Brazil’s Tax Adjustments: A Closer Look at the Controversial Proposal

Brazil’s Tax Adjustments: A Closer Look at the Controversial Proposal

In a move that is set to face opposition in Congress, Brazil’s Finance Minister Fernando Haddad has unveiled tax adjustments aimed at limiting benefits across various sectors and ensuring fiscal compensation. The package intends to replace an approved bill that was previously vetoed by President Luiz Inacio Lula da Silva but overturned by Congress. While Haddad emphasizes the government’s commitment to balanced public accounts, critics argue that the proposed measures contradict the decision made by a broad majority in Congress.

The tax adjustments put forth by Haddad’s executive order entail erasing rules approved by lawmakers for small towns and scaling back tax benefits for companies. Senator Efraim Filho, the author of the bill targeted by the replacement proposal, believes that the issuance of the executive order contradicts the previous decision made by Congress and will face resistance from the start. These contentious adjustments are expected to endure political scrutiny, which may pose significant challenges for their implementation.

One major aspect of the proposed tax adjustments is the reduction of the contribution rate on payroll for smaller municipalities from 20% to 8%, which is expected to result in a revenue loss of approximately 15 billion reais ($3.09 billion). Haddad clarified that this portion of the bill will be entirely removed, subject to further negotiation. However, the remaining impact of the bill, totaling 12 billion reais, will be compensated through tax adjustments on three fronts, according to the secretary of the revenue service, Robinson Barreirinhas.

To offset the revenue loss, the government plans to propose a phased end to payroll tax exemptions for the sectors that previously benefited from them. Under the new proposal, companies would be required to pay 10% or 15% (depending on their category) on the equivalent of one minimum wage for each of their formal workers, in exchange for the standard 20% payroll rate. This alternative solution is estimated to cost 6 billion reais annually.

Another measure included in the tax adjustments is a reduction in the post-pandemic tax benefits granted to the event industry through the “PERSE” program, ultimately leading to its elimination by 2025. This change aims to further offset the revenue loss and contribute to the necessary fiscal compensation. By phasing out these post-pandemic tax benefits, the government expects to achieve long-term financial stability.

The third measure proposed in the tax adjustments is the restriction of taxpayers’ ability to offset taxes annually. While the specific annual ceiling for tax compensation is yet to be established and regulated, the parameter being considered is 30%. Taxpayers would still be able to offset taxes; however, the length of time allowed for utilizing the tax credit would be determined by a scaling system based on the value, limited to five years. Notably, this limitation will only apply to tax credits received in judicial cases above 10 million reais.

Analysts at XP have positively assessed the proposed tax adjustments, citing a “good probability of achieving fiscal gains” through these measures. They believe that the adjustments may help mitigate current distortions in the Brazilian tax system. However, given the opposition expected from Congress and the potential for political resistance, the road to implementing these tax adjustments is likely to be arduous. Only time will tell whether Brazil will be able to navigate through these challenges and successfully achieve its goal of balanced public accounts.


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