Productive sector experiences hangover and calibrates expectations with Lula 3 – 02/25/2023 – Market

The country needs to grow, purchasing power needs to increase and tax collection needs to improve. If the expectations of the main sectors of the economy for the first year of the Luiz Inácio Lula da Silva (PT) government were listed, these would be common points.

They are not the only ones. Discussions for tax reform and the promise to present a new fiscal rule (which replaces the spending ceiling) by March are at the center of the agenda. High interest rates and inflation control also come into play. After the pandemic, sectors that managed to maintain good results in 2020 and 2021 are now experiencing a kind of hangover.

At the end of last year, data measuring economic activity already showed a loss of pace. The level of employment has improved, but average income has embarked on a downward trend in 2021 and reached the lowest levels of the decade. The challenge now is to grow even with so many obstacles.

Not even the World Cup saved the sale of televisions and air conditioning

For those who produce electronics, the end of 2021 announced that the bonanza generated by the pandemic would end. In the previous year and a half, homes had to be adapted for remote work.

Now the situation is different. The 2022 balance sheet is not yet ready, but Eletros (National Association of Electronics Manufacturers) already knows that it was not good. Not even the World Cup, traditionally a booster in television sales, saved the result.

In the air-conditioning segment, Eletros projects a 60% drop and, among refrigerators, 13%. In the case of televisions, José Jorge do Nascimento, CEO of Eletros, says that, with effort, the sector should tie with 2021, a year without any sales booster.

The assessment in the sector is that President Lula will need to guarantee, in the first year, good results, and this should favor the segment. “He will not be able to make a mistake and will have the obligation to adopt measures to revive the economy”, says Nascimento.

There is also what Nascimento sees as characteristic of PT governments, which is greater attention to income generation, fundamental to facing what he calls the “consumption crisis”, one of the four axes that the sector considers a priority.

Eletros believes that the consumption crisis must be faced with job creation and income distribution. Expenditure control may favor the reduction of interest rates and inflationwith effects on input and credit costs.

And finally, Eletros defends the maintenance of policies that give advantages to the industry, allowing the importation of raw materials at a “more competitive” cost.

Tax reform is a priority, but not a consensus

The tax reform, considered by the Lula government 3 as one of its priorities, is pointed out by several sectors as fundamental for the resumption of growth. Two PECs (proposed amendment to the Constitution) deal with the subject and have, in common, the unification of taxes.

For each sector and even among the different industrial segments, however, it is seen in different ways, even if the consensus is that tax collection has to change.

The executive director of Abvtex (Brazilian Association of Textile Retail), Edmundo Lima, highlights the complexity in the management of state taxes, the ICMS.

“A retail company that operates in all states has to deal with dozens of ICMS rates. It’s all very complex. The unification of rates and simplification is very important for us”, he says.

Abvtex represents names like Arezzo&CO (Anacapri, Reserva, Arezzo, Alexandre Birman), C&A, Centauro, Riachuelo, Dafiti, Malwee, Marisa, Renner, and the groups Soma (Animale, Farm, Hering, Cris Barros, NV) and InBrands ( Ellus, Richards, Bobstore, VR, Herchcovitch; Alexandre and Salinas).

In industry, tax reorganization and simplification is seen as an essential factor for reindustrialization. “Industry went from 27% of GDP to minus 11%. Of course, services and agribusiness grew, but we fundamentally lost competitiveness. Then the big item on the agenda is the Brazil cost and, in that, the big issue is tax reform”, says Marco Polo de Mello Lopes, coordinator of the Industry Coalition.

The group brings together entities from 14 sectors, including Aço Brasil (of which Marco Polo is CEO), Eletros and manufacturers of plastic, machinery, toys and the construction industry, among others.

“We have a Brazil agenda that caters to everyone and all sectors have given up their specific demands”, says Marco Polo. On Friday (17), the group met with the Minister of Finance, Fernando Haddad, and presented the sector’s joint guidelines. In addition to taxes, demands on energy transition and export financing were also dealt with.

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More advanced proposals for tax reform

1) PEC 45 – report by Deputy Aguinaldo Ribeiro

• Replaces five taxes (PIS, Cofins, IPI, ICMS and ISS) with a Tax on Goods and Services and a Selective Tax on cigarettes and alcoholic beverages
• Six-year transition in two phases, one federal and the other with ICMS and ISS
• Replaces the exemption of the basic food basket with the refund of taxes for lower-income families

2) PEC 110 – Senator Roberto Rocha report

• Creation of CBS (Contribution on Goods and Services) with merger of PIS and Cofins
• Creation of the IBS (Tax on Goods and Services), with the merger of ICMS and ISS
• Replaces IPI with a selective tax on items harmful to health and the environment
• Creation of the Regional Development Fund, supplied with IBS resources
• Tax refunds for low-income families

3) PL 3887/2020 – proposal from the Ministry of Economy

• Creation of CBS (Contribution on Goods and Services) with merger of PIS and Cofins
• Current rule for exemption from the basic food basket maintained

4) PL 2337/2021 – text approved by the Chamber

• IRPF exemption in the range up to R$ 2,500 and average correction of 13% in the other ranges
• Maximum simplified discount of BRL 10,563.60 (today, the limit is BRL 16,754.34)
• Taxation of dividends, with exemption for Simple and presumed profit
• Cut the IRPJ base rate from 15% to 8%
• CSLL cut by up to 1 percentage point
• End of JCP (Interest on Equity)

Sources: Chamber of Deputies and Federal Senate

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IPI, transition of new rules and regional benefits

What must be the point of contention between Eletros, the government and other sectors (and even in the industry itself) is the maintenance or not of the IPI (Tax on Industrialized Products).

