Government seeks exemption for tax reform time limits
The Brazilian government has submitted a bill to Congress aiming to exempt its proposed income tax reform from a regulation that restricts the establishment or extension of tax benefits to a maximum period of five years. This regulation, implemented in 2012, is included annually in the Budget Guidelines Act (LDO).
The proposed reform, sent to legislators recently, plans to increase the income tax exemption threshold from R$2,824 to R$5,000 per month. This alteration is anticipated to lead to a foregone tax revenue of R$25.84 billion in 2026. The Finance Ministry assures that this loss will be balanced out by imposing new taxes on wealthy individuals earning more than R$600,000 yearly.
Since 2012, the LDO has mandated that any introduction, reauthorization, or expansion of tax incentives should be confined to five years and incorporate particular transparency and oversight mechanisms. Financial experts informed Valor that this provision reinforces Article 14 of the Fiscal Responsibility Law (LRF), which establishes criteria for approving tax exemptions to prevent revenue loss for the federal government, states, and municipalities that partake in tax collections.
In its recent bill presented to Congress, the government suggests changes to Article 139 of the 2025 LDO to eliminate three present requirements for income tax proposals brought forth by the Executive Branch. These proposals would no longer have to (1) contain a five-year expiration stipulation, (2) delineate specific objectives and metrics, or (3) assign an agency for monitoring and evaluating the efficacy of the measure.
The Planning and Budget Minister, Simone Tebet, stated in the bill’s purpose that exempting the income tax reform from the five-year ceiling is in harmony with the fundamental principle of progressive taxation. She mentioned, “In this context, the proposed adjustment to the 2025 LDO would allow such benefits to be introduced without a time limit, exempting them from the five-year rule. This change would enable the permanent implementation of the federal government’s proposed improvements to personal income tax, aimed at promoting equity and tax justice.”
According to the Ministry of Planning and Budget, although the new exemption threshold would only come into effect in 2026, an amendment to the LDO for 2025 is crucial now. This is due to the fact that the current LDO encompasses modifications to tax laws made within its fiscal year. Additionally, as per Brazil’s annual anteriority rule, any tax reform sanctioned in 2025 can only be enforced in 2026.
Marcelo de Sousa Teixeira, a legislative advisor, pointed out that the five-year limit aligns with Constitutional Amendment No. 109, which was put into effect in 2021. This Amendment imposed a cap on tax expenditures at 2% of GDP and imposed other restrictions on granting or expanding such benefits.
He also noted that the five-year limit has been minimally effective, as there are currently 112 tax benefits without a defined expiration date. The Finance Ministry declined to comment on the matter.
