Brazil Plans 10% Tax Break Cut to Avert Controversial IOF Hike

Brazil's government is expected to support a new bill proposing a 10% reduction in federal tax breaks over two years, sources told Reuters, in a bid to avoid implementing a highly unpopular increase in the Tax on Financial Transactions (IOF).

The legislation, introduced by lower house lawmaker Mauro Benevides, aims to reduce the value of fiscal, credit, and tax incentives by 5% in 2025 and an additional 5% in 2026. The move could generate 40 billion reais ($7.16 billion) in revenue annually for the next two years, helping stabilize public accounts without resorting to the contentious IOF hike announced last month.

The government faced heavy political backlash after its earlier decree raised IOF rates on credit, foreign exchange, and private pension operations. Lawmakers quickly mobilized to oppose the measure, prompting officials to seek alternative revenue-generating solutions.

Exemptions from the proposed tax break cuts include the Manaus Free Trade Zone and non-profit organizations. Additionally, the bill prohibits the creation or renewal of federal tax, credit, and fiscal benefits, further limiting potential revenue leakage.

Finance Minister Fernando Haddad confirmed that the government will introduce a broader fiscal package next week focused on improving Brazil's budgetary outlook. The success of these measures is seen as critical for revisiting the controversial IOF decision and ensuring investor confidence in the country’s fiscal discipline.

The proposal reflects Brazil’s shift toward more sustainable fiscal policy amid growing concerns about public debt and revenue shortfalls. If approved, the legislation would mark a key step in balancing government accounts without undermining economic growth or overburdening financial transactions.