IOF “soap opera” reveals political and fiscal impasse; government and Congress insist on their positions

The eyes and ears of the Republic will be focused this Tuesday (15) on the conciliation hearing between the Executive and Congress on the Tax on Financial Transactions (IOF), an issue that, in addition to a political impasse, constitutes a key piece for public accounts. The government arrives at the negotiating table, determined by Minister Alexandre de Moraes, of the Federal Supreme Court (STF), with a closed strategy: not to give up the validity of the decree that raised the tax .

The IOF increase, announced in May by presidential decree, is seen by government officials and the Treasury as essential to boosting the federal coffers by R$12 billion and enabling the government to meet its fiscal framework target this year. When announcing the measure, the government also froze R$31.3 billion in discretionary spending, counting on the additional revenue to help offset losses and ensure fiscal balance.

Congress reacted swiftly, overturning the presidential decree in a historic defeat for the government through a Legislative Decree Project (PDL), arguing that the Executive could not increase taxes without Parliament's approval.

Faced with the conflict, the government filed a lawsuit with the Supreme Federal Court (STF), which suspended the effects of both the Executive decree and the Legislative bill until a final decision was reached. This left the expected resources from the IOF increase frozen, putting further pressure on the Treasury.

Haddad has less than two weeks to find a solution before the release of the next bimonthly revenue and expenditure report, a document that assesses the state of public finances. Without an agreement with Congress, new budget freezes or contingencies will be necessary.

"There is no alternative proposal," says minister

On Monday (14), the Chief of Staff, Rui Costa , stated that the government of Luiz Inácio Lula da Silva (PT) should not bring an alternative proposal to the meeting. "The government already has the proposal and that is what it did in the decree. The government's official position is that the decree is regular and the government asked the STF to comment. We do not have an alternative proposal, our position is the one that is there in defense of the decree. The government will not negotiate on this issue. The government will defend maintaining the defense of its decree in the Judiciary," Rui Costa told journalists, after an event at the Planalto Palace.

On the other hand, the presidents of the Chamber of Deputies and the Senate - Congressman Hugo Motta (Republicans-PB) and Senator Davi Alcolumbre (União Brasil-AP) - have also reaffirmed to Finance Minister Fernando Haddad that Congress will not accept tax increases.

On Friday (11), the Legislature sent a request to the Supreme Federal Court (STF) requesting that the Executive decree that increased the tax be upheld. The document requests the declaration of constitutionality of the measure taken by Congress that invalidated the government decrees on June 25, under the argument that its prerogative is to legislate and monitor the Executive Branch.

Representatives have advocated for an intermediate alternative to the initial decree: maintaining the tax increase on transactions previously subject to the IOF (Federal Operations Operations Operations) tax, such as foreign exchange and purchases of foreign currency, but removing the tax on transactions previously not subject to the tax, such as "risk sacked." Commonly used in retail, "risk sacked" is a transaction in which the supplier receives payment in cash from a financial institution and the debt is repaid by the buyer over a longer period of time.

Last week, Haddad, Motta, Alcolumbre and the Minister of Institutional Relations, Gleisi Hoffmann, met, but no decision was made. This Monday (14), members of the two Powers met again, according to an investigation by Folha de S. Paulo , and may have advanced the proposals.

The general assessment of government supporters, however, is that the government is stronger than ever to insist on maintaining the presidential decree. The main argument is that issuing decrees is a tool of the presidency, not specifically of Lula.

The Planalto Palace believes it gained political leverage from its friction with US President Donald Trump. The clash over the 50% tariffs on Brazilian products, considered excessive and politically biased by agribusiness sectors, reportedly generated a "sense of unity" in the country and benefited Lula. It also believes it successfully handled the IOF's official social media communications , reinforcing the "tax justice " rhetoric.

Despite the recovery, the Executive still needs to maintain dialogue with Congress to be able to approve new compensation measures for the proposed Income Tax exemption for salaries up to R$5,000 per month , Lula's main electoral banner for 2026.

IOF "soap opera" has legal controversies

The conciliation hearing will be attended only by lawyers from each side, with no politicians present. The outcome of this "soap opera" in the Supreme Court is being closely watched not only because of the public finances but also because of the institutional limits on fiscal policy between the branches of government. Both the decree issued by the Executive Branch, which raised the IOF (Financial Operations Tax) to offset losses from the payroll tax exemption, and the Legislative Decree Project (PDL) approved by Congress, which suspended the effects of the measure, are controversial, according to experts.

The government appealed to the Supreme Federal Court, alleging an invasion of jurisdiction by the Legislature, which opened a new debate among constitutional scholars. On the one hand, some argue that the presidential decree is supported by the Constitution, which grants the Executive the power to change IOF tax rates by decree, provided legal limits are respected and linked to regulatory purposes—such as economic control or monetary policy. According to this interpretation, Congress could not use the PDL as an instrument to interfere with this legitimate Executive power, based on the principle of separation of powers.

On the other hand, legal experts argue that the decree exceeded legal limits by having a predominantly tax-raising purpose, which would require approval through ordinary law. The opposition also reinforces this understanding, which Minister Haddad himself made explicit. From this perspective, the legislature would have the right and duty to suspend the act through the PDL.

The merits of the case, however, will only be decided if the Executive and Legislative branches fail to reach an agreement at the conciliation hearing. For legal experts, however, the very holding of the hearing itself is also a subject of legal controversy.

Vera Chemim, a constitutional lawyer, says that resorting to a hearing is inappropriate because there is no dispute between the traditional parties in a legal proceeding. "A hearing could be appropriate in a specific federal dispute, but in this case, we're talking about an abstract review, where we judge whether a decree is constitutional or not," she told Poder360 .

Constitutionalist André Marsiglia is even more emphatic . "This attempt at conciliation is completely alien to the Supreme Court's role," he says. "The Supreme Court judges theses, not conflicts between subjective parties. There's nothing to reconcile. It's a legal aberration."