Tax reform: incentives for industry ‘no longer need to be tax’, says Robson Andrade

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In an interview with g1, president of the National Confederation of Industry (CNI) states that tax simplification could be the main trigger for a new round of foreign investment in the country. Robson Andrade, president of the National Confederation of Industry (CNI) Iano Andrade/Industry News Agency There is no sector more satisfied with the tax reform than industry. The simplification of taxes and the end of the accumulation of taxes throughout the production chain promise to unlock the high cost of producing in Brazil. The next step for industrialists now is to monitor the progress of the reform so that the backbone of the text is preserved: unifying taxes and guaranteeing tax credits, with quick returns. The outlook is positive, as the senators’ signal is to maintain the main aspects of the reform. For the president of the National Confederation of Industry (CNI), Robson Andrade, the approval of the Proposed Amendment to the Constitution is enough for businesspeople to start opening their hands to investments. “The production sector lives up to expectations. With positive expectations for the future, we can start working accordingly. (…) This will greatly improve the business environment in Brazil”, says Andrade in an interview with g1. Along with equality, however, some benefits granted to the industry over the years will disappear. The Manaus Free Trade Zone was preserved, but tax benefits granted to companies that set up shop in more remote regions of the country will be reduced. For the CNI, it will not be a problem. Andrade’s expectation is that states will start investing in infrastructure, education and training to attract companies within their borders. “States can continue to offer incentives and compete with each other. But now, incentives no longer need to be tax-based.” See below the main excerpts from the interview. g1 – Is it already possible to estimate a potential gain that the industry will have with the tax reform? Numerically, no. Industry is the sector that pays the most taxes in Brazil. We pay 34% of total federal taxes, and around 40% of state taxes. We do not yet have a defined rate, but estimates are around 25%. So, yes, there is an important tax gain for the industry. But they are misunderstanding this reduction, as if it would be compensated by excessive burden on other sectors. The agricultural sector will not be changed, and the services sector, which currently benefits, is only consumed by a higher-income population. Furthermore, simplifying taxes is an issue that benefits all sectors. Any company today has a very large structure for calculating the tax and credits generated. There are a series of difficulties that will be facilitated and will generate cost savings. Not only for industry, but for all sectors, there is the potential to unlock investments that will have direct benefits for the growth of the economy and the country. All sectors need investment, as this is how jobs are created. g1 – Going beyond the issue of this growth potential and expectations regarding the economy, how will the reform boost businesspeople’s decision to invest? For the simple fact that today we pay high taxes on investments. Plus, we pay in advance. In the case of ICMS [Imposto sobre a Circulação de Mercadorias e Serviços], if you buy machinery and equipment, you pay before you start producing. The same goes for export exemptions. The tax burden embedded in exports is hidden within production chains. There is a sector that has up to 10% of hidden taxes. As taxation becomes based on consumption, it will be completely exempted, as is the case in other countries. A very large cost reduction is a benefit for all Brazilian sectors. Exports of manufactured goods, which is what we need to export, will have a huge market expansion. We are large exporters of primary goods, but the produced product is not competitive due to taxation and is left behind. It is something that will greatly benefit the Brazilian trade balance. Exceptions in the tax reform can increase VAT to 27%, says Fazenda g1 – But these are all effects of the complete reform, after the transition period. And in the short term? The productive sector lives up to expectations. With positive expectations for the future, we can start working accordingly. Some benefits appear immediately, as companies begin to change their vision of the future. This will greatly improve the business environment in Brazil. And the government, with Minister Fernando Haddad and Minister Geraldo Alckmin, are already thinking about other stimuli, such as accelerated depreciation. It does not represent a reduction in the Union’s revenue, but it represents a cash flow that favors investments. g1 – If you had to choose just one aspect to represent the great gain of tax reform for the economy, what would it be? It’s very difficult to choose just one. Brazil has many priorities, which one do you choose? I would choose education. But, in the reform, the main thing is tax simplification. It represents the improvement of the business environment. The others are just as important and obvious — the exemption on exports, investments, the reduction of the tax burden, the mandatory formality — but the complexity that has been created in the Brazilian tax system is crazy. You can’t keep up with the changes, the regimes, the ordinances. It has to have a huge structure. Brazil really needs foreign investment, to bring resources from other countries. The Arabs are very interested in investing in Brazil, and it has many resources, but it is extremely difficult for you to explain how the Brazilian tax system works. For us, it is already difficult to understand. Explaining it to an English person, a German person, a Japanese person or an Arab person is very complicated. g1 – Returning to the whole ‘cake’, how important is the reform for the country’s reindustrialization agenda that the government has promised since the election campaign? We are already on this reindustrialization agenda. Fortunately, Vice President Alckmin and Minister Haddad have a vision of the need and importance of the industry for the country’s growth. They take the view that there has been premature and unnecessary deindustrialization in the recent past. And he also has the vision that the industry is what allows states to progress and develop, through technology and innovation, but also with the revenues of states and municipalities. I would like to see 27 states like São Paulo. Why is São Paulo a state that has fewer fiscal problems and infrastructure investments? Because São Paulo is a rich state, which receives 30% of Brazil’s GDP. This is in the taxes that come from the industry. The agenda shows that there is a focus on attracting industrial investment and developing the industry. We are seeing that, really, there is a perspective not only of tax relief, but also a perspective of attracting investment through credit measures. Brazil was an industrial power in the past and we lost that due to lack of discussions about an industrial policy. Today, all countries — the United States, Germany, France, China — all have very bold industrial policies, so we cannot lose this space. Tax reform text arrives for analysis in the Senate g1 – Regarding the situation in the states, one of the concerns is in industrial units that occupied spaces through subsidies. What is the situation of these states, which granted benefits to attract companies and will no longer have this difference? The issue of states is interesting to analyze. At first glance, it seems obvious that the businessman would choose states in the South. But, when deciding on an investment, one does not look at just one factor. Where is the raw material? Is your market internal or external? Where are your collaborators? In a context like this, the source of resources, experience and professional qualifications can be comparative advantages that each state offers, for example. See today, you have very strong investments in the Northeast for the innovation and technology market. Pernambuco has become a technology hub, with a highly qualified workforce and clean energy supply. States can continue to offer incentives and compete with each other. But now, incentives no longer need to be tax-based. State governments, through the funds they will manage, can model incentives for credit, human resources, better infrastructure, among others. I believe that the incentives will become clearer, more transparent and the competition will be greater. States will be more interested in investing in infrastructure to attract companies. g1 – With the reform reaching the Senate, what are the sector’s concerns during the process? We work a lot with senators, even during recess. We have pending discussions, mainly regarding some last-minute amendments to the proposal. The main concern is article 20, which is the possibility for states to create inspection fees. This is absurd, especially because there is no limit to these fees. This could be a big problem.

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