Tax reform incentives favor polluting sectors

The text of the tax reform approved by the Senate extended until 2032 tax incentives enjoyed by four automobile factories located in the Central-West and Northeast. The favor given to the production of vehicles with combustion engines irritated competing automakers in the country and exposed the contradiction of the government, which says it prioritizes the energy transition policy, aimed at decarbonization. This point, one of the most controversial in the Proposed Amendment to the Constitution (PEC) 45/2019, is again under debate in the Chamber.

For politicians and analysts heard by People’s Gazettein addition to adding to the long list of exceptions to the rule established by the reform, the measure supported by President Luiz Inácio Lula da Silva (PT) to encourage gasoline and diesel cars highlights the government’s commitment to favoring the interests of local allies, especially parliamentarians from Pernambuco and the PT-led group that has governed Bahia since 2006.

The reform approved by deputies in July expected to extend tax benefits for Stellantis (Fiat), in Goiana (PE), for another decade; HPE (Mitsubishi and Suzuki), in Catalão (GO); Caoa (Chery and Hyundai), in Anápolis (GO); and BYD, in Camaçari (BA), but only for the production of electric vehicles. On the eve of the vote in the Senate plenary, the text was changed to include combustion vehicles, flex engines or biodiesel. Therefore, the 32% tax discount for Caoa and HPE must continue.

The controversial change proposed by senators Fabiano Contarato (PT-ES) and Carlos Viana (Podemos-MG) provoked outrage from most companies in the automotive sector and its granting of incentives for the production of combustion cars was considered a technological and environmental setback, in addition to representing a significant tax waiver for the Union’s coffers.

Contradiction is reinforced by the taxation of electric cars

To reinforce the contradictory signals sent by the Planalto, electric car manufacturers were impacted by the tax announcement, bringing the prospect of a sharp increase in their prices in 2024. From January onwards, electric cars, hybrids and plug-in hybrids purchased abroad will again be subject to import tax (IPI).

The Brazilian Electric Vehicle Association (ABVE) condemned the extension of regional incentives for combustion vehicles. According to the entity’s president, Ricardo Bastos, the ideal would be for the reform to incorporate fiscal stimuli aimed at the development of new decarbonization technologies in the country, such as hybrid and electric vehicles, covering the entire national territory.

“From the point of view of decarbonizing mobility, fiscal changes should be guided – and interpreted – in the light of a national program that brings guidelines, clear goals and internal logic for all agents involved”, ponders André Fortes Chaves, consultant at Carvalho & Furtado Advogados and one of the coordinators of the Electromobility Laboratory (Lemob), a network of specialists from different areas focused on promoting electric vehicles in the country. Chaves regretted that Rota 2030, a program instituted in 2018, during the Michel Temer (MDB) government, to stimulate technological innovation in the automotive sector, has not yet been updated.

Chinese automaker GWM also took to social media to criticize the concession in the tax reform of tax incentives for the production of vehicles powered by fossil fuels. In addition, General Motors, Toyota and Volkswagen also reacted through a joint manifesto, complaining about the lack of transparency in the senators’ decision to extend the exemptions for four factories until 2032, without any compensation required from the beneficiaries.

Tax exemptions for four factories total R$5 billion annually

The benefits of the automotive regime – created in 1997 by the government of former president Fernando Henrique Cardoso (PSDB) and extended in 2010 and 2020, should end in 2025, with the end of the IPI exemption for Stellantis and Baterias Moura, both in Pernambuco. In addition to being maintained, this differentiated treatment can now also reach BYD’s future factory in Bahia.

This policy allocates R$5 billion annually in incentives for vehicle production in the Northeast and Central-West, 90% of which is used by the Stellantis factory in Pernambuco. An assessment carried out by technicians from the Federal Audit Court (TCU) revealed that there was no Union governance over the incentive program, highlighting the absence of goals, evaluation and inspection of innovation counterparts.

Given these facts, experts highlight that the industrial policy aimed at regionalizing automotive production may not have compensated for public investment, and cite as an example the closure of Ford factories in Bahia in 2021, resulting in 5,000 unemployed people.

The Center for Industries of the State of São Paulo (Ciesp) criticized the extension of tax incentives to the Northeast and Central-West as “undue privileges enjoyed by factories already installed in the country”. The entity defends the incentive only for manufacturers of electric or hybrid vehicles, which, in practice, would only favor the Chinese BYD.

Reform benefits AM with exemption to import oil

Another controversial point in the reform approved in the Senate involving the industrial sector is the section inserted by rapporteur Eduardo Braga (MDB-AM), which exempts the import of oil and derivatives through the Manaus Free Trade Zone, favoring his own state. The change repeats the understanding of the Federal Supreme Court (STF), which, in a preliminary decision, considered the exclusion of oil and derivatives operations from the list of benefited activities to be unconstitutional and authorized the application of incentives. The issue will still be definitively analyzed by the Court’s plenary session.

In an interview with Power 360, the leader of the opposition in the Senate, Rogério Marinho (PL-RN), criticized the exemption given by the text of the tax reform to the import of oil and gas through Amazonas. If the measure is confirmed by the Chamber and sanctioned by Lula, he believes that there will be a migration of companies to the northern state, resulting in unfair competition and the loss of tax collection by the Union.

For Adriano Pires, director of the Brazilian Infrastructure Center (CBIE), the government’s apparent contradictions in favor of investments aimed at the consumption of fossil fuels reflect revisions that the global energy sector itself has made, despite the debate surrounding the energy transition and the highlight to have a cleaner matrix. The specialist understands that the dictates of environmental sustainability need to evolve, but in line with the need for energy security and the supply of energy to less favored social classes.

Since the pandemic, with the disorganization of production chains around the world and other subsequent challenges, such as the wars between Russia and Ukraine and between Hamas and Israel, the need to guarantee the supply of energy has become evident, even to enable the energy transition for predominantly clean sources. Otherwise, the result of pressure from the environmental agenda without measuring the side effects is the interruption of investments in the oil and gas sector and the increase in prices.