Brazil tax strategy to bring down fuel, electricity prices seen having limited effects

BRASILIA -
Brazil’s congress approved a bill that limits the ICMS tax rate that state governments can charge on fuels, natural gas, electricity, communications, and public transportation.
Local lawyers told BNamericas that the measure may reduce fuel and power prices in the short term but it is unlikely to produce any major effects in the medium and long term.
In most states the ceiling was set at 17% or 18% and the federal government will pay compensation to the states for lost tax revenue until December 31, via reduced payments on debts that states owe the federal government.
The bill will become law once signed by President Jair Bolsonaro, who pushed strongly for the proposal with an eye on his struggling reelection campaign for the October presidential election. Double-digit inflation has turned into a major election issue and fuel and electricity prices have been among the main inflation drivers. Congress’ approval of the bill is seen by analysts as political victory for the Brazilian leader.
How much difference will it make?
Marcus Francisco, tax specialist and partner at Villemor Amaral Advogados, said that in the formation of fuel and electricity prices there are other factors that drive increases.
“In the case of fuels, if the barrel of oil [price] increases, automatically the final price for the consumer will go up. For electricity, on the other hand, there are several subsidies that are part of the price and that can increase the rate [paid],” he said.
There is also a possibility that some states will take the issue to the supreme court since ICMS is a key source of revenue for them, Francisco added.
Tiago Severini, a partner at law firm Vieira Rezende, said the comparison between the revenue impact and the effective price reduction, based on the estimates made by the states and the federal government, seems disproportionate.
“In other words, a large tax collection impact is generated, which is quite unequal among the different states, for a not so strong price reduction,” he said.
“Due to the lack of clarity regarding the precision of the calculations involved, it’s difficult even to assess the adequacy of the offsets the federal government has been considering to cover the cost it would have with the compensation for the states” Severini added.
The compensation ideas that are known so far include hiking other taxes, such as the social contribution on net profits (CSLL) that is paid by oil and gas firms focused on exploration and production.
“This can generate severe adverse effects, such as legal disputes, reduced investments in the country, and reduced attractiveness of the new auctions by [sector regulator] ANP,” Severini said.
Related News

Ford deal to build electric cars in Oakville comes amid $500M government cash to upgrade plant
TORONTO - The federal government and Ontario have pledged to spend up to $500 million to make the Ford plant in Oakville, Ont., able to build electric vehicles.
The future of the plant has been a key question for Canada's automotive industry ever since the Unifor union started negotiating with the automaker for a new three-year pact to cover the company's Canadian workforce.
The two sides struck a deal a few hours after a midnight strike deadline on Tuesday morning, one that will see the company commit $1.98 billion to build five new electric vehicles and an engine contract that could yield…