Brazil Congress nixes Lula's financial transactions tax hike

BRASÍLIA, June 25 (Reuters) – On Wednesday, both chambers of Brazil’s Congress voted to overturn a presidential decree issued by President Luiz Inácio Lula da Silva that sought to increase the Financial Transactions Tax (IOF) on select credit, foreign exchange, and private pension operations.

This legislative decision represents a significant setback for the Lula administration, which had introduced the measure as part of a broader strategy to boost revenue and reduce the scope of potential budget freezes required under Brazil's fiscal framework.

The swift rejection of the tax hike by Congress also highlights the government's ongoing difficulties in navigating legislative negotiations. Much of President Lula’s economic agenda, including proposals to curtail public expenditures, has faced considerable resistance in Congress amid declining approval ratings ahead of next year’s presidential election.

Originally announced in late May via executive decree, the tax increase aimed to generate approximately 61.5 billion reais (around USD 11.07 billion) by 2026. The measure proposed higher taxes on various financial operations, including corporate loans and foreign-currency card transactions.

The decree was met with immediate backlash. Within hours, the government was compelled to partially reverse course by removing certain overseas investments from the scope of the tax amid widespread criticism that the policy resembled capital controls.

Earlier this month, the administration attempted to soften the measure by introducing a revised version with reduced rates. However, the revised decree continued to target corporate borrowing, foreign exchange transactions, and pension fund operations.

Ultimately, these efforts proved unsuccessful. Wednesday's Congressional vote fully reinstated the prior tax regime. The administration may now consider appealing to the Supreme Court or exploring alternative fiscal strategies to bolster public finances.

While President Lula’s government has prioritized increased social spending, it has simultaneously sought to eliminate what it considers inequitable tax exemptions that disproportionately benefit high-income groups. However, lacking a solid coalition in Congress, the administration has faced persistent obstacles in gaining approval for new expenditures and has seen multiple proposals for cost-cutting measures diluted or rejected by lawmakers.