Why is Coca-Cola threatening to leave Brazil?

Brazil is quickly overcoming the truckers’ strike that nearly paralyzed its economy for 11 days in late May. However, some of its effects still linger. In order to convince truckers to get back behind the wheel, the federal government promised a number of subsidies – from lower diesel prices to a minimum freight reference table. But the government is cash-strapped and restrained by the federal spending cap. So, in order to pay for fuel subsidies, it had to cut expenses elsewhere – slashing the budgets of some ministries and reducing tax benefits for industrial sectors.

One of the affected sectors were soda syrup producers – such as Ambev, Pepsi, and, of course, Coca-Cola. The government has lowered taxes on soft drink syrup from 20 to 4 percent. While it may sound strange to see big business complaining about tax cuts, allow us to explain.

These soda makers are located in the Manaus Free Trade Zone, the country’s only free trade area. It was created in 1967 by the military dictatorship to promote industrial development in the heart of the Amazon. Behind it, there was the thinking that by promoting job creation in Manaus, locals wouldn’t have to resort to deforestation for survival. Thanks to its tax-free policies, over 700 companies have been lured to the region.

Companies in the Manaus Free Trade Zone receive benefits on taxes at all levels – federal, state, and municipal. They don’t pay...