Business owners lobby against Lula’s tax decree

Representatives from productive sectors are meeting with lawmakers on Tuesday to advocate for overturning a presidential provisional decree that indirectly increases their tax burden by changing the federal tax credits system. 

President Luiz Inácio Lula da Silva recently signed the decree to compensate for payroll tax breaks approved by Congress in 2023. The benefit was created in 2011 and extended multiple times. It was set to expire at the end of last year — but Congress kicked the can down the road another time, with the tax breaks expected to be phased out by 2028.

Seventeen economic sectors and small municipalities enjoy the tax breaks, which were supposed to benefit the sectors that create the most jobs in Brazil. However, a study by the Institute of Applied Economic Research (Ipea) found that these sectors do not employ the most people, and many have reduced formal employment since 2011.

According to the government, the provisional decree should guarantee around BRL 29 billion (about USD 6 billion) to public coffers. Finance Minister Fernando Haddad says it is fair and necessary for the administration to meet its fiscal targets. 

While they come into force immediately, provisional decrees must be approved by Congress within 120 days, or else they expire. Business owners want Congress to repeal the decree, arguing that “there is no longer room for burdens on the productive sector” and that the changes are “a setback in relation to the advances of recent tax reform.”

Entities in the health sector stated that the costs would be passed on to consumers, with “negative impacts on the population, the economy, and the sustainability of the public health system itself.”

The provisional decree prevents companies from using credits related to federal social security contributions (PIS and Cofins) to avoid paying other taxes, such as income tax. It also prohibits the reimbursement of presumed tax credits. 

The government’s economic team claims that the credit system was created to avoid cumulative taxes, but after legal changes, it is actually being used to subsidize companies without due transparency and social control. 

According to the Finance Ministry, the restrictions affect large companies the most, which have large credit stocks. Exporters will be particularly harmed because, as they do not pay PIS/Cofins, they will not be able to use the credits.

Mr. Haddad has been saying he is open to negotiating and finding a solution for exporters. On Monday, June 10, the National Confederation of Industries softened its critical tone against the new rules. 

After being defeated in Congress, the government took action at the Supreme Court to overturn the payroll taxes exemptions, which lawmakers had approved against the administration’s will. The court then gave the Legislative and Executive Branches until the end of June to find a negotiated solution to the issue.

If that does not happen, the legislation in favor of economic sectors and municipalities will be suspended, stated Supreme Court Justice Cristiano Zanin.

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