No agreement: IOF increase remains suspended and experts issue a warning

No agreement: IOF increase remains suspended and experts issue a warning

The injunction that suspended both the presidential decree that raised the IOF and the legislative decree that had annulled this increase remains valid

By Camila Pati
(Photo: Felipe Sampaio/STF)

The lack of an agreement at the conciliation hearing held on Tuesday, 15th, at the Federal Supreme Court (STF), brings relevant risks, in the opinion of experts consulted. Convened by minister Alexandre de Moraes to discuss the validity of the decrees that increased the rates of the Tax on Financial Operations (IOF), the attempt to reach an understanding failed and the end of the IOF soap opera will be left to a court decision, but there is still no date for the outcome.

The government is not willing to negotiate as it seeks resources to be able to close the accounts within the fiscal target. With the first decree to increase the IOF, in May, the projection was to obtain 20 billion more reais with the increase in revenue for the year. The government's retreat and the presentation of the second, milder decree, cut the expected value in half: 10 billion reais. Still, the government does not want to lose this amount.

At yesterday's hearing, representatives of the Federal Attorney General's Office, the Ministry of Finance, the National Congress, the Liberal Party (PL) and the Socialism and Freedom Party (PSOL) reaffirmed their positions already presented in the ongoing processes. The reporting minister directly questioned the parties about the possibility of reciprocal concessions. As recorded in the minutes of the hearing, “those present said that, despite the importance of dialogue and the initiative of this hearing, they preferred to wait for the court decision.”

Next steps

As a result, the injunction granted by Moraes at the beginning of the month remains valid, which suspended both the presidential decree that raised the IOF and the legislative decree that had annulled this increase. In practice, the effects of the tax increases remain suspended and the rates applied before the first decree increasing the IOF published on May 22nd are in force. At the end of the hearing, Moraes determined that the process should proceed to a decision, even responding to the Senate's request that the suspension be maintained until the final judgment.

Rafael Balanin, tax specialist at Gasparini, Barbosa e Freire Advogados, explains that the cases will be sent to the Rapporteur, Minister Alexandre de Moraes, so that he can analyze the maintenance of the suspension order of all Decrees or even submit the case to judgment by the Plenary of the Supreme Court. “The judgment on this issue is extremely relevant because it not only involves a legal analysis of the constitutionality of the provisions implemented to increase the IOF (as well as the reaction of the National Congress to these measures), but also seeks to resolve the impasse between two of the Powers of the Republic”, he says.

In practice, so far at least, the government is losing the battle. “In any case, the precautionary decision granted by the minister is still provisional and needs to be endorsed by the Plenary of the STF, and can be changed or even revoked, although this rarely happens”, says lawyer Donovan Lessa, partner at Maneira Advogados.

The expert highlights that the STF will have to decide two central points: first, whether the president can increase the IOF just to raise more, or whether this prerogative is only valid when there is a regulatory objective, such as controlling the financial market or implementing monetary policy. Second, even if the increase is accepted as legitimate, the government would have to respect the rule of precedence, that is, only charge the new amount in the following year, guaranteeing predictability for taxpayers.

“The National Congress justifies its legislative Decree that overturned the increase, precisely due to the “deviation of purpose” of the Decrees of the Presidency of the Republic, which raised the IOF exclusively for the purpose of meeting fiscal targets, which makes them illegal and unconstitutional”, he says. In his opinion, the STF's precautionary decision goes in the direction of the misuse of purpose thesis. “Because it states that, if it is proven that the increase in tax was due exclusively to revenue purposes, without meeting regulatory purposes, then there will be incompatibility with the Constitution”, he explains.

If the Supreme Court is convinced that the increase in the rate was promoted only to generate greater revenue and resolve the issue of balancing the Government's accounts, it should consider the charge unconstitutional.

This is a time of legal uncertainty

For tax specialist Mary Elbe Queiroz, partner at Queiroz Advogados and president of Cenapret, explains that the issue will be decided by the STF and that prolonged uncertainty affects the economy "As there was no agreement in the conciliation hearing, the next natural step is the judgment by the Federal Supreme Court. However, the prolonged uncertainty generates a scenario of legal uncertainty that directly affects investors, companies and funds that work with private credit. Therefore, the STF is expected to guide the judgment as much as possible. rather, so that there is normative stability and predictability in tax relations.”

In the same vein, Theo Braga, CEO of SME The New Economy, assesses that legal uncertainty remains at the heart of business decisions. "Although the legislative decree that suspends the additional IOF charge is still in force, the impasse over the validity of the presidential decree raises doubts that hold back investments and directly affect risk appetite. The judgment by the STF needs to take place soon so that entrepreneurs and investors can make decisions based on clear and stable rules", he says.

Elias Menegale, tax specialist at Paschoini Advogados, says that the failure of negotiations at the conciliation hearing exposes the rift between the government and Congress. “Once again, all parties involved ended up failing to resolve, articulate and give in. And ended up leaving it to the Judiciary to make the decision”, he says.