Brazil's Congress blocks Lula's veto on extended payroll tax exemption

Brazil's Congress blocks Lula's veto on extended payroll tax exemption

The Brazilian Congress voted on Thursday to block President Luiz Inacio Lula da Silva's veto on a bill focused on extending payroll tax exemptions for 17 labor sectors until 2027, in an expected setback for the government.

During a joint session, senators voted 60 in favor of overturning the veto and 13 against, while in the lower house, the vote was 378 to 78, meaning the bill - that passed months ago - can now be instated.

Finance Minister Fernando Haddad called the measure unconstitutional and said the government would contest it in the judiciary. Speaking to reporters, he emphasized that the extension entails a tax waiver of over 25 billion reais ($5.10 billion), which had not been included in next year's budget.

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"So, it will be a problem to balance the budget with this measure," he said, referring to the government's target of eliminating the primary deficit in 2024.

Without providing details, the minister said that the government would present another measure on this matter by next week, adding it would not impact the budget since it would be accompanied by "compensatory measures".

Implemented temporarily in 2012, the tax exemption has been successively extended in the face of pressure from benefiting companies.

In Brazil, companies pay a 20% tax on their payrolls to contribute to social security. Under the bill, the benefiting sectors would continue to be able to replace this burden with rates ranging from 1% to 4.5% on their gross revenue for another four years.

The targeted companies claim to be the largest employers in the country and argue that, without the measure, many formal jobs would be lost.

This group includes sectors such as construction, communication, apparel and clothing, animal protein, call centers, collective and cargo road transportation, among others.

However, different academic studies scrutinizing the measure concluded it was ineffective, as its fiscal cost exceeded the salary received by employees, primarily benefiting the companies.

WIN

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Despite the setback in this regard, the government secured a victory in a Congress committee that passed a crucial revenue-boosting measure on Thursday, which still needs to be analyzed in plenary sessions of both the lower house and the Senate.

The vote on the measure, which prevents companies from using state-granted corporate tax discounts to reduce taxable income for federal revenue purposes, was made possible after intense political negotiations and was celebrated by Haddad.

The government was counting on an extra 35.3 billion reais in revenue in 2024 from the measure. Haddad said that this outlook remains unchanged despite several relaxations made to the text compared to its original version.

The proposal also incorporated changes to "interest on equity" (JCP) payments, which currently allow companies to deduct shareholder remuneration from their corporate tax obligations.

Originally, the government aimed to raise 10.5 billion reais next year by eliminating JCP, but Congress retained the instrument with specific changes to its applicability.

According to Haddad, the government will now take administrative measures later this year to offset this revenue loss.