UPDATE 1-Brazil confident Senate will back taxing the wealthy to offset middle-class exemptions

(Recasts with additional comment, context) By Marcela Ayres and Isabel Teles BRASILIA/SAO PAULO, Oct 2 (Reuters) – Brazil's government said it was confident the Senate would pass a bill expanding income tax exemptions for the middle class, after the measure cleared the Lower House late Wednesday. The proposal, a key initiative of President Luiz Inacio Lula da Silva, could boost his prospects ahead of next year's general election. Finance Minister Fernando Haddad told reporters he did not expect any hurdles in the Senate. "The bill is based on fiscal balance and seeks tax justice," Haddad told reporters on Thursday, hailing its unanimous passage by lawmakers. "I am certain the proposal will also enjoy broad support in the Senate," Lula wrote on X late Wednesday, adding that the measure would benefit 15 million Brazilian workers. Under the approved legislation, the monthly income tax exemption threshold would rise next year to 5,000 reais ($940), above three minimum wages, from the current 3,036 reais. To offset the revenue loss, the bill introduces a progressive minimum tax on monthly incomes above 50,000 reais and imposes a 10% withholding tax on dividends sent abroad, regardless of whether the recipient is an individual or a company. Beyond exempting monthly incomes up to 5,000 reais, the bill also eases the tax burden for earners up to 7,350 reais, covering much of Brazil's middle class, a key voter bloc that has turned conservative in recent years and that Lula's Workers Party hopes to lure back. The bill further mandates that, beginning in January, any dividend payment exceeding 50,000 reais in a single month from the same company to the same individual will be subject to a 10% withholding tax. Arthur Lira, the bill's sponsor in the Lower House, estimated that the expansion of tax exemptions would reduce revenue by 31.3 billion reais next year, offset by new income tax collections of 25.2 billion reais and 8.9 billion reais from foreign-sent dividend taxation. ($1 = 5.3203 reais) (Reporting by Marcela Ayres in Brasilia and Isabel Teles in Sao Paulo, Editing by Louise Heavens and Alex Richardson)

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