Decision on IOF has immediate and retroactive effect; understand why the government wants the money

Celebrated by the Planalto Palace, the decision by Minister Alexandre de Moraes, of the Federal Supreme Court (STF), to validate the increase in the Tax on Financial Transactions (IOF), represents a relief for the government's accounts and, in particular, for the Minister of Finance, Fernando Haddad, who will be able to count on around R$40 billion for the Budget over the next two years.

Moraes decided on Wednesday (16) to maintain most of the government decree , revoking only the collection of operations involving the risk drawn. The government estimated to collect an additional R$12 billion in 2025 and R$32 billion in 2026 with the new IOF rules. However, with the exit of the risk drawn, this amount will be reduced by R$450 million in 2025 and R$3.5 billion in 2026. With this, the Treasury managed to ensure compliance with the fiscal framework, at least this year.

The tax on Free Benefit Generating Life Plans (VGBL) was maintained, contrary to Congress's request. Contributions above R$600,000 per year (or R$50,000 per month) to a VGBL—a supplementary pension plan—will now be subject to a 5% IOF tax.

The decision requires approval by the full Court, but it has immediate and retroactive effect. This means that all credit transactions for legal entities—individual micro-entrepreneurs (MEIs), companies under the Simples (Simples) system, and large companies outside these regimes—have had their tax rates doubled, as determined by the June presidential decree, and these rules are now in effect again.

The Legislative Decree Project (PDL) that overturned the increase was also suspended, and any payments that have not been made since then must be regularized. The same applies to the IOF (Foreign Exchange Rate) tax. In other words, dollar purchases now return to paying 3.5% per transaction.

The agreement between parliamentary leaders and the Executive, hammered out in meetings last week, already provided for the exclusion of the "drafted risk," a transaction in which a company advances a receivable to the bank based on the customer's commitment to future payment. This modality is not considered a credit transaction, as there is no shared financial responsibility.

For public accounts analyst Murilo Viana, the government opted for the IOF (Tax on Financial Transactions) because of its ease of collection. "Unlike other taxes, the IOF is immediately applicable and goes directly into the federal government's coffers, without needing to go through Congress or comply with a validity period," he says. "Changes to Income Tax, for example, can only take effect the year following approval."

With the IOF tax secured, the economic team will be able to postpone new budget freezes and contingencies when the next Primary Revenue and Expenditure Assessment Report (RARDP) is announced next week — which assesses whether government revenue and spending are aligned with the fiscal target for the year.

IOF brings tax relief to the government, but causes legal uncertainty

Although it represented a patch for the tax issue, the IOF imbroglio has become a political problem, shaped by the tug-of-war between Congress and the government. But above all, it represents a legal risk that adds to others that contribute to the country's legal uncertainty, with negative impacts on investment and, consequently, economic growth.

The government appealed to the Supreme Federal Court (STF) alleging an invasion of jurisdiction by the Legislature in overturning the decree, since the Constitution grants the Executive the power to change the IOF tax rates, as long as legal limits are respected and linked to regulatory purposes — such as controlling the economy or monetary policy.

According to this interpretation, Congress could not use the PDL as an instrument to interfere in this legitimate competence of the Executive, according to the principle of separation of powers.

On the other side, Congress argued that the decree exceeded legal limits by having a predominantly tax-raising purpose, which would require approval through ordinary legislation. The PL was the first party to appeal to the Supreme Federal Court, alleging a misuse of its purpose.

The understanding is that Minister Haddad himself explained the motivation. From this perspective, the Legislature would have the right and duty to suspend the act through the PDL.

In the decision, Moraes admitted that the change in the IOF rates had not exceeded the maximum parameter set by law and that a revenue-raising purpose had not been proven.

For constitutionalist Vera Chemim, assuming that the analysis of the content of the Executive decree effectively corresponds to constitutional and legal provisions, “there is nothing to question from a legal point of view.”

"Even so, the statement that there was no proof that the IOF will be manipulated for revenue purposes leaves room for doubt, since Haddad has already publicly stated that the change in the IOF rates would be intended to cover deficits in public accounts," he highlights.

For Chemim, Congress acted within its prerogatives in suspending the presidential decree that increased the Financial Transactions Tax (IOF) rates. "You have a democratic regime there that decided to enact that legislative decree with a significant number of votes: 383 in the Chamber of Deputies, in addition to symbolic approval in the Senate."

She believes the decision "can be interpreted as unconditional support for the Chief Executive, in relation to the Legislative Branch, which is constitutionally competent to oversee the legislative acts of that branch." The expert expresses concern about the politicization of the Court.

“The exchange of consensus (among all political representatives) for the constant judicialization of political issues constitutes one of the main factors that led to the strengthening of the STF and its judicial activism, making that Court increasingly politicized, resulting in the current controversy in which the court's decision overrides a decision of a political power.”

Tax expert Gabriel Vieira emphasizes, however, that despite its regulatory nature, the IOF may have a secondary revenue-raising function. "Case law recognizes the possibility of a revenue-raising function as long as it is not the measure's primary and permanent objective," he says. "The case involves limits on the Executive branch of taxation. The Supreme Federal Court generally respects the Executive branch's discretion in economic matters."