Brazil’s Haddad unveils set of tax tweaks to ensure balanced public accounts

BRASILIA (Reuters) – Brazil’s Finance Minister Fernando Haddad unveiled on Thursday tax adjustments to limit benefits across various sectors and ensure fiscal compensation, which are expected to face opposition in Congress.

The package aims to completely replace the text of an approved bill that President Luiz Inacio Lula da Silva vetoed, just to have it overturned by Congress two weeks ago.

Speaking at a press conference, Haddad said that all measures would constitute an executive order to be released this year. Once signed by Lula, the measures would be immediately effective for four months, but would require Congress approval to go past that period.

The changes erase rules approved by lawmakers for small towns and scale back tax benefits to companies, and they are likely to face political scrutiny, said Senator Efraim Filho, the author of the bill targeted by the replacement proposal.

“The issuance of the executive order contradicts a decision made by a broad majority in Congress. It will face resistance right from the start,” he wrote on social media.

Haddad, who reiterated the government’s intention to pursue balanced public accounts in 2024, had previously indicated that the government would present a substitute proposal for the bill.

It originally extended payroll tax exemptions for 17 labor sectors until 2027, and its impact had not yet been incorporated into the 2024 budget.

The minister clarified on Thursday that the majority revenue loss, around 15 billion reais ($3.09 billion), was expected to arise from a change contained in the text that reduced the contribution rate on payroll for smaller municipalities from 20% to 8%.

According to Haddad, the executive order is now set to remove this whole part, which will be subject to further negotiation.

The remaining impact of the bill, amounting to 12 billion reais, will be compensated in the new measure with tax adjustments on three fronts, said the secretary of the revenue service, Robinson Barreirinhas.

The government will propose a phased end to payroll tax exemptions for the benefited sectors, suggesting that, in exchange for the standard 20% rate on the payroll, companies pay 10% or 15%, depending on their category, on the equivalent of one minimum wage for each of their formal workers.

According to Haddad, this alternative has an annual cost of 6 billion reais, which will be offset by changes aiming to reduce post-pandemic tax benefits granted to the event industry through the “PERSE” program, eventually eliminating it by 2025.

A third measure will restrict the ability of taxpayers to offset taxes annually, added the minister.

Barreirinhas stressed that the annual ceiling for tax compensation is not yet established and will be further regulated, but 30% is a parameter that could be adopted.

“The idea is to implement a scaling, the higher the value, the longer the period of use (of the tax credit), but limited to five years,” he said, adding that the limitation will only apply to tax credits received in judicial cases above 10 million reais.

In a note to clients, analysts’ at XP (NASDAQ:) positively assessed the proposal, mentioning a “good probability of achieving fiscal gains” with the measures, which may mitigate current distortions.

“For now, we maintain our primary deficit projection of 91.6 billion reais (0.8% of GDP), but the risks are tilted to the upside.”

($1 = 4.8584 reais)