Benefit to automakers costs BRL 5 billion per year and does not develop regions

Tax benefits for automakers installed in the North, Northeast and Midwest cost about R$ 5 billion per year to federal coffers and, contrary to what was promised, do not promote regional development.

In effect for more than two decades, the billionaire tax waiver – which is supported by other Brazilian taxpayers – had a low socioeconomic impact, generally restricted to a few municipalities, and failed to decentralize the country’s automotive industry.

These are the main conclusions of a joint audit carried out by the Federal Court of Auditors (TCU) and the Federal Comptroller General (CGU) on the so-called Automotive Policies for Regional Development (PADR). The report, obtained by People’s Gazetteshould be analyzed by the plenary of the TCU on the afternoon of this Wednesday (29).

“The PADR, costing more than R$ 5 billion annually and more than R$ 50 billion since 2010, had a small and localized impact on per capita GDP, general employment and technical-scientific employment, thus not contributing to the development regional, its main objective. The installation of the beneficiary factories did not result in industrial agglomeration around them, and the companies buy most of their inputs from suppliers in the Southeast and South regions”, points out the report.

The tax incentive was implemented in the government of Fernando Henrique Cardoso (PSDB) by two laws, one from 1997 and the other from 1999, which guarantee presumed tax credit on Industrialized Products (IPI) to vehicle and parts factories in the three benefited regions.

The benefit, which initially would last until 2010, was successively extended by Congress, without any proof of economic return, and is now valid until the end of 2025.

According to the audit by the TCU and the CGU, between 2010 and 2021 the Union waived R$ 51 billion in taxes for automakers installed in the covered regions, in amounts corrected for inflation. Between 2017 and 2021, the waiver was more than BRL 5.6 billion per year, on average. “A cost that is redistributed to all other taxpayers”, point out the auditors.

In the case of the Fiat Chrysler factory (now the Stellantis group) in Goiana (PE), where the Jeep brand models are produced, the tax waiver is equivalent to R$ 34,400 per month per job generated, “without, with that , there have been significant changes in the socioeconomic reality of that municipality”, according to the report.

This amount, referring to the year 2019, refers only to the federal exemption, and therefore does not include state and municipal tax waivers. That year, according to the audit, the automaker benefited from just over R$4.6 billion in federal tax incentives, or R$388 million per month, for a total of 11,258 jobs created.

The document compares the relative cost of tax relief to other government programs. While each job generated by the Jeep factory costs federal coffers more than R$34,000 per month, the expense per family benefited by the Auxílio Brasil (renamed Bolsa Família) is R$600 per month. In the case of the Continuous Provision Benefit (BPC), paid to the elderly and people with disabilities, the amount is just over R$ 1,200 per month.

Tax reduction for automakers had low socioeconomic impact

The low socioeconomic impact was the rule in all territories that had plants installed under the tax benefits, says the report that will be analyzed by TCU ministers.

In addition to the Jeep factory, companies such as HPE Automotores, which assembles Mitsubishi and Suzuki vehicles in Catalão (GO), and Caoa, manufacturer of Hyundai and Chery in Anápolis (GO), benefit from exemptions. Ford was also part of the program, with its own brand factories in Camaçari (BA) and Troller in Horizonte (CE), but at the end of 2021 the company ended vehicle production in the country.

According to the audit, the tax reduction policy was unable to promote industrial agglomeration around the factories. Of all the inputs purchased by the five analyzed units, 71% are produced in the Southeast and 8% in the South of the country, and only 22% come from the three regions that automotive policies seek to develop.

Another evidence of the limited impact of the tax incentive is the share of each region in the country in employment in the automotive industry. According to the report, the Northeast’s share increased from 3% to 6% between 2006 and 2020, but the joint participation of the three regions benefited by the exemption policy remained at just 8%. And the same increase of 3% occurred in the slice of the South region, which was not benefited by the programs.

Also between 2006 and 2020, the number of employees in the automotive industry in the North, Northeast and Midwest increased by 16,082, while in the South region the increase was 18,153. The TCU and AGU report does not address the impacts of Ford’s departure, which certainly worsened the Northeast’s numbers from the end of 2021.

“What is observed is that the PADR are disjointed from the policies of investments and regional development. When they are thought to encourage specific companies individually, without considering the need to form productive chains, the PADR do not attack the alleged ‘natural disadvantages’ of the North, Northeast and Midwest regions”, points out the audit.

Another example of the low socioeconomic impact of reducing taxes on automakers is the performance of the Municipal Human Development Index (HDI-M), calculated based on data from the last two Censuses, in 2000 and 2010. According to the report, the variation in this indicator in the locations benefited by the exemption it was not greater than in the other regions of the North, Northeast and Midwest.

Incentives for automakers to repeat errors in this type of program

One of the first findings of the TCU and CGU auditors is that the tax incentive policy for automakers repeats common errors in this type of program, pointed out by different studies in recent years.

Starting with the fact that the initiative did not start from a previous diagnosis. It is not known which public problem will be attacked.

This original error leads to others. Without knowing the problem, the Union also does not know what result it wants to achieve with the tax incentive. Therefore, there are no concrete objectives, indicators, targets or deadlines.

“These policies do not have a logical model that explains how state interventions will deal with the causes of a public problem at the lowest possible cost”, says the text.

Nor is it defined who is responsible for the supervision and evaluation of the program. “The PADR just ‘exist’, although their roles of direction, supervision and coordination of implementation, monitoring and evaluation, almost in their entirety, have not been established”, point out the auditors.

Similar problems were previously identified by the TCU in other tax incentives. Among them, those of the 1991 Information Technology Law and the 2005 Law of Good. In both cases, the tax benefit was not designed as an instrument of a broader public policy, but as an end in itself.

Report seeks to prevent benefit from being extended without changes

The problems detected by the TCU and CGU auditors did not prevent the tax benefit for automakers from being extended by Congress on at least three occasions, with the duration being extended to 2015, then 2020 and, more recently, 2025.

The main recommendation made by the auditors, which will now be analyzed by the TCU ministers, concerns precisely future renewals of the benefit.

The document proposes to notify ministers and other public agents that the submission of a proposal to extend this policy, without revision and structural changes, “may characterize irregular conduct”, violating article 37 of the Constitution – according to which the public administration must obey the principles of “legality, impersonality, morality, publicity and efficiency” – and other norms.

The report also proposes notifying the Ministry of Finance to present, within 90 days, an action plan to assess, define responsible parties and improve the governance of automotive policies.

Federal government gives up more than R$ 450 billion per year

The incentive for automakers is part of an ocean of tax benefits granted by the Union, on the initiative of the Executive or the Legislative itself, in most cases without governance or evaluation of results.

In the sum of all the exemptions, the federal government will fail to collect R$ 456 billion this year, or 4.3% of the Gross Domestic Product (GDP), according to estimates by the Federal Revenue Service. Resignations amounted to less than 3% of GDP until the mid-2000s, but gained momentum with initiatives by PT governments to boost economic growth, passing the mark of 4% of GDP in the early years of the following decade.

At the end of 2022, the transition team of Luiz Inácio Lula da Silva (PT) indicated the intention to reassess tax waivers. So far, however, the government has limited itself to undoing benefits created last year – such as fuel tax relief – and has not presented a proposal for a broader review.

In the opposite direction, Lula has just created yet another exemption. A decree published this Wednesday included the photovoltaic segment, for the production of solar energy, within a program to support the semiconductor industry that, in 2023, provides for tax exemption of more than R$ 600 million.

The government of Jair Bolsonaro (PL) also wanted to cut benefits, without success. Approved in 2021, amid the pandemic, Constitutional Amendment 109 required the Executive to present a plan to reduce incentives to 2% of GDP by 2029 – less than half of the current level.

The plan was introduced, but has been stalled in Congress ever since. And even its eventual approval would have almost no effect: the program was dehydrated by maneuvers made by Congress, which prohibited cuts in the main incentives, and by a creative accounting made by the Executive.

The result is that the plan, instead of cutting the equivalent of 2% of GDP, proposed to eliminate benefits corresponding to just 0.06% of GDP – just over R$ 4 billion a year, according to the government’s account at the era.