At the base of Eletros there are several factories installed in the Manaus Free Trade Zone. Currently, goods manufactured in the region are protected from a 35% IPI cut. The measure taken in the Jair Bolsonaro (PL) government affects 4,000 products made in other regions and was maintained by the new management.

The armor intended to maintain the competitiveness of these products, making them cheaper than their imported counterparts. The most advanced tax reform proposals do away with the IPI.

For Eletros, the tax advantage of the Free Zone needs to be maintained. The segment also maintains other points of attention on the tax reform, such as the transition period and the situation of states and municipalities that invested in industrial centers.

“There are states in which the tax benefit increases according to the distance from the capital. The reform needs to understand these regional particularities, we cannot end up neglecting states and regions.”

Cut in compensation for exporters unbalanced trade balance

For Marco Polo de Mello Lopes, from Aço Brasil, a steelmaker, it is essential to put an end to the accumulation of taxes. “We have a regime where you have a debit account, another credit account and, when you go to export, there is a very strong tax residue, of 6.5%, on average, and 7% for the steel industry”, he says.

He has defended the increase in the rate of Reintegra, a mechanism for tax compensation for exports, currently at 0.1% (it used to be 3%). The adjustment would be a palliative, according to him, while the reform is not approved.

“Where we should have the best result in exports, which is the trade balance of manufactured goods, which have the highest added value, more than ore or soybeans, we have accumulated a deficit”, he says. This deficit, he says, went from US$ 78 billion in 2020 to US$ 128 billion in 2022.

The joint agenda of the industry also includes the extension in the payment of taxes. As it is today, the deadline for receiving sales is usually longer than the payment of taxes. “Especially in small and medium-sized industries, it [o empresário] have to go to the banks. What we have also been proposing to the states is for there to be compatibility between deadlines.”

Consumer needs confidence to turn off ‘yellow light’

For Ivo Dall’Acqua Júnior, vice-president of FecomercioSP, (Federation of Trade in Goods, Services and Tourism of São Paulo), the level of consumer confidence is low. The year also began with “shakes” in retail (with Americanas and other large chains reporting financial difficulties).

“We perceive that the consumer is cautious, but there is optimism because it seems that the scenario is being defined and it seems that the economy will walk”, he says.

The way in which the Lula government will tackle issues such as employment and income will also be important for textile retailers, says Edmundo Lima, from Abvtex.

“There is an expectation that the social issue will be dealt with more forcefully, as it was the discourse throughout the entire campaign. For us, it is important not only in relation to employment, but in maintaining benefits and in valuing the minimum wage”, affirm.

In the construction industry, measures taken by the government in these early days were well received, such as the resumption of Minha Casa, Minha Vida.

Abrainc (association of developers) says that the program will be fundamental in the performance of the sector. The Cbic (construction industry chamber) praised the intention to end annual withdrawals from the FGTS (Fund for the Guarantee of Severance of Service). The sector, which saw its results soar during the pandemic, when the domestic environment began to receive even more attention, is now squeezing in the face of high interest rates.

Textile retail wants inspection of international competitors

The big clothing companies want to discuss the taxation of ecommerce and the confrontation with foreign platforms (such as Shein). Abit (Brazilian Association of the Textile Industry) is another critic of the insufficient inspection of these companies. The sector points to a lack of isonomy in taxation.

While Brazilian companies are subject to taxes at all stages, the platforms would be using the exemption benefit for exchanges between individuals to avoid import tax (if charged from the customer in all operations, it would make the products more expensive).

The other problem, according to Abvtex, is labeling and security, standards to which retailers are obliged to comply. “From tests we did and conversations with consumers, we understand that there is no compliance with these standards.”

Fashion retailers also want to discuss the import tax. Lima says that the tariff rose from 20% to 35% in 2007. At the time, it came from industry pressure and would be temporary. “It was a time for the industry to invest and become more competitive, but the rate never came back.” The international average for this type of tax is between 16% and 18%.

Tense beginning in the relationship with the agro

In agribusiness, the CNA (Confederation of Agriculture and Livestock of Brazil) says that its expectations are the same as in the electoral period. The document addressed to the “next rulers” deals with issues such as food security, economic, social and sustainable development.

The sector, however, is irritated with what it considers to have been the emptying of the Ministry of Agriculture, and the new government’s nods to environmental guidelines, as shown by the Sheet. The state-owned Conab (Companhia Nacional de Abastecimento) became subordinate to Agrarian Development and is now commanded by Edegar Pretto, who has a historical connection with the MST (Movement of Landless Rural Workers).