Haddad achieves victories in the first semester, but real difficulties are coming now – 07/03/2023

Finance Minister Fernando Haddad scored nearly twelve victories in the first semester of the Lula’s government 3, so much so that market operators regard pragmatism as one of the main factors behind the asset appreciation that occurred in the last quarter.

Undoubtedly the Minister paved the way and moved many houses towards the daunting task which he would undertake in the second term: to get the groups that pay little tax today (individuals and corporations) to start taxing the expenditure of the new state. The rule, designed by his team and about to be approved by Congress, is applicable. Another challenge is the withdrawal of tax benefits that no longer make sense and tax sectors that currently do not pay taxes.

The task is daunting because the procedures pass through Congress and the judiciary. Whenever a group in a society is about to lose some benefits, there is a strong reaction and an attempt to stop these changes. But Haddad’s strategy of ranking factors may prove effective if it follows the same logic that then-President Michel Temer outlined with the pension reform, which ended up being approved at the start of the Bolsonaro government, but based on what Temer did before. Approval of the spending cap. The base ended up agreeing to the fix because the roof was pressing on other expenses.

In this second half, the new spending rule would also prompt Congress and the judiciary, as well as society, to support and pass the changes needed to keep the new spending rule in effect, while also making a significant realignment in revenue. Haddad appears to subvert the reasoning advocated by many that the government does not have a shortage of revenue, but it spends badly (it needs to cut expenditures and spend better), by arguing that the government collects it poorly, by allowing some privileged groups to pay taxes Few while the poor pay a lot. Haddad chose the path of rearranging revenue rather than attacking spending first.

Below see the balance of Haddad’s many victories and some defeats in the first half and the difficulties that will come in the second half:

Wins

Fuel RecyclingHaddad’s first victory at the end of February, despite pressure from within the government to extend the exemption for a longer period at the beginning of the government.

ICMS support in STJ: The Court unanimously decided at the end of April that companies cannot continue to deduct income tax and social contribution on net profit (CSLL) granted by the states (estimated impact of R$90 billion)

Gallipolo in British Columbia: In early May, Haddad appointed the number two man on the central bank’s monetary policy board, in a negotiated solution with Planalto and Roberto Campos Neto.

Pis/Cofins for STF Financial Institutions: The Supreme Court imposed, in mid-May, a defeat on banks with regard to the collection of PIS / Confins in financial activities (impact estimated at R$ 115 billion)

tax framework: At the end of May, the full council approved the new tax law by 372 votes. The text is sewn together with the economic team. The Senate approved the rule on June 21 and the text returned to the House.

Reduced support for cars: After launching Alckmin’s plan at the end of May to make cars worth up to R$120,000 cheaper, Haddad’s team revamped the program by setting financial limits and environmental compensation

inflation targetAt the end of June, the minister kept the inflation target for the coming years unchanged at 3% and in the range of 1.5 percentage points, despite Lula’s behind-the-scenes pressure to change the numerical target. It also achieved the enduring goal that it had been championing

Import Taxes: After much fanfare, I’ve now introduced a tax compliance plan for remittances on the last day of June. Brazilian retailers criticized the solution and it is still being discussed. Haddad seeks a negotiated solution.

In addition to this list, Haddad tends to come out victorious:

in a vote Carve BellWhich would return the pro-tax victory in the event of a tie with some concessions for taxpayers

in Full approval of the new tax base by Congress

in agreeing to tax reform At home before the July holidays

defeats

In the first quarter of the reign, Haddad’s strength was in doubt after some defeats:

a Fuel exemption extension From January 1 to February 28 (Haddad pleaded for reinstatement at the start of his term)

a Increase the minimum wage (Haddad wanted R$1,302 and ended up at R$1,320)

a Infrared table readjustment (Haddad wanted to update the table in 2024)

Quarries that will come in the second half

Tax turtles: Income Recovery from Tax Credits: Exemptions, amnesties, reductions, deductions, reductions, and tax suspensions that were made in the past, but don’t make sense today.

Individual income tax reform: Approved in the House in 2021, stalled in the Senate, and conditioned on a readjustment of the IR schedule and keeping the discount streamlined for all. The project of the Haddad team to reform the international relations is still unknown and it is not known whether part of what was approved in the room will be used.

Corporate income tax reform: in the same project as the individual. The text approved by the House and stalled in the Senate called for a 15% tax on profits and dividends (equity mutual funds are excluded and there are exceptions such as Simples), lowering the IRPJ from 15% to 8%, and implementing an additional 1.5% of Financial compensation for the exploitation of mineral resources (CFEM) and the maintenance of the additional 10% foreseen in the legislation for monthly earnings above R$20,000, as well as the reduction of the social contribution on net income (CSLL) by one percentage point in two steps of 0.5, taking into account the reduction of incentives tax that will increase collection.

interest on principal (JCP): It is in the same draft income tax for individuals and legal entities. The reform approved by the Chamber ended the deduction of interest on equity (JCP) from the tax calculation base.

Exemption from salaries: Currently 17 sectors are exempt and Haddad’s team is preparing a wide exemption project that has not yet been issued. It is necessary to find a source of financing and everything indicates that the chosen path will be income tax reform. But in order to be able to pay for a broad exemption, it is necessary to find a way to fund Social Security (INSS). The government opposed the project to extend the exemption for 17 sectors for four years, but the text was approved in the Senate.