Brazilian Companies Pushing Lula for Better Deals on Back Taxes

(Bloomberg) -- President Luiz Inacio Lula da Silva’s plan to balance the budget by reaching settlements in corporate tax disputes is facing hurdles as some large Brazilian companies hold out for better deals.

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Ten major players from different sectors, including banking and infrastructure, have been discussing potential resolutions to unsettled court disputes with the Finance Ministry, according to Executive Secretary Dario Durigan.

Leia também a versão em português.

Companies peg the total amount under negotiation at 700 billion reais ($125 billion), which could send some 130 billion reais to public coffers after settlements are reached. The government, however, needs to offer deals that take into account different corporate circumstances, according to people familiar with the matter.

Lula’s economic team, led by Finance Minister Fernando Haddad, needs the agreements to help balance the books amid market concern about Brazil’s fiscal outlook as the government pushes for more social spending. According to the 2025 budget bill, Latin America’s largest economy is counting on 166.4 billion reais in additional revenue to achieve its goal of bringing the primary deficit, which excludes interest payments, to zero. At least 30 billion reais of that amount would come from tax settlements.

Banks are optimistic about the prospects for those deals, said the people, who asked for anonymity because the discussions are private. They have cash on hand after record profits and consider such transactions as positive for shareholders given they would reduce future uncertainties on their balance sheets. The success of the negotiations will depend on the discount the government is willing to offer, the people said.

Other segments, however, are more concerned about spending cash now to settle pending disputes that wouldn’t become expenditures until later. Two of Brazil’s biggest companies say they still need a more “business-friendly” agreement, according to one person familiar with the matter.

The companies say the government wants payments to be made in one lump sum, for example. But it’s hard to convince shareholders to sign off on large, one-time outlays to settle long-term tax disputes when interest rates are rising, the person said, given it might be more advantageous to wait for such situations to be resolved in court.

Companies ​​are seeking deeper discounts on their debts than the government is willing to provide, Durigan told Bloomberg. Still, the secretary described the proposals on the table as quite advantageous. “It’s a good way out,” he said. “We can’t keep betting on the conflict.”

Both Durigan and the people familiar declined to name the 10 companies involved in the negotiations.

Large companies want access to tax credits and bigger discounts on interest rates before settling with the government, according to Luiz Gustavo Bichara, a tax lawyer with experience in such negotiations. He said that while there’s genuine interest in reaching agreements, the firms need bigger incentives.

Durigan argued the plan would also be a boon for Brazil’s private sector. It would end disputes that can drag on in courts for years, generating high legal costs without any guarantee of victory for companies, he said. Successful settlements would remove the legal overhang, he added, and reduce both fines and interest owed.

An agreement between the Finance Ministry and Petroleo Brasileiro SA earlier this year paved the way for the current plan. In June, the state-controlled oil driller agreed to pay almost 20 billion reais in back taxes to the federal government.

Other companies, however, argue it’s not fair to expect them to do the same thing as Petrobras. The energy giant has a more robust cash position that the others, one of the people said, adding that the government’s stake in the firm also contributed to the board’s approval of the tax settlement.

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