Lula administration sees “chaos” if lawmakers fail to approve measure
08/22/2023
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Fernando Haddad — Foto: Rafa Neddermeyer/Agência Brasil
The Lula administration believes that a “legal and political chaos” could be created if Congress fails to pass this week the provisional measure on the taxation of offshore companies and trusts, which serves to compensate for the extension of the exemption from Income Tax (IR), in force since May 1, to R$2,640 per month. As a result, leaders of both the economic team and Congress launched a “communication strategy” on social media with the aim of convincing public opinion days before the measure lapses, and thus putting pressure on lawmakers.
The Ministry of Finance is extremely worried about this scenario, since the parliamentary leaders, led by Chamber of Deputies Speaker Arthur Lira and Senate President Rodrigo Pacheco, have stated that the measure should be transformed into a bill and therefore not be the subject of a provisional measure.
The government’s main concern is that if only the new income tax exemption is approved without the compensation measure, President Luiz Inácio Lula da Silva would not have many alternatives. In the worst-case scenario, he would be forced to veto the measure, with all the political burden of returning the income tax rates to their previous levels, under penalty of violating the Fiscal Responsibility Law (LRF). In this case, workers would feel the effects as early as September, as the old income tax exemption levels would apply and they would have to pay higher rates.
Alternatively, the Ministry of Finance would have to issue a new provisional measure to create new taxes or raise rates to offset the effects of the income tax exemption, both in the past and in the future. “They’re holding a knife to the government’s throat,” points out a source on the condition of anonymity. “A chaotic situation is being created, both legally and politically,” the source added.
Government officials also point out that even if the measure falls and there is no income tax exemption in the future, the Lula administration will have to find sources of revenue to compensate for the four months of the new income tax levels, since the Ministry of Finance was waiting for the amounts that would be regularized by those who hold money abroad only after the law was passed in Congress.
Faced with this scenario, officials within the Ministry of Finance are still negotiating possible flexibilities to the rules in order to convince lawmakers to pass it this week, since the deadline for its expiration is August 28.
Finance Minister Fernando Haddad has said publicly that “there is no plan B” in case the offshore tax measure doesn’t pass, but government leaders point out that the minister is trying as hard as possible to get Congress to approve the provisional measure on offshore companies. Otherwise, it would show that the government has “thrown in the towel.”
“We can’t accept that a worker pays up to 27.5% on the income from work and 15% on the income from his investment fund, while a millionaire or billionaire doesn’t pay a centavo on financial income abroad, even here, in closed-end funds,” said a source.
At the beginning of the month, the special committee approved the provisional measure that extends the income tax exemption to R$2,640 per month, in a text by Deputy Merlong Solano. The government worked to include the taxation of offshore companies in the provisional measure with 19 amendments, with the intention of speeding up the vote and preventing the correction of the income tax levels from becoming invalid.
However, the government’s move to include the taxation of offshore companies in the same income tax measure irritated Mr. Lira. This discontent was deepened by the fact that, a few days later, Mr. Haddad criticized the “power” of the Chamber of Deputies, saying that the deputies could not use their power to “humiliate the Executive branch and the Senate.”
Mr. Pacheco, for his part, even waited to send it to the Chamber of Deputies to decide whether to exclude this point from the minimum wage provisional measure, but the legal interpretation was that this could only be analyzed when the text reached the plenary. The government even tried to deal with the issue through a specific provisional measure, but the committee of deputies and senators that was supposed to debate it wasn’t even set up. The government tried four times to convene a session to start the work, but did not get the support of the Centrão – a cluster of center and center-right parties.
Mr. Lira and Centrão deputies argue that taxing foreign income would be an “increase in the tax burden” and that they have already warned the government that they do not agree with raising taxes. The timing of the vote is also bad, as the provisional measure will be analyzed amid the impasse in the cabinet reshuffle with Progressive Party (PP) and Republicans and complaints from lawmakers about the delay in paying budget amendments.
On Monday, Brazil’s Federal Revenue posted on its social media a video recorded by the secretary of the Federal Tax Service, Robinson Barreirinhas, advocating the approval of the measure. The post was soon deleted. “The increase in the income tax exemption for the needy will benefit more than 38 million Brazilians. To this end, the idea is that 0.04% of Brazilians with money in tax havens will be taxed,” the tax agency said in the video.
In the recording, Mr. Barreirinhas argues that “to compensate” for the income tax exemption, the government “proposed that exactly 0.04% of Brazilians” pay taxes on their income abroad. “Very few people have millions of reais abroad, sometimes more than R$1 billion each,” the secretary said.
On X, the social media formerly known as Twitter, Workers’ Party (PT) president, Deputy Gleisi Hoffmann, questioned Congress leaders for being against the taxation of offshore companies. “It’s not increasing the tax burden,” she said. “It’s taxing people who don’t pay anything. Anyone who invests in Brazil pays. Workers pay taxes. And the super-rich pay nothing?” she wrote.
*Por Guilherme Pimenta, Lu Aiko Otta, Raphael Di Cunto — Brasília