Brazil’s Government Considers Effects of Previous Tax Changes on Fiscal Rules

BRASILIA (Reuters) – Brazil’s Finance Minister Fernando Haddad announced on Monday that the government is working to accurately assess the impact of revenue losses stemming from previous tax reforms, acknowledging that these losses will influence President Luiz Inacio Lula da Silva’s new fiscal guidelines.

During an event organized by BTG Pactual, Haddad pointed out that tax revenues have consistently fallen short of the government’s expectations since July. The government is projecting a revenue shortfall of approximately 50 billion reais ($10.2 billion) for this year, which is partly attributable to tax reforms implemented by earlier administrations. This deficit was accounted for in estimates suggesting a primary budget deficit of less than 1% of gross domestic product (GDP) for 2023.

With Lula, who holds leftist views, stating that the administration does not need to eliminate its primary budget deficit in 2024 as previously outlined under the new fiscal rules, speculation is growing about potential revisions to next year’s fiscal targets—a topic Haddad has chosen not to directly address.

He noted that corporate income tax collections have been significantly affected by a "monumental offset" of tax credits resulting from a 2021 Supreme Federal Court ruling. This decision excluded a state tax from the calculation base for federal taxes, creating opportunities for extensive tax credit claims by companies dating back to 2017.

Haddad mentioned that the government is currently deliberating on how best to navigate the adverse and unpredictable effects of widespread tax credit claims on overall tax revenues. "That is the current topic of discussion, nothing else. We are engaged in technical work," he stated. "We are dealing with a significant sum that impacts the recently approved fiscal framework."

The minister also emphasized the necessity of enacting legislation to ensure that state-level tax incentives do not indiscriminately reduce businesses’ taxable income at the federal level.

Additionally, Haddad indicated that there is potential for further interest rate cuts by Brazil’s central bank, which has already implemented three consecutive reductions of 50 basis points, lowering its key Selic rate to 12.25%.

He expressed support for the Senate’s ongoing examination of comprehensive tax reforms concerning consumption taxes, viewing it as a measure that will boost the country’s productivity.