Brazil's top court temporarily suspends payroll tax exemption law

By Ricardo Brito

BRASILIA (Reuters) - A Brazilian Supreme Court justice on Thursday temporarily suspended a law extending payroll tax exemptions for 17 sectors of the economy, according to a decision seen by Reuters.

Justice Cristiano Zanin granted an injunction suspending part of the law after a government request.

President Luiz Inacio Lula da Silva last year vetoed the bill passed by Congress extending the payroll tax exemptions until 2027, but lawmakers later voted to block his veto.

That led the Lula administration to request that the top court declare the law unconstitutional, as the leftist leader's economic team sees the payroll tax revenue as essential to balancing public accounts.

Zanin's preliminary decision will now be analyzed by the other members of the Supreme Court, who will vote whether to uphold it or not.

Brazil's solicitor general argued in his injunction request earlier this week that the tax exemption extension had been approved by Congress "without adequate demonstration of the financial impact of the measure," as required by the constitution.

The suspension of parts of the law will be valid until the financial impact is made clear by Congress, or until the Supreme Court reaches a final rule on the matter, according to Zanin's decision.

Zanin, who was appointed to the Supreme Court last year by Lula, said his decision was aimed at avoiding a "billion-real fiscal disaster" that could happen if the law remained effective until a final rule by the court.

Brazil's Senate head Rodrigo Pacheco said he respected the justice's decision but would argue against it, adding that lawmakers "chose to preserve jobs" by extending the tax exemptions and that decision should be respected.

Pacheco in a statement criticized the government for taking the matter to courts, calling it a "mistake," and said he would convene Senate leaders, lawyers and consultants on Friday to discuss the matter.

The tax waiver extension, which also includes some small cities, reduces Brazil's tax income by an estimated 10 billion reais ($1.9 billion) per year, according to the government.

(Reporting by Ricardo Brito and Bernardo Caram in Brasilia; writing by Andre Romani; editing by Gabriel Araujo and Diane Craft)