Industrial production tax in Brazil has been slashed by 25% for most products, in an effort to combat inflation, help the country overcome a productive slump brought on by the global pandemic, and promote industrialization.
The move was announced on February 25, with Economy Minister Paulo Guedes stating that it would be brought in with immediate effect.
“It’s a simple move, but an important one. It’s a historic landmark. It is the first time that we are going to reduce taxes linearly,” Guedes was reported saying by O Globo.
According to state news agency Agencia Brasil, some automobiles will only see a reduction of 18.5% in the tax, which is officially known as the Tax on Industrialized Products (IPI), while tobacco products will be excluded from the cut.
It had previously been thought that alcoholic beverages and weapons would also be excluded, but they do enjoy the benefit.
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Guedes reportedly acknowledged that the effect on inflation would be short-term, but emphasized that the move is part of a longer-term strategy to bolster the manufacturing sector.
“[The tax cut] is a milestone of the beginning of Brazilian re-industrialization after four decades of deindustrialization,” Guedes stated, according to Reuters.
According to Guedes, the move will result in tax revenues being reduced by approximately $3.9 billion (all figures in USD), with half of that being borne by the federal government, and the remainder affecting regional and local government coffers.
Guedes stated that the government had considered slashing industrial production tax in Brazil in half, however opted not to as it would unduly affect a tax credit benefit that is tied to the IPI rate and enjoyed by companies operating in the Manaus Free Trade Zone.
The announcement came just hours after Brazilian President Jair Bolsonaro had promised “good news” for Brazilian business regarding industrialization.
Because industrial production tax in Brazil is a regulatory tax, the rate could be changed by presidential decree, which was published the day of the announcement.
According to Agencia Brasil, a note published by the Brazilian President’s Office stated that the tax cut could be implemented because of strong revenues, with January 2022 being a record month for tax income.
“There is, therefore, sufficient fiscal space to enable the reduction now made, which seeks to encourage domestic industry and commerce, reheat the economy and generate jobs,” the note reportedly read.
Cutting Industrial Production Tax in Brazil Good for Business
The announcement of the significant reduction of industrial production tax in Brazil was welcomed by bodies representing the manufacturing industry, such as the National Confederation of Industry (CNI) and the Federation of Industries of Santa Catarina (Fiesc).
According to Mario Cezar de Aguiar, president of Fiesc, while the reduction was not as significant as hoped, with the 50% cut previously suggested, it was still “excellent news”.
The industrial sector is the one that pays the most tax, is the most penalized. This takes away the competitiveness,” her was reported as saying by NSC Total.
Meanwhile, his counterpart at the CNI, Robson de Andrade, highlighted how the tax cut would generate positive effects for the economy, including reducing consumer prices, and increasing sales of manufactured goods.
For international investors it also makes the Brazilian manufacturing sector a more enticing investment.
Over the past decade, Brazil’s industrial sector has provided a decreasing proportion of