By Marcela Ayres and Bernardo Caram
BRASILIA (Reuters) -Brazil’s Finance Ministry does not plan on targeting income tax benefits for individuals in a broad reform of tax breaks to shore up public finances, two ministry officials told Reuters.
The officials, who spoke on condition of anonymity because the measures are still being prepared, said the package will preserve all existing deductions for individuals in their income tax filings – such as those for health and education expenses.
Exemptions for retirees over the age of 65 and individuals with serious illnesses will also be left untouched, they said.
This year’s federal budget projects 544 billion reais in total tax benefits, but politically sensitive exemptions and deductions for individuals account for 91.7 billion reais, or about 17% of the total.
Finance Minister Fernando Haddad said that the government aims to pass a bill that would cut most tax expenditures by at least 10%, effectively excluding from the review benefits tied to the Manaus Free Trade Zone and the “Simples” tax regime for small businesses.
Under former President Jair Bolsonaro, a 2021 constitutional amendment mandated a reduction in tax benefits but did not specify how such reductions would be achieved in subsequent legislation, rendering the measure largely ineffective.
Now President Luiz Inacio Lula da Silva’s government aims to lay out clear rules on which tax benefits would be affected and the methods for reducing each, one of the sources said.
If a benefit grants a presumed tax credit, the taxpayer would retain 90% of the credit instead of 100%. If the benefit is a full exemption, the applicable tax rate would become 10%, the source added.
“Once this bill is approved, it would allow these benefits to be automatically reduced starting next year,” the source said, adding that the measure would be an important tool to help balance public accounts.
Haddad has stressed that the government would maintain ongoing talks with Congress to finalize the proposal.
TAXING FINANCIAL INVESTMENTS
Separately, the government has announced that it will issue an executive order to raise some taxes in order to roll back a controversial decree that increased the IOF tax rate on certain financial transactions.
The package includes the creation of a single income tax rate of 17.5% for all types of financial investments, including stocks and bonds – except for currently exempt instruments, which would be taxed at 5%.
According to one source, the current tiered structure, which ranges from 15% to 22.5% depending on asset class and holding period, distorts investor behavior by encouraging certain asset choices over others.
The source also stressed that the flat rate will allow taxpayers to offset gains and losses across their investment portfolio when filing annual tax returns. Any excess tax payments would be refunded based on the net gains for the year.
(Reporting by Marcela Ayres and Bernardo Caram; Editing by Brad Haynes and Mark Porter)
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