Coca-Cola wants more tax breaks

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 social security tax, nor tax on industrialized goods. They also get an 88-percent discount on import tax, 75 percent on income taxes, and a 55-to-100-percent discount on state goods and services tax.

The region was set to remain a free trade zone until 2013, but former Presidents Lula and Dilma Rousseff extended the benefits until 2073.

The beef between Coca-Cola and the government

As these companies don’t pay taxes on industrialized goods, they receive tax credits when they sell their syrup to other regions of Brazil, where the taxes are applied. In a nutshell, if the tax on syrups is at 20 percent, it means that their production costs are reduced by that same amount. According to newspaper Folha de S.Paulo, Coca-Cola alone accounts for 60 percent of all tax credits in the soft drink industry.

So, in their case, a tax cut is actually a bad thing.

Industry lobbyists have declared that with the additional costs, producers will lose BRL 6 billion in sales per year, and will have to cut 15,000 jobs. Coca-Cola has reportedly gone further than its peers, threatening to leave Brazil altogether – unless the tax rises to at least 15 percent. The company says it will move to Colombia, and soda prices could have an 8-percent bump due to import taxes.

“We have invested in production processes, but also helped create a sustainable economic chain in the Amazon through social and cultural programs,” said Alexandre Jobim, president of the association that lobbies for the sector.

With 31 companies, the soda industry makes up 93 percent of the food and beverage sector in Manaus. If they make good on their threat to leave, the state of Amazonas would lose BRL 3.2 billion in GDP.

But the government doesn’t want to meet Coca-Cola halfway. The soda giant is under suspicion by tax authorities of employing fraudulent practices in order to get more tax credits. According to auditors, the syrup factory is increasing the prices sold to bottling plants in Brazil. Allegedly, Coca-Cola is selling one kilogram of syrup for BRL 200 in the national market, but then exporting it for roughly BRL 20. As most bottling plants belong to Coca-Cola, the extra money would be going from one pocket to the other, with the company receiving more and more tax breaks.

These practices have allegedly allowed the company to send heftier profits to its American headquarters.

In a statement, Coca-Cola denied any wrongdoing. “We have been in Brazil for 76 years, and in the Manaus Free Trade Zone for 28 years – always complying with the current legislation, which has been proved by independent auditors and authorities.”

Does it make sense for Brazil to have a Free Trade Zone?

To sustain the Amazon Free Trade Zone, the government surrenders around BRL 20 billion in taxes every year. In state goods and services tax alone, waivers doubled from BRL 3.4 billion in 2010 to BRL 7 billion in 2017. Meanwhile, the state’s revenue went up by only 27 percent. It means that the state is giving up more than its getting back from other activities.

During that same time span, the average number of workers employed in the Free Trade Zone went from 103,000 to 85,500. Still, the local government is held hostage by tax incentives. “Without those incentives, hardly anyone would take a factory up there,” said a consulting firm.

The trade hub was heavily affected by the drop in demand for durable goods, as 95 percent of its production is directed to the domestic market. Practically all television sets, motorcycles, and air-conditioners are produced there. About 0.5 percent of Brazil’s GDP is produced in the Manaus Free Trade Zone.

Innovation is also a trait in the area. Thanks to the aforementioned tax incentives, companies bring state of the art technology within international standards. They are less polluting and more advanced than what we see in the rest of the country.

But 50 years on, infrastructure has proved to be a major hurdle to the full development of the trade hub. Costs with transportation reach BRL 17 billion per year, due to the region’s isolation. There are two private ports in the city, plus an airport. If two waterways that have been planned for decades were effectively built, at least BRL 1.6 billion would be saved.

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MoneyAug 27, 2018

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BY The Brazilian Report

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