BRAZIL’S TOP COURT BACKS MOST OF LULA’S TAX HIKE DECREE AFTER STALEMATE
In a significant development for Brazil’s economic policy, the country’s Supreme Federal Court (STF) has upheld most parts of President Luiz Inácio Lula da Silva’s controversial decree to raise the IOF tax (Tax on Financial Operations), despite a recent clash with Congress. The court’s ruling, issued on July 16, 2025, comes after weeks of political tension and institutional gridlock over how to handle Brazil’s fiscal challenges.
The original decree, introduced by Lula’s government in May 2025, aimed to increase tax revenue by adjusting IOF rates on various financial activities, including corporate credit, foreign exchange, and private pension transactions. The plan was projected to raise over 12 billion reais (around $2.2 billion USD) in 2025, with the intention of preventing mandatory budget cuts and maintaining fiscal stability under Brazil’s new fiscal framework.
However, the measure faced fierce resistance from Congress. On June 25, 2025, Brazil’s lower house overwhelmingly rejected the tax hike, voting 383 to 98 to overturn the decree. The Senate quickly confirmed the decision. This marked the first time in over three decades that Congress had successfully revoked a presidential tax decree, underscoring the fragile relationship between Lula’s executive branch and the legislative majority.
In response, the government appealed to the Supreme Court, arguing that the legislative reversal undermined legal stability and violated constitutional boundaries. Justice Alexandre de Moraes initially suspended both the tax increase and Congress’s rejection, citing the need for institutional dialogue. A mediation hearing involving all three branches of government was held, but no consensus was reached.
On July 16, the STF delivered its ruling. The court upheld almost all of Lula’s IOF decree, declaring it constitutional and necessary to support public financing. However, it struck down one component of the measure — a provision that sought to tax “forfait” operations, a type of advance payment used in international trade. The justices determined that taxing forfaits exceeded the legal scope of the IOF and required explicit legislative authorization.
The government welcomed the partial victory. Finance Minister Fernando Haddad praised the ruling as a reaffirmation of the executive’s fiscal tools and said it would help ensure the country meets its budgetary targets. However, he acknowledged the loss of revenue from the forfeited forfait tax, which was expected to generate about R$450 million in 2025 and over R$3.5 billion in 2026.
Political analysts view the outcome as a crucial moment in Lula’s third presidency. While the court’s backing provides relief to the government’s fiscal strategy, the episode highlights the growing resistance Lula faces in Congress. With the 2026 elections looming, the president will likely need to negotiate more carefully with lawmakers to pass future economic reforms.
In summary, Brazil’s top court has granted Lula a partial but important win, preserving his authority to manage tax policy while emphasizing the limits of executive power. The ruling may shape how future financial legislation is drafted and signal a more active judicial role in resolving political deadlocks in Latin America’s largest democracy