Tax reform may extend benefit to the Free Zone – 06/16/2023 – What tax is this

There are more than seven proposals to try to solve the Manaus Free Trade Zone issue within the tax reform, including some that extend the benefits of the industrial sector to service companies. Two of them were the subject of reports in this Sheet (see further below).

At a meeting of FGV’s Tax Studies Nucleus this Friday (16), former Federal Revenue Secretary José Barroso Tostes Neto made a presentation on these proposals, highlighting that, in some, these incentives are not only being maintained, but expanded.

The Manaus Free Trade Zone was created in 1967 with tax incentives expected to last 30 years. They have already been extended five times and are now valid until 2073.

But what will happen after these more than 50 years? Tostes claims that no proposal mentions this fundamental aspect: “signaling for the future”. And at this point, the former secretary points out a way forward, which follows the logic behind the tax reform: promoting development via the budget and not further distorting the tax system.

According to him, the extension of benefits to the service sector may be related to a legitimate concern with encouraging activities that lead to greater use of the biodiversity of the Amazon region.

In this case, in his words, perhaps more appropriate than creating a new tax incentive for services is the creation of a bioeconomy fund, another proposal that is also on the discussion table.

“It is more appropriate to promote a policy of development and research to better use the potential of biodiversity in the region through the budget than through the tax system”, says the former secretary in his presentation

In an interview with Sheet, the governor of Amazonas, Wilson Lima (União Brasil), said last week that there is no possibility of making a transition process to another economic matrix. “On the day we announce that we are going to carry out a transition process, the businessman understands that he will no longer be able to stay here and starts to demobilize today”, stated the governor.

Tostes points out that, in the absence of any proposal to change the model, the tendency is for it to actually be perpetuated —he also makes the reservation that the report by the Chamber’s working group with the reform guidelines speaks of maintaining the benefits “while a solution is built” for the region.

Regarding the proposals already presented for maintaining the model, the former secretary assesses that there is not one that is mature enough to reassure everyone, regardless of their position on the subject.

For him, pushing the discussion to the moment of voting on the complementary law that will regulate the tax reform causes apprehension both for those in favor and for those against the incentives.

He also pointed out that the proposals are still very superficial or contain devices that cause concern, such as maintaining the current rule for sharing revenue between origin and destination, maintaining the IPI until 2073 or creating differentiated tax rates. “All this will lead to greater complexity for the new tax.”

The proposals cited in the presentation are those contained in PEC 45 (2022 report), substitute PEC Brasil Solidário, PEC 110, Simplifica Já (PEC 46), PL 3,887 (CBS proposal), proposal by local industries and CCiF (Centro Tax Citizenship).

In the links below are the reports on the CCiF proposal and that of the government of Amazonas delivered to the Ministry of Finance.

See also the presentation by the former secretary at the FGV working group.

The tax waiver for the region is estimated at BRL 55 billion at the federal level and BRL 16 billion from the state ICMS, according to projections for 2023.

This blog agrees with the assessment that it is not possible to end incentives for industries in the region overnight. On the other hand, the maintenance of the Industrial Pole of Manaus cannot be done with policies that contribute to the deindustrialization of the rest of the country, such as the maintenance of the current tax system. There is a risk that the industry in Amazonas will also lose its relevance before another source of jobs is found for the region.

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