Tax Exempt Bonds Spark Debate Over Increased Brazilian Government Debt Costs

The growing supply of tax exempt bonds in Brazil has reignited a debate among financial market participants regarding their tax exemptions and the competition they create for National Treasury issuances. Market agents argue that a portion of the high rates paid by the government on debt issuance stems from competition with Income Tax exempt titles, which occupy a significant portion of investment portfolios and compromise tax collection. Between 2020 and 2025, the issuance of exempt and incentivized titles, including CRIs, CRAs, LCIs, LCAs, and incentivized debentures, more than tripled to 896.5 billion reais. In contrast, National Treasury offerings increased by 37 percent to 1.7 trillion reais during the same period. The tax exemption, first granted in 2004, increases the net profitability of these titles and forces taxed products to offer higher gross interest rates. According to a study by the brokerage Warren, approximately 0.78 percentage points of these interest rates can be attributed to the competition from exempt instruments. This distortion reportedly cost the National Treasury 5.1 billion reais in 2024, 13.5 billion reais in 2025, and 5.3 billion reais in the first half of this year, totaling 23.9 billion reais. Additionally, the Federal Revenue Service estimates that exemptions cost 31.7 billion reais annually for LCI, LCA, CRI, and CRA, and another 1.3 billion reais for debentures. This year, the Treasury canceled three auctions of title sales, with June sales failing due to difficulties in price formation as buyers demanded higher remuneration. The National Treasury and the Ministry of Finance did not comment when contacted.