Pacheco dehydrates Haddad’s MP and relieves city halls of taxes – 04/01/2024 – Market

The president of the Senate, Rodrigo Pacheco (PSD-MG), decided this Monday (1st) to let the section of an MP (provisional measure) by Minister Fernando Haddad (Finance) that provided for the reimbursement of city hall payrolls expire.

The text predicted that, as of this Monday, the rate charged to municipalities with up to 156.2 thousand inhabitants would increase from 8% to 20%, which will no longer occur due to Pacheco’s decision.

The overturn of the measure means a setback for the government of Luiz Inácio Lula da Silva (PT), which could suffer a loss of close to R$10 billion in its revenues if there is no alternative to the impasse.

Pacheco’s decision — who is also the president of the National Congress — comes after the government displeased the Legislature and maintained the re-encumbrance of municipalities in force, despite having agreed to revoke the section that dealt with the charge on the payroll of companies in 17 sectors.

At the end of February, the president of the Senate threatened to give his own direction to the benefit of city halls, and the Palácio do Planalto was willing to create a “flexibility” proposal, formalized in a bill that is being processed in the Chamber of Deputies.

However, with the section of the MP in force, municipalities would be subject to the resumption of the highest rate, which could have an impact on the city halls’ cash flow.

In a note, the president of the Senate stated that “the decision means that the discussion on the issue of payroll tax relief and its possible new model must be fully addressed by bill, not by MP.”

He also criticized the government’s action, considering that Congress had already decided to exempt municipalities.

“An MP cannot revoke a law enacted the previous day, as if it were another round of the legislative process. This guarantees predictability and legal certainty for everyone involved,” he stated.

Just like companies, municipalities that contribute to the INSS (National Social Security Institute) paid an employer tax rate of 20% on their employees’ salaries.

Parliamentarians, however, wanted to reduce the burden of this charge on city halls’ cash on the eve of the municipal election year.

The cut in the tax rate for these city halls, to 8%, was approved by Congress, vetoed by Lula and reestablished by parliamentarians in 2023.

When the lights went out last year, the government issued an MP to, among other measures, revoke the exemption from municipalities and reinstate the 20% charge from April 1st.

With the arrival of the date, Pacheco extended the validity of the MP by 60 days, but determined that the part that deals with the reimbursement of city halls be overturned. The president of the Senate stated, however, that he is open to establishing a “swift” discussion on the matter.

The Executive expects that any flexibility in the reburdening of municipalities will be accompanied by a compensation measure. The original cut in the rate was approved without this loss of revenue being in the Budget approved by parliamentarians.

This is not the first change in the legal content of the text.

Just over a month ago, Lula signed a second MP that revoked the payroll tax relief for companies in 17 sectors. The Executive also sent a bill addressing the issue, as demanded by party leaders.

The government did not do the same with the reburdening of municipalities because it needed to reconcile political demands with the impacts on the Budget and, above all, on the fiscal target, which is zero deficit for 2024.

The repeal of the re-encumbrance of the 17 sectors has already imposed the need to recognize a loss of revenue. Giving the same treatment to city halls would lead to an additional cost of at least R$10 billion in the first report, according to technicians’ calculations, due to the resumption of the social security rate cut. Therefore, this section of the MP was kept in force by the government.

Meanwhile, the government continued negotiations with parliamentarians and city hall representatives. The Executive formalized its proposal last week with a new payroll tax relief model, with the aim of covering smaller municipalities.

The criteria for accessing the tax benefit is that the municipality has up to 50 thousand inhabitants and RCL (net current income) per capita of up to R$3,895. In 2024, they would have a rate set at 14%.

The project foresees a gradual increase in the contribution rate that city halls pay to the INSS applied to civil servants’ payrolls. The level starts at 14%, reaching 18% in 2026. The contribution rate, before Congress approved the exemption, was 20%.

The counterparts for accessing the benefit are for the municipality to be in compliance or to adhere to a debt consolidation plan with future installments, a type of Refis.

With these new access rules, payroll tax relief benefits the poorest municipalities, which would have the lowest social security contribution rate.

The proposal has a more restricted scope than the benefit previously approved more broadly by Congress.