How tax cuts on fuels may impact Brazil’s tax reform?

. Feb 13, 2020
fuel prices tax reform brazil Photo: Rafastockbr/Shutterstock

President Jair Bolsonaro has proved to be quite sensitive to demands concerning fuel prices—which makes sense, considering the major truck drivers strike that briefly paralyzed the country in 2018. However, by putting tax cuts on the table, he has met with an economic conundrum with more chances of causing a political stir than actually reducing prices in the short term.   

Since January, the president has been attacking the tax burden on petrol as the reason why Petrobras’ cuts on fuel prices in refineries do not translate into decreases at the pumps. His target has been the State Goods and Services Tax, or ICMS.

</p> <p>“We have slashed gas and diesel prices at refineries for the third time, so why aren’t the prices [for consumers] going down?” he tweeted. “Because governors charge an average of 30 percent of ICMS on fuel prices at the pumps and update this every fifteen days, harming the consumers.”</p> <p>“Governors do not accept losing revenue, even if it means slashing gas prices by BRL 0.5 per liter,” he continued, promising to submit a bill in Congress to establish a fixed value for ICMS on fuel.</p> <p>The backlash from governors was immediate: 23 of them <a href="">signed a document</a> urging the federal government to cut its own taxes on fuel, to which the president issued a challenge, saying he would make these changes, as long as the local government leaders did the same on their ICMS rates.</p> <h2>Lose-lose situation</h2> <p>A <a href="">report</a> by the National Council of Finance Policy shows that ICMS made up a staggering 85 percent of the revenue collected by Brazilian states in 2019. Oil, fuels, and lubricants correspond to roughly 26 percent of ICMS tax collection—or BRL 90 billion.</p> <p>It is important to remember that each state controls its own ICMS tax rates, meaning the importance of levies on fuels varies widely around the country. In the state of Amazonas, ICMS on fuels reaches 38 percent of overall state goods tax collection.&nbsp;&nbsp;</p> <p>Its importance for states’ finances cannot be overstated. In São Paulo, it helps fund state universities. For instance, 9.57 percent of all revenues of the University of São Paulo come from this tax.&nbsp;&nbsp;</p> <div class="flourish-embed" data-src="visualisation/1387547"><script src=""></script></div> <div class="flourish-embed" data-src="visualisation/1387569"><script src=""></script></div> <h2>Brasília, we have a problem</h2> <p>President Bolsonaro, though, has a point when it comes to the heavy burden that ICMS represents on fuel prices. According to Fecombustíveis, approximately 44 percent of gasoline prices are related to tax—23 percent on diesel and 26 percent on bioethanol—and ICMS makes up the lion&#8217;s share.</p> <p>As a comparison, the <a href="">World Energy Prices 2019</a> report by the International Energy Agency shows that, in Brazil, one liter of gasoline costs USD 1.19—way above the USD 0.81 charged in the U.S., but also way below EU standards, considering a liter in Germany is sold for USD 1.73.</p> <p>Brazil, however, is used as a case study for how unequal gasoline prices may be inside of a country. The report notes that gasoline prices in China are largely homogenous due to national price regulations, unlike Brazil, &#8220;where prices are market-based and largely affected by local taxes.”&nbsp;</p> <p>Since 2016, Brazil has been playing by free-market rules, pegging Petrobras’ pricing policy to international benchmarks. While the strategy has been pivotal to ensure the state-owned firm&#8217;s recovery after years of corruption scandals and questionable management, it leaves the country exposed to international price fluctuations—especially considering the company’s monopoly on fuels.&nbsp;&nbsp;</p> <p>Given this scenario, Sergio Massillon, institutional director at the National Federation of Fuels, Natural Gas and Biofuels Distributors (Brasilcom) believes that the simplification of the tax would be the best alternative to reduce bureaucratic costs.&nbsp;</p> <p>“As we understand it, the president’s proposal would create a fixed value [of tax] in Brazilian Reais. (&#8230;) We believe it would benefit everyone involved,” he wrote in an emailed statement to <strong>The Brazilian Report</strong>.&nbsp;</p> <p>Mr. Massillon also points out the potential gains in the transparency of fuel costs. &#8220;The prices at the refinery, plants or importers would have a fixed value in reais for federal taxes, another for state taxes and all the variations, whether positive or negative, would reflect directly on the prices paid by the consumer. We believe that, inside of a modern policy, the direction the president points out is the most coherent and transparent.”</p> <h2>Tough talks</h2> <p>ICMS is a widely questioned tax in Brazil and has been subject to many legal disputes over the years. As each state defines its own rates, ICMS is the main tool for Brazil&#8217;s so-called &#8220;tax wars,&#8221; which involve giving states tax incentives to lure companies to setting up there. Over the years, while there have been many proposals to change the ICMS, none moved forward, given <a href="">the complexity of Brazil’s tax system</a>. Any alterations depend on the will of Congress to approve the government&#8217;s incoming tax reform proposals.&nbsp;</p> <p>“There is not a chance it will move forward [in Congress]. The calculations are impossible, in a severe fiscal crisis no one can give up on several billions. There’s not a chance this is happening even on the government’s side, because it would go against everything the economic team has been doing to improve the fiscal aspect”, said Leandro Gabiati, director at political consultancy Dominium, in an interview with <strong>The Brazilian Report.</strong>&nbsp;&nbsp;</p> <div id="buzzsprout-player-1516360"></div> <script src=";player=small" type="text/javascript" charset="utf-8"></script> <hr class="wp-block-separator"/> <p>The tax reform was established by House Speaker Rodrigo Maia as Congress&#8217; number one priority for 2020, with the optimistic schedule of approving the overhaul before the mid-year recess, after which lawmakers will turn their attention to October&#8217;s municipal elections.</p> <p>In Mr. Gabiati’s view, the deadline is too optimistic, given the number of interests involved and the lack of a consensus, reminiscent of the slog that was approving the pension reform last year. However, he believes the president’s moves on the governors will do little to impact it.</p> <p>“The economic agenda in Congress moves regardless of the government’s will or even its mistakes. When the government gives up on controlling the legislature’s agenda, like they did, Congress is the one who decides whether to vote or not. I believe this friction between the president and governors will be restricted to the Executive branch”, he added.

Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, she worked as an Editor for Trading News, the information division from the TradersClub investor community.

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