Any changes to tax-exempt bonds will include transition rules, Treasury says

National Treasury Secretary Daniel Leal said Wednesday that any changes to how tax-exempt securities—such as Real Estate Credit Bills (LCIs), Agribusiness Credit Bills (LCAs), and infrastructure debentures—are taxed would likely come with transition rules to avoid jolting the market. “Nothing’s been decided. That’s a discussion for later, but it will involve striking the right balance through a transition rule,” he told reporters after a congressional hearing. As Valor has previously reported, the National Treasury believes the rapid growth in tax-advantaged securities is distorting the market, particularly for inflation-linked federal bonds (NTN-Bs). That’s why it favors picking the debate back up after the elections over possible changes to how these instruments are taxed. Options on the table include applying income tax or the Tax on Financial Transactions (IOF) to these investments, as well as tweaking the rules governing how tax-exempt securities are issued and offered. Asked about it by reporters, Leal said there’s “a range of possibilities” under consideration. “The discussion is about figuring out what transition rule would work best, and how to avoid hurting a segment of the market that’s otherwise healthy and functioning well,” he said. “We need to work together on this. At the same time, we can’t let this part of the market keep growing in a way that eats into the Treasury’s ability to raise funding.” Leal reiterated that any measures would be worked out in consultation with the productive sector and Congress. “Any rule with a significant impact on the sector needs to be carefully thought through so it phases in gradually. It’s even possible that whatever rule we land on won’t have much of an immediate effect when it first kicks in. Right now, the goal is just to study the issue,” he said. The secretary emphasized that no changes to the tax or issuance rules for tax-exempt securities are currently being considered, and that this debate should wait until after the elections. In 2025, the government issued a provisional measure that would have imposed a 5% income tax on tax-exempt securities, but Congress didn’t approve it. Speaking at the same hearing, Leal also said the primary balance path laid out in the Budget Guidelines Bill (PLDO) is enough to stabilize public debt as a share of GDP by 2029, after which the ratio should start to decline. Brazil’s gross general government debt hit 81.1% of GDP in May. The latest Prisma Fiscal report, which compiles market forecasts for the Finance Ministry, has analysts expecting gross debt to close this year at 83% of GDP and climb to 86.5% by 2027. The government’s own projections show debt continuing to rise through 2029, peaking at 87.8% of GDP, before settling into a steady decline down to 83.4% by 2036. In the 2027 Budget Guidelines Bill, the government projects a central government primary surplus equivalent to 0.5% of GDP in 2027, 1% in 2028, 1.25% in 2029, and 1.5% in 2030. This year’s target is a 0.25% primary surplus, with a tolerance band of 0.25 percentage point applied throughout. “It’s worth stressing that these primary balance results would be enough to stabilize debt as a share of GDP and, starting in 2029, put it on a downward path toward 83.4% by 2036,” Leal told Congress’s Joint Budget Committee. “We still expect debt to keep rising through 2029, and then to level off and start declining based on these projected primary results,” he added. The rise in the debt ratio, he explained, is being driven mainly by nominal interest costs, while economic growth has helped pull the debt-to-GDP ratio down. Leal also said the Treasury has no objection to using fiscal indicators—including public debt levels—to track the country’s fiscal health. He cautioned, however, that a debt ceiling on its own wouldn’t solve Brazil’s fiscal problems. Daniel Leal Divulgação/Tesouro Nacional