Brazil’s government ponders impact of past tax changes on fiscal rules

BRASILIA (Reuters) -Brazil’s Finance Minister Fernando Haddad on Monday said the government is trying to precisely identify the impact of revenue shortfalls from past tax changes, admitting they will affect President Luiz Inacio Lula da Silva’s new fiscal rules.

Speaking at an event hosted by BTG Pactual, Haddad said tax revenues had fallen short of government expectations since July.

He said the government anticipated a shortfall of around 50 billion reais ($10.2 billion) this year, partly as a result of tax changes during prior administrations. Those funds had been factored into estimates for a primary budget deficit below 1% of gross domestic product (GDP) for 2023.

Since Lula, a leftist, said the government did not need to eliminate its primary budget deficit in 2024 as outlined under new fiscal rules, there has been growing speculation among that next year’s fiscal target may be revised, a matter Haddad has avoided addressing directly.

Haddad said the country’s corporate income tax collection has been impacted by a “monumental offset” of tax credits following a 2021 Supreme Federal Court decision that excluded a state tax from the base calculation of federal taxes.

The effects of this decision retroactively go back to 2017, creating room for extensive tax credit claims by companies.

Haddad said the government is now considering how to handle this situation, given the adverse and unpredictable impact of widespread tax credit utilization on tax revenues.

“That is the current topic of discussion, nothing else. We are engaged in technical work,” he said. “We are dealing with a significant sum that impacts the recently approved fiscal framework.”

The minister also said the government needed to pass a measure to ensure that state-level tax incentives should not indiscriminately reduce companies’ taxable income for federal revenue purposes.

Haddad also said there is room for more interest rate cuts by Brazil’s central bank, which has delivered three consecutive 50-basis-point reductions that have pushed its key Selic rate to 12.25%.

He also said he supported the Senate’s ongoing analysis of a broad tax reform affecting consumption taxes, considering it a measure that will enhance the country’s productivity.

($1 = 4.9052 reais)

(Reporting by Marcela Ayres; editing by Ed Osmond, Sharon Singleton and Paul Simao)