Target of criticism from Haddad, tax benefits are expected to exceed R$500 billion in 2024, the highest level in 9 years

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When granting benefits, the government gives up part of the revenue in order to boost sectors of the economy. But Haddad wants to review the practice, especially given the difficulty of closing the fiscal deficit. The tax benefits granted by the government — which have been criticized by Finance Minister Fernando Haddad — are expected to total R$523.7 billion in 2024, equivalent to 4.5% of the Gross Domestic Product (GDP). Also known as tax expenditures, these benefits are tax incentives that the government gives to boost sectors. To achieve this, the government voluntarily gives up part of the tax collection (see benefited sectors below). Haddad has proposed reviewing some of these incentives. He understands that they generate a worsening in the balance of public accounts, the subject of debate in recent weeks, due to the difficulty of closing the fiscal deficit in 2024. The calculation of R$523.7 billion in tax benefits was made by the Federal Revenue Secretariat and sent by the government to Congress in next year’s Budget proposal. In 2023, the expectation is that tax benefits will be around R$450 billion — equivalent to 4.29% of GDP. In historical comparison, the projection for next year is the highest since 2015 — when benefits reached a record 4.93% of GDP. The comparison with GDP is considered more appropriate by experts in historical terms. In Haddad’s sights This week, during his participation in the Brazil Investment Forum, the Minister of Finance, Fernando Haddad, stated that “tax expenditures” exceed the 6% mark of GDP only at the federal level. In addition to the benefits officially calculated by the Federal Revenue, Haddad includes other less visible tax incentives — which he has already informed that he seeks to reverse in the National Congress (see below). “Attacking tax waste is essential to rebalance the accounts, so that the adjustment does not fall on the shoulders of the poor. We cannot repeat this mistake. How much sacrifice has been made in recent years that has meant an impoverishment of the population that most needs attention. Come on, yes, rebalance the accounts, but focusing on waste. I would say without a shadow of a doubt that tax expenditure is perhaps the biggest waste, as it is the most opaque of expenditures”, declared Haddad, at the time. Fiscal deficit: uncertainty generates speculation in the financial market, says Míriam In September, the Ministry of Planning created a working group to identify public policies or government programs, financed by direct spending or subsidies, that will be subject to review. The assessments will be included in the 2025 Budget Guidelines Law. In his goal of achieving zero deficit in 2024, which has been contested by the political wing of the federal government, Haddad proposed a series of measures in recent months to reverse incentives for sectors of the economy . Such as: collection of offshore and exclusive funds; end of the interest on companies’ equity mechanism; end of subsidies given by states with an impact on federal taxes. The government has also indicated that it will seek to eliminate, in the future, the lack of taxation on the distribution of profits and dividends. Company profits are already taxed in Brazil, but their distribution to individuals, since 1996, has been tax-free – something that does not happen in almost all countries. A possible change in the 2024 fiscal target, to foresee a public deficit, would help the government to minimize spending cuts to fulfill its promises. And with this, reducing the impact on investments in infrastructure, such as works under the new Growth Acceleration Program (PAC), in the middle of the year of municipal elections. Cutting expenses The balance of public accounts must also involve cutting expenses considered less effective. According to economists, the adjustment to reduce spending has not received the same attention from the government. The economic team already knows that to achieve the goal of zero deficit in 2024, it will need to cut at least R$50 billion in public spending in the first months of next year. “The model was to increase spending sharply, and then chase revenue to finance this increase in spending. Then the time has come to find revenue, and the government is not finding revenue. Expenses have grown a lot,” said economist Marcos Mendes, professor at Insper. “The fundamental thing is to avoid new increases, both on the part of the Executive and the Legislative”, he added. Tax benefits planned for 2024 See below the main tax incentives foreseen by the Federal Revenue Secretariat in the 2024 Budget and their values: Simples Nacional: R$ 125.4 billion Agriculture and Agroindustry: R$ 58.9 billion (basic basket included here, worth R$39 billion). Exempt and Non-Taxable Income – IRPF: R$ 51.3 billion Non-Profit Entities – Immune / Exempt: R$ 41.93 billion Regional Development: R$ 40.73 billion Deductions from Taxable Income – IRPF: R$ 33.13 billion Manaus Free Trade Zone and Free Trade Areas: R$ 32.72 billion Medicines, Pharmaceutical Products and Medical Equipment: R$ 19.74 billion Savings and Credit Securities – Real Estate and Agribusiness Sector: R$ 18.76 billion Benefits of Workers: R$ 18.36 billion Automotive Sector: R$ 9.63 billion Tax reform Within the scope of the tax reform on consumption, several benefits related to PIS and Cofins, taxes that will be extinguished, would also cease to exist. These incentives would disappear by 2027, when PIS and Cofins will be extinguished (according to the proposal being discussed in the Legislature). This estimate does not include the end of benefits from the Manaus Free Zone and Simples Nacional, regimes that will be maintained. In the new proposed tax model, however, investment will be exempt for all sectors, as well as exports. This week, Fernando Haddad noted that not all benefits will end with the tax reform. “Nobody wants to tax the holy house, nobody wants to tax Prouni. Everyone is sensitive to knowing who has the capacity to contribute and who does not have the capacity to contribute”, declared the minister. According to the proposal of the rapporteur in the Senate, Eduardo Braga, the following may be exempt from charging future VAT: urban, semi-urban and metropolitan public transport services for road and subway passengers medical devices accessibility devices for people with disabilities medicines basic health care products menstrual health vegetables, fruits and eggs acquisition of medicines and medical devices by public administration and social assistance entities higher education education services under the terms of the University for All Program (Prouni) passenger cars purchased by people with disabilities and people with disorders on the autistic spectrum, and by professional drivers who use the car for use in the rental category (taxi) services provided by non-profit innovation, science and technology entities physical or legal rural producers with annual revenue of up to R$ 3.6 million urban rehabilitation activities in historic areas and critical areas for urban recovery and conversion. Decisions on the exemption of these sectors, however, will only be taken through a complementary law — after the eventual approval of the reform by the National Congress. There will also be specific regimes for some sectors, the format of which will also be defined through a complementary law. They are: fuels and lubricants financial services, real estate operations, health care plans and prediction competitions (such as lotteries) cooperatives hotel services, amusement parks and theme parks, bars, travel and tourism agencies and restaurants and regional aviation diplomatic missions and representations of international organizations sanitation and highway concession services collective passenger transport services intercity and interstate road, rail, waterway and air operations that involve the provision of the shared structure of telecommunications services sports activities developed by Society Football Anonymous (SAF). At the same time, the report also predicts that some sectors of the economy will pay 40% of the standard rate (charged from all segments of the economy, also regulated through a complementary law). They are: education services health services medical devices — including compositions for enteral or parenteral nutrition and special compositions and nutritional formulas intended for people with inborn errors of metabolism accessibility devices for people with disabilities medicines basic health care products menstrual public transport services for road and subway passengers of an urban, semi-urban and metropolitan nature foods intended for human consumption and natural juices without added sugars and preservatives personal hygiene and cleaning products mostly consumed by low-income families agricultural, aquaculture and fishing products , forestry and natural plant extractives agricultural and aquaculture inputs national artistic, cultural, journalistic and audiovisual productions, sporting activities and institutional communication and goods and services related to sovereignty and security. A benefit is also foreseen for the national basic basket, which will be exempt, and another for the extended basic basket – which will have a reduced rate (of 40% of the total value). Which products will be included in these basic baskets will be defined later, in a complementary law.

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