On October 2, the federal government issued a Provisional Measure (MP) that directly impacts the banking sector by modifying the regime for deducting losses related to defaults from the calculation base of Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL). This MP amends Law 14.467/2022, which had foreseen a shorter transition for the deduction of these losses, thus creating a significant fiscal effect on the banking sector’s balance sheet.
Key Changes Introduced by the MP:
- Extension of the Transition Period: The MP extends the transition period from three to seven years (1/84 per month) for banks to deduct default-related losses from their tax obligations (IRPJ and CSLL). The deduction, originally set to begin in April 2024, will now only be allowed from 2026 onwards.
- Alternative Deduction Option: The provisional measure also offers an alternative for banks that wish to extend the deduction period to ten years (1/120 per month) by choosing an “irrevocable” option. In this scenario, financial institutions will be able to spread the impact of the losses over time, allowing for better fiscal and operational planning.
- Fiscal Impact: With the postponement and extension of the deduction period, the federal government expects to collect over R$ 15 billion additional revenue in 2025. This amount is justified by the need for the Executive to increase revenue both to close the 2025 Annual Budget Bill (PLOA) and to finance proposals such as raising the Personal Income Tax (IRPF) exemption threshold, which the government aims to set at R$ 5,000.
Prudential Justifications and Impact on the Banking System:
In addition to the revenue aspect, the change seeks to prevent banks from writing off this “tax asset” related to default losses too quickly. An accelerated deduction could harm the financial institutions’ balance sheets, creating challenges in adhering to Basel rules and other regulatory standards that measure financial soundness and capital levels.
Although the government has not released a formal statement of reasons for the MP, it is assumed that the decision to postpone and extend the deduction period partially serves the interests of the banks themselves. By spreading the deduction over time, banks can better manage their capital structure, avoiding significant fluctuations in their balance sheets, though this will result in a greater tax obligation starting in 2025.