The X factor: Could Brazil's legal battle with Musk threaten the business climate?

There are concerns in Brazil that the ongoing legal conflict between Elon Musk's social media platform X and the supreme court may have adverse implications for the business climate in the country.

The litigation began following a recent ruling by Alexandre de Moraes, one of the 11 supreme court justice, suspending the operations of X in Brazil. 

The ruling, likely to be upheld by a panel of five other justices, comes amid a prolonged clash between De Moraes and Musk centered around allegations of fake news dissemination on the platform during Brazil’s 2022 elections and continuing into 2023. X was therefore stopped from operating until it complies with the court orders and pays outstanding fines.  

“The issue at hand goes beyond X itself. With the supreme court assuming such assertive legal action, it raises a critical question among stakeholders: today it is targeting X, could it target my company tomorrow?” Luciano Rostagno, chief strategist at EPS Investments, told BNamericas.

The proactive stance of the court, with rulings issued by individual justices rather than the full bench, has stirred concerns among legal professionals, particularly since some decisions are being made before the relevant legislation is established.

“Setting aside the legal merits of the case involving X, the problem at present is that there is a perception of increased legal risk in Brazil," said Alberto Sogayar, an infrastructure lawyer at Sogayar e Alcântara Advogados.

“The proper functioning of democratic institutions occurs in the following way: the judiciary makes judgments, congress draws up the laws and the government is the executing power. When we have a judiciary that is addressing issues that haven’t yet been evaluated in congress, such as regulation of social media, that creates a climate of significant legal uncertainty,” said Sogayar.

However, not all observers believe there will be a direct impact on business decisions in Brazil due to the current litigation.

“I don’t see a direct link between this legal battle and investment decisions in Brazil. While it does draw attention, these are specific circumstances within an already complex landscape. It will certainly draw attention to understanding the particularities of this case. The actions of social networks, their boundaries and potential sanctions are being debated globally,” Paulo Dantas, an infrastructure and project financing specialist at law firm Castro Barros Advogados, told BNamericas.

Meanwhile, Roberto Guimarães, former national treasury secretary and current director of planning and economics at Brazilian industry and infrastructure association Abdib, told BNamericas that the situation currently appears limited to X’s operations and is not likely to have broader repercussions for the infrastructure sector.

Political ramifications

The 2022 presidential election in Brazil, which saw leftist Luiz Inácio Lula da Silva defeat right-wing incumbent Jair Bolsonaro, was marked by a highly polarized political environment which has persisted to the present. The election process was fraught with allegations of fake news, primarily targeting left-leaning candidates.

The electoral court, also presided over by De Moraes at the time, played a prominent role in curbing the spread of fake news during the election. In January 2023, after Lula was sworn in, De Moraes was also instrumental in the conviction of Bolsonaro supporters who vandalized government, judiciary and congressional buildings in the capital, challenging the election results.

The government has refrained from making formal statements on the ongoing dispute between the supreme court and X. However, vice president Geraldo Alckmin has hinted at the administration’s stance.

“The crux of the matter is that Elon Musk must comply with the law. Being a billionaire does not exempt him from legal obligations,” Alckmin said in an interview with daily Folha de S. Paulo on Monday. He added that the current litigation is unlikely to have long-term consequences for Brazil.

“In a democratic regime, the rules apply to everyone. No one is above the law. This only reinforces Brazil’s commitment to democracy, which is crucial for investment, as legal certainty thrives in democratic environments. Last year, Brazil was the world’s second-largest recipient of foreign investment,” Alckmin noted, emphasizing that De Moraes’ actions during the 2022 election and into 2023 “saved democracy.”

The confrontation between X and the supreme court has escalated just days before Brazil’s independence day on September 7, with right-wing groups organizing what could be large protests against the current administration and supreme court.

Tax concerns

Beyond the litigation involving X, another issue is looming over Brazil's business environment. The federal government has submitted a bill to congress proposing an increase in corporate income tax, including the CSLL (social contribution on net profit) and taxes on shareholder equity.

Although the president of the lower house, Arthur Lira, indicated over the weekend that the measure is unlikely to pass, analysts have expressed concern.

“The government is once again opting for the worst possible approach – raising taxes – rather than improving fiscal results by enhancing public spending quality,” Rostagno said.