Brazil's top court backs most of Lula's tax hike decree after stalemate with Congress

By Marcela Ayres

Brazil's highest court on Wednesday upheld most of a controversial presidential decree raising the country's financial operations tax (IOF), handing a revenue-boosting win to President Luiz Inacio Lula da Silva's government.

Judge Alexandre de Moraes ruled that only the proposed tax hike on forfait, advance payments made to suppliers that were previously treated by the government as credit operations, would be cut back.

The decree, first issued in late May, increased IOF rates on certain corporate credit, foreign exchange and private pension transactions in an effort to generate additional revenue and reduce the size of a budget freeze required to meet this year's fiscal rules.

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The measure, however, sparked immediate backlash from lawmakers and the financial sector.

Just hours after the decree was published, the government partially rolled back some of the changes, and amid continued pressure, it further scaled back the IOF hikes.

Even so, Congress passed last month a legislative decree to overturn the presidential measure.

In response, the government took the case to the Supreme Court, arguing the decree was legal and warning of a potential revenue shortfall of around 12 billion reais ($2.16 billion) this year, with more than double that impact expected in 2026.

Brazil's finance ministry issued a statement on Wednesday evening that welcomed the court's decision, saying it would help restore harmony between branches of government.

It also said blocking the proposed IOF tax hike on forfait payments represents lost revenue of 450 million reais, or $80.9 million, this year and a further 3.5 billion reais in 2026.

Finance Minister Fernando Haddad told journalists in Brasilia that the government will start working next week on ways to offset the revenue loss, but noted Brazil is heading to a "good primary result" this year, without giving further details.

He added that there is still room in the 2026 budget plan, which is in the works.

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