As the Brazilian government navigates a difficult economic environment and struggles to keep its public finances on a sustainable path, the idea of rationalizing and reducing tax expenditures — the multiple tax breaks, incentives and deductions that governments concede to individuals and businesses as part of their fiscal policy — has gained traction and stimulated an interesting debate. In the Tax Expenditures Country Report for Brazil that we published last year, we showed that if information on subnational tax expenditures is included in the calculations, the Brazilian government “spends” around 7 percent of GDP in revenues it does not collect, a figure well above both the global average and the average for the region, which stand at around 4 percent of GDP.
Over the past few years, a few different reform proposals had been slowly making their way through Congressional proceedings, but the end of 2025 finally brought an important development to Brazil’s tax expenditure agenda. Complementary Law No. 224/2025, signed into law by President Lula on December 26, not only instituted a 10 percent across-the-board cut in various federal tax expenditures, but also established a series of new rules and governance mechanisms designed to enhance the effectiveness of tax expenditures, increasing transparency and institutionalizing the cycle of monitoring, evaluation, and review. The new law thus represents a significant paradigm shift in the treatment of tax expenditures in Brazil.
The main changes introduced by the Law regarding the governance of tax expenditures and the design of individual provisions are as follows:
- A requirement to present estimates of budgetary and financial impact and compensatory revenue measures not just when tax expenditures are introduced, but also when they are renewed and extended, expanding the scope of the Fiscal Responsibility Law (LRF);
- The creation of a series of requirements for the introduction of tax expenditures, such as: (i) estimating the number of beneficiaries; (ii) limiting their validity for a maximum of five years (with an exception for long-term investments, provided they are accompanied by periodic evaluations); (iii) presenting performance targets for economic, social, and environmental dimensions, as well as regional impact assessments; and (iv) introducing enhanced mechanisms for transparency, monitoring, and evaluation of results;
- The prohibition to renew tax expenditures that have not met established targets or for which an evaluation has not been conducted;
- The establishment of a multidisciplinary and specialized committee to evaluate tax expenditure policy;
- The standardization of data disclosure on tax expenditures on government transparency portals;
- The regulation of the 2 percent of GDP cap for federal tax expenditures, which had been introduced in a constitutional amendment approved in 2021, specifying which items are included in this rule, thereby enabling the monitoring of its compliance.
Although the Law represents a considerable advance, some doubts about its scope and effect still persist, raising issues that require further discussion. The first issue concerns the applicability of the law, that is, whether it applies only to the federal government or to subnational entities as well. Article 1 clearly establishes that the law “provides for the reduction and criteria for granting tax, financial, or credit incentives and benefits granted exclusively within the scope of the Federal Government.” However, given that the governance aspects contained in the LRF apply to all entities, these changes must in principle be extended to subnational governments.
The second issue concerns the scope of the new Law. Although it entered into force on the date of its publication (December 26, 2025), with general effectiveness as of January 1, 2026, the Law is silent regarding the treatment of existing tax expenditures with no fixed sunset clause, which account for more than 70 percent of total tax expenditures, according to the 2026 Budget Law.
The third point concerns another aspect related to the termination of tax expenditures with no sunset clause. It is necessary to define how their termination will occur based on a negative performance evaluation, since there are no pre-established targets. A contrary interpretation would undermine any attempt to achieve the 2 percent of GDP limit. In this regard, for new tax expenditures, the law also provides very little clarity on the governance of the evaluation process, ranging from the agencies responsible for the process to guidelines regarding evaluation studies and their consequences.
The new law is already facing considerable challenges from specific interest groups. Private sector actors have taken the government to Court, arguing that some of its provisions are unconstitutional. Other efforts are trying to lock in certain tax expenditures — such as those related to special tax treatment for churches, small enterprises and cultural projects — through constitutional amendments, which would take them out of the reach of Law 224/2025.
Despite these limitations and challenges, the introduction of the new law opens up important opportunities to improve the governance of tax expenditures in Brazil in at least three areas:
1. Enhancing transparency. Although transparency levels for tax expenditures are relatively good in Brazil, there are several areas where practices could be improved, also to facilitate the implementation of Law 224/2025. This includes:
a) Providing a more comprehensive definition of tax expenditures and a standardized estimation methodology applicable to all government entities.
b) Defining a minimum standardized set of information and data to be disclosed for each tax expenditure, enabling an informed public debate on the objectives and effectiveness of each tax expenditure.
c) Preparing a periodic assessment report on compliance with the tax expenditure ceiling.
2. Improving management. Effective management of tax expenditures requires greater coordination among the various agencies involved, and special attention to how tax expenditure policy integrates with the overall public policy cycle and the annual budget. This includes:
a) Establishing a coherent process for managing tax expenditures throughout the public policy cycle, designating the government agencies responsible for managing and monitoring each policy, and possibly a collegiate body responsible for the overall coordination of tax expenditures, to ensure information exchange, aggregate analysis of results, integration into the budget process, and coordination of the evaluation and review process.
b) Requiring a formal assessment from the Ministry of Finance (or an independent commission) regarding legislative proposals to create or extend tax expenditures.
c) Promoting greater integration of tax expenditures with the budget cycle, establishing as a requirement the comparison of each tax expenditure with the equivalent budget expenditure.
d) Improving cooperation among different levels of government on tax expenditure management, analysis and monitoring.
3. Institutionalizing evaluation. The area of evaluation is perhaps the most innovative and, at the same time, most challenging aspect of the new law. This reflects both the inherent difficulties of assessing the impacts of tax expenditure provisions and the large number of existing tax expenditures being implemented without a transition rule. Progress in this area may include the following measures:
a) Establishing objective criteria and common methodologies for evaluating different types of tax expenditures, and a schedule of evaluations to guide relevant decisions to be taken in the coming years and in the medium and long term.
b) Including in the list of tax expenditures to be evaluated all those without a sunset clause and establishing clear priorities for their gradual review and evaluation, in order to address one of the most significant gaps in the new law.
c) Establishing agreements and collaborations between public agencies (including the Courts of Auditors) and non-governmental entities (research institutes, universities, etc.) to conduct evaluations of tax expenditures.
In two other recent papers (available only in Portuguese, here and here), we present and discuss several examples and good practice cases, based on both national and international examples. We hope that these can serve as inspiration for the governance of tax expenditures in Brazil, building on the reforms introduced by Law 224/2025, to become increasingly transparent and effective. To contribute to this process, we are also setting up a research hub called GTLab (Laboratório de Gastos Tributários) aimed at promoting research and analysis on tax expenditure governance and policy in Brazil.