Brazil to shield individual tax breaks in broader fiscal reform push: report

Brazil’s Finance Ministry is planning not to alter income tax incentives for individual taxpayers as part of its broader tax-expenditure reform, according to a Reuters report.

Officials involved in the reform process said that long-standing tax deductions for health and education expenses will be preserved.

Additionally, exemptions for individuals over the age of 65 and for those with serious illnesses will remain intact.

The decision signals a deliberate move by President Luiz Inácio Lula da Silva’s administration to avoid politically sensitive areas while still advancing a broader effort to streamline tax benefits and improve fiscal sustainability.

While the comprehensive plan targets corporate and sector-specific tax exemptions that have eroded public revenues over time, the government is opting not to provoke resistance by tampering with widely popular deductions used by millions of Brazilians.

The Finance Ministry is expected to focus on improving the efficiency and fairness of the overall tax system, aiming to reduce distortions without creating backlash from individual taxpayers.

Focus shifts to corporate and sectoral benefits

The government intends to reduce overall tax expenditures by at least 10% through a measure now being prepared.

The revision will omit popular schemes like the Manaus Free Trade Zone and the “Simples” tax regime for small firms.

These regions are deemed too politically and economically important to include in the first phase of the revamp.

This move builds on a previous legislative effort that failed to result in tangible change.

The previous administration’s 2021 constitutional amendment called for a reduction in tax advantages but provided no enforcement tools, leaving the proposal worthless.

The new strategy, spearheaded by President Luiz Inacio Lula da Silva’s administration, aims to establish specific guidelines for lowering tax breaks and increasing budgetary transparency.

New tax regime for financial investment

In a separate initiative, the government intends to issue an executive order to reorganise taxation on financial investments.

The proposal would repeal a contentious decree that increased the IOF tax on some financial transactions and establish a simpler tax regime for investment income.

The proposed plan would subject most financial investments, including stocks and bonds, to a 17.5% unified income tax rate.

Currently, exempt instruments would be taxed at a lower rate of 5%.

The adjustment aims to solve inefficiencies in the current system, which charges varied rates depending on asset class and holding term.

The current system, which ranges from 15% to 22.5%, has been criticised for incentivising tax-motivated investment decisions.

Offsetting losses and simplifying returns

One of the key features of Brazil’s upcoming tax reform is a provision that will allow investors to offset gains and losses across their portfolios when filing annual income tax returns.

This change is aimed at delivering a more accurate assessment of net income while reducing distortions in tax liability.

Under the new framework, if an investor has paid more tax than required due to earlier isolated gains, any excess would be refunded based on their consolidated net result at year-end.

The reform also simplifies tax rates and harmonizes rules across different categories of financial assets, with the dual objective of making investment choices more neutral and improving overall tax compliance.

The Finance Ministry expects the streamlined structure to generate higher and more consistent revenues, aiding the government’s broader fiscal consolidation agenda.

Together with the decision to preserve politically sensitive deductions for individuals, these measures form part of a calibrated, incremental approach to overhauling Brazil’s tax system—one designed to sidestep legislative resistance while enhancing long-term fiscal sustainability.

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