Brazilian govt facing tensions with congress over tax exemptions

The administration of President Luiz Inácio Lula da Silva is facing growing tensions with Brazil’s congressional leaders, as finance minister Fernando Haddad wants to end payroll tax exemptions for 17 economic sectors and city halls.

The measure was created in 2011 during the Dilma Rousseff administration and has been extended several times. But the government is trying to block the most recent extension, approved by the supreme court last year and set to expire in 2027, to avoid reducing tax collection.

Senate president Rodrigo Pacheco and lower house head Arthur Lira advocate for the exemption, as they want to force the government to improve public finances through spending reductions rather than tax increases.

"The relationship between Lula's administration and the leaders of congress is not good at the moment, and this clash regarding tax relief could create a serious problem for the government in the coming months, with the leaders of congress promoting retaliation against the government in future votes on issues of interest to the government," André Pereira César, a political analyst at Hold Consultoria, told BNamericas.

Currently, companies can pay a tax of between 1% and 4.5% instead of 20% on social security payrolls.

The tensions come as the government depends heavily on good relations with congress, amid pending regulations to be evaluated as part of the broad tax reform approved last year.

"All regulations associated with the tax reform are in the hands of congress to be evaluated now. The government is in a weak position to try to bargain for anything regarding taxes on the payroll," added César.