides insights into the proportion of the actual tax burden on profits relative to accounting profits.

This analysis has dual implications: on the one hand, many entities seek opportunities to minimize their ETR; on the other, tax authorities assess whether the objectives of a country’s fiscal policy are being achieved through profit taxation by comparing the ETR with nominal tax rates.

The article “Income Tax Incentives as a Determinant of the Effective Tax Rate” by Sousa et al. (2025) specifically examines the effectiveness of tax incentives in determining the ETR. Employing descriptive statistical techniques and panel regression models, the study analyzes accounting data related to income taxes, tax incentives, and accounting profits, offering valuable insights into the dynamics of taxation and fiscal policy.

3.2 Practical Relevance

Regarding the significance of the research question, the study by Sousa et al. (2025) addresses a critical research gap, as studies on the ETR rarely focus on the effects of adopting tax incentives despite these being key factors in the resource allocation decisions of economic agents (Rezende et al., 2018; Silva et al., 2019).

The research question is thus both innovative and relevant, particularly as it examines tax incentives and their consequences on the ETR based on their monetary values rather than treating them as a binary variable. From the perspective of accounting’s objective to generate information useful for decision-making, the study of tax incentives and their impact on the ETR enhances the transparency of financial statements. This transparency enables such information to better support decisions by economic agents and fiscal policymakers, demonstrating the broad range of accounting information users affected by this form of disclosure.

Furthermore, in addressing the importance of the research question, the article by Sousa et al. (2025) explicitly references numerous prior studies that have analyzed factors potentially affecting the ETR. Given the extensive volume of research in this area, the article organizes and synthesizes key studies, focusing on determinants such as firm size, leverage, capital intensity, profitability, and inventory intensity, and hypothesizes how these factors might positively or negatively influence the ETR.

With regard to methodology, the study by Sousa et al. (2025) employs unbalanced panel data, using five measures of ETR as dependent variables: GAAP ETR (Generally Accepted Accounting Principles), Current ETR, Deferred ETR, Cash ETR, and Cash ETR3. The independent variable is the monetary value of tax incentives on profits (INCFiscal). This methodological approach allows for a nuanced examination of the relationships between tax incentives and ETR.

The variable INCFiscal represents the amount of tax incentives on income divided by total assets. Meanwhile, ETR GAAP is the effective tax rate calculated according to accounting standards, whereas ETR Current reflects the effective tax rate determined by tax regulations, and ETR Deferred represents the effective tax rate on deferred income taxes. Additionally, ETR Cash denotes the effective tax rate based on taxes paid, while ETR Cash3 represents the three-year average of the effective tax rate on taxes paid. Finally, ETR Sectoral is calculated as the average ETR Current for companies within the same industry sector.

Regarding the study’s findings, several noteworthy conclusions emerge: (i) INCFiscal was found to explain the ETR GAAP and ETR Cash metrics, confirming that tax incentives impact operating revenue, consistent with the provisions of Accounting Pronouncement No. 07 issued by the Brazilian Accounting Standards Committee (CPC-Comitê de Pronunciamentos Contábeis); (ii) The ETR Current and ETR Deferred metrics were not affected by tax incentives, in contrast to ETR GAAP and ETR Cash, which exhibited significant relationships with these incentives.

The segmentation of results by industry sectors is particularly insightful, providing detailed information on the effective tax rate metrics applied across the analyzed sectors. In its conclusions, Sousa et al. (2025) acknowledge a key limitation of their study: it relies on accounting data without access to more granular information about specific types of tax incentives. The authors also suggest directions for future research, recommending further exploration of sector-specific analyses and the impact of changes in tax legislation. Such investigations could offer a deeper understanding of the relationship between tax incentives and corporate tax burdens in Brazil.

3.3 Relevant Practical Issues Not Explored in the Article

In addition to the significant insights regarding the relationship between tax incentives and the determination of the ETR presented by Sousa et al. (2025), it is essential to highlight the relevance of the topic in light of the introduction of the “Pillar 2” framework by the Organisation for Economic Co-operation and Development (OECD) in various legal systems.

The issue of aggressive tax planning at the international level has existed for decades. However, in February 2013, OECD and G20 countries initiated a coordinated effort, culminating in the report “Addressing Base Erosion and Profit Shifting”. By November 2015, fifteen action plans were delivered, structured around three pillars: (i) introducing coherence in domestic rules affecting cross-border activities; (ii) establishing substantive requirements within existing international standards; and (iii) promoting greater fiscal transparency and legal certainty (OECD, 2016).

In 2021, the OECD and G20 countries embarked on a subsequent phase of this initiative, agreeing to implement two measures, “Pillar 1” and “Pillar 2”. These measures aim not only to reform the taxation of income but also to alter the allocation of taxing rights among countries through the establishment of new mechanisms for calculating and collecting corporate income taxes for multinational groups.

Specifically, the OECD’s “Pillar 2” establishes a minimum income tax requirement to be enforced in the countries where an entity operates. If an entity operates in multiple countries, others where it also operates may levy taxes to make up for the shortfall in the minimum tax threshold. For this purpose, the effective tax rate on profits will be used to determine the applicable tax rate. This underscores the importance of studying the ETR and its relationship with tax incentives.

In the Brazilian context, it is worth noting that in October 2024, Provisional Measure No. 1.262/2024 was published, which was converted into Law No. 15.079/2024 in December 2024. This law introduces a minimum income tax, as outlined in OECD’s “Pillar 2”, through the creation of an additional levy on the Social Contribution on Net Profit (CSLL-Contribuição Social sobre o Lucro Líquido).

As a result of this process, the study by Sousa et al. (2025) becomes even more relevant for analyzing the implementation of new tax incentives and how they will affect the calculation of the ETR. Furthermore, this presents a significant opportunity for future research on the topic.

Regarding the theoretical framework related to studies on tax incentives, it is evident that accounting research on this subject has varied objects and methodologies (e.g., effects of tax reforms, the “Lei do Bem”, and the “allowance for corporate equity”), which complicates comparability between studies. In this sense, similar to the approach taken in the theoretical framework regarding the ETR, an informational gain could be achieved by creating a systematic table of studies related to tax incentives.

Considering the broad semantic scope of the term “tax incentives”, some examples of the incentives considered in the present article have been provided, with future research being encouraged to explore the consequences of each tax incentive on the ETR metrics.

Although the methodology section generally describes the reasons for excluding certain companies whose data were collected for the study, a more detailed explanation of these exclusion reasons would be valuable. For instance, a question arises regarding whether insurance companies are included in the exclusion of companies from the financial sector. Furthermore, in cases where earnings before income tax (EBIT) are negative, it is important to note that such companies may still have incurred tax expenses, although the calculation of the ETR becomes irrelevant in these situations.

Since the data used for the research were sourced from financial statements, it is crucial to clarify whether consolidated or individual parent company financial statements were used. For instance, it is common for a significant portion of the parent company’s accounting results to consist of equity method results, which are not included for income tax purposes in Brazil.

Moreover, if consolidated financial statement data were used, it is important to mention that these figures represent the consolidated values of different entities related to EBIT and income taxes. As such, subsidiaries may be subject to specific tax regimes, such as the Presumed Profit (Lucro Presumido) regime.

For future research considerations, it is worth noting that although the discussion of the results includes the conclusion from Lima and Lima (2013) suggesting that the reduction in the nominal tax rate stems from permanent differences in the calculation of profit, it is interesting to observe that there are far more legal hypotheses regarding permanent differences that have an effect of increasing the ETR than those that result in a decrease in the ETR. A significant portion of the exclusions from the Real Profit (Lucro Real) tax regime are temporary in nature. Given the context of tax controversies in recent years, one may question whether there has been a significant increase from 2017 to 2022, specifically regarding exclusions related to subsidies.

The conclusion that there is an increase in the tax burden when there is an increase in tax incentives, according to the ETR Cash and ETR Cash3 metrics, is quite surprising, as described in the article. However, it warrants further reflection, even if only through the indication of some potential explanations to be tested in future research.

3.4 Conclusion

Research examining the relationship between tax incentives and the ETR is inherently a valuable tool for evaluating public policies, as it aims to measure the effectiveness of specific tax incentives in determining whether the intended objectives of such policies have been achieved.

The article by Sousa et al. (2025) is commendable for testing the impact of tax incentives on profit taxes through the use of five different ETR measures as dependent variables, providing results that could serve as important benchmarks for the evaluation of public policies.

The topic may gain new dimensions to be explored in future research, particularly in light of the adoption of the “Pillar 2” rules of the OECD into Brazilian legislation, with the publication of Law No. 15,079/2024, which established an additional CSLL in cases where the income taxation of multinational entities operating in Brazil does not meet the threshold for global minimum income tax.

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  This is a bilingual text. These commentaries were originally written in Portuguese, published under the DOI https://doi.org/10.1590/1808-057x20242148c.pt
• Article reviewed:
  Costa, M. G. C. M., Lucena Filho, R. B., França, R. D. (2025). Incentivos fiscais sobre a renda como determinante da Effective Tax Rate. Revista Contabilidade & Finanças, 36(spe), e2150. https://doi.org/10.1590/1808-057x20242148.en

Edited by

• Editor-in-Chief:
  Andson Braga de Aguiar

• Associate Editor:
  Cláudio de Araújo Wanderley

Publication Dates

• Publication in this collection
  30 June 2025
• Date of issue
  2025