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Lula’s complete veto on payroll tax exemption sparks debate

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Vincent

In a significant move affecting Brazil’s economic landscape, President Lula has fully vetoed the bill that sought to extend payroll tax exemptions for 17 key economic sectors. The decision was published in an extra edition of Brazil’s Official Federal Gazette on Thursday, the last day of the deadline.The vetoed bill proposed a model that would enable companies to contribute between 1% and 4.5% of gross revenue instead of the standard 20% on salaries. The current regulation, set to expire this December, was proposed to be extended until December 31, 2027, by the National Congress.This change was targeted to apply across a range of 17 industries. The sectors included textiles, footwear, machinery and equipment, animal protein, construction, communications, and road transport. Together, these segments of the economy employ about 9 million workers.The government justified the veto by declaring the bill unconstitutional, citing conflicts with a section of the 2019 Social Security reform. However, experts challenge this interpretation.The payroll tax exemption originated from a provision in Article 195 of Brazil’s Federal Constitution, which grants flexibility to modify the rate or calculation base of payroll contributions. This adjustment is contingent on factors such as the nature of the economic activity, the intensity of labor utilization, or the scale of the company involved.The Social Security reform dictates that while payroll contributions may have varied rates, the exchange of the calculation basis, as seen in the exemption, is no longer permissible. However, this prohibition does not extend to substitutions that were instituted prior to the implementation of the reform.Chede Suaiden, a partner at Bichara Advogados, emphasizes that it is not unconstitutional as it is a "mere extension" and not a new method of replacing the tax base. However, he notes that he has yet to review the detailed reasoning behind the presidential veto.The veto now moves to Congress for review, which could overturn the president’s...

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