Brazil government will not insist on tighter tax credit rules, sources say

The Brazilian government will not insist on a highly contested measure tightening rules for tax credits after the Senate sent it back, but there is still no decision on a replacement measure, two sources close to the presidential palace told Reuters on Tuesday

The Finance Ministry had included the measure last week in an executive order outlining tighter rules for the use of tax credits by companies. The measure triggered a strong backlash from the most affected industries, including the powerful agribusiness sector.

An executive order takes immediate effect but needs to be voted on by lawmakers within four months to remain valid. By sending it back to the government, in effect the order is canceled. The measure had aimed to raise as much as 29.2 billion reais ($5.52 billion) to offset a revenue loss of 26.3 billion reais from tax benefits passed by Congress for the payrolls of some economic sectors and small cities.
The government needs to find alternatives to compensate for the lost revenue, because the Supreme Court has ruled that Congress must approve compensation for maintaining payroll benefits. No alternative has been decided so far, the sources said. It will be up to President Luiz Inacio Lula da Silva’s economic team to rework a proposal that is more palatable to Congress and the industries.
As of Monday, Finance Minister Fernando Haddad was still betting that he would be able to negotiate the tighter tax credit rules with Congress, one of the sources said.

But after a conversation with Senate President Rodrigo Pacheco on Monday, Lula was convinced the measure would have no chance of succeeding, the source said.

Later on Tuesday, Haddad told reporters that his ministry has no plan B for the measure and that the Senate has assumed part of the responsibility for finding a solution.

Reporting by Lisandra Paraguassu, Maria Carolina Marcello and Victor Borges in Brasilia and Luana Maria Benedito in Sao Paulo; Writing by Peter Frontini; editing by Jonathan Oatis, Kylie Madry and Leslie Adler

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