It surprises me that the BR tags are actually removed, I would just expect to see them as plain text. HTML is just one of the many forms of markup, normally the text should just be represented 'as is'.
If you want to export XHTML then that's what the dynamic label option is for :)
I tried adding custom styling to p tags, but that did not work. The transformation adds
space-after="1em" space-before="1em" to the style attribute of the
<fo:block element. What do I have to specify to prevent that, or set the spacing to zero or none?