Tax Reform: rapporteur discusses incentives for automakers – 10/12/2023 – Market

The Senate’s Tax Reform rapporteur, Eduardo Braga (MDB-AM), is considering including in his text the provision of tax incentives for automotive manufacturers in a way linked to technological innovation and energy transition. According to him, parliamentarians, states and the federal government have made suggestions on the topic.

The debate takes place while the Stellantis group —which brings together the brands Jeep, Fiat, Citroën, Peugeot and RAM— has a chance of seeing its benefits in the Northeast, scheduled to end in 2025, extended through the Tax Reform. The possibility aroused the fury of competitors, who see no justification for incentives for established manufacturers.

“The federal government is talking to us, but we are creating a text that we hope can reach a consensus on,” Braga said on Tuesday (10). “What I argue is that this [incentivo para a indústria automotiva] whether for technological innovation, energy transition, decarbonization. And it obviously has limitations and restrictions”, said the senator.

The discussion attracts the government of Luiz Inácio Lula da Silva (PT), interested in ensuring benefits for the Chinese BYD after negotiations for the company to land in Bahia. The assessment is that approving the PEC without this measure could compromise the agreement, create legal uncertainty and leave Brazil “demoralized” with China.

In the case of BYD, competitors have a more lenient assessment because they recognize that the company is an entrant in the Brazilian market and still has the technological innovation of electric cars as a differentiator.

The automotive schemes for the Northeast were created in 1997. The main benefit of the program is the 75% reduction in the amount to be paid in Income Tax.

Regional incentives for the sector have already been the subject of analysis in a report by the TCU (Federal Audit Court) on Tax Reform made at the request of Braga, who promises to use the document to support decisions.

The report states that benefits to automakers that set up shop in the North, Northeast and Central-West generated a reduced and limited effect.

Among the cases analyzed by the TCU is the installation of the current Stellantis factory in 2015 in the Goiana region, in Pernambuco. To carry out the survey, the agency measured the evolution of indicators such as GDP (Gross Domestic Product) per capita and the proportion of employed people.

For the agency, there was a significant impact from the installation of the factory in the immediate region of the municipalities of Goiana and Timbaúba (44 kilometers apart), but not in the so-called Intermediate Region of Recife (which encompasses 71 municipalities, including the two).

Also according to the study, 11,258 jobs were created by 2019 by the installation of the factory. As the tax waiver for the project was R$4.6 billion in 2019, the TCU concludes that the policy represented a monthly cost of R$34,400 for each job.

Technicians claim that the measure is much more expensive than other public policies — such as Bolsa Família, which pays at least R$600 per month to beneficiaries.

The benefit to automakers is just one of the examples brought together by the document, which concludes that legal improvements to the tax incentive policy in the country are necessary — such as the creation of rules for periodic assessment of the economic and social impacts of measures.

The TCU report also states that the laws that created the regional benefits do not provide any demonstration of how the incentives will help in achieving the objective — for example, they fail to detail the problems faced, in addition to their causes or effects.

“It was also found that the Union does not know what results it wants to achieve with the PADR [programas de incentivo regional]as these policies do not have concrete objectives, targets, indicators and deadlines, the achievement of which signals with certainty that the causes of a public problem are addressed”, states the document.

Thus, concludes the TCU, the policies “are not based on a clear theory, nor on a logical model that explains how the policies will deal with a public problem, at the lowest possible cost”.

Stellantis said it respects the TCU report, but questions the focus on the period since 2015. “The report could have been more comprehensive and covered even longer periods. It is very focused on Stellantis”, said the company’s corporate communications director, Fabrício Biondo.

Stellantis is the largest company still located in the Northeast benefiting from the benefit. Another multinational group that settled in Bahia to have access to the same program was Ford, which built a factory in Camaçari (BA) — closed since 2021.

Biondo contrasted the TCU findings with another study, produced by the consultancy Ceplan and paid for by Fiepe (Federation of Industries of Pernambuco).

The document points out that there were “strong traditional impacts (on GDP, income, employment, basic education…)”. Furthermore, he concludes that the company’s installation in Pernambuco was an agent of innovation thanks to the “relationships it established, among others, with the main local universities”.

The automaker’s executive also questions the TCU’s numbers regarding the number of jobs created. This is because, for him, it is also necessary to take into account the positions created following the installation of the company’s hub in Pernambuco.

In this calculation, Biondo continued, there were 16 thousand direct employees and 60 thousand if indirect positions were included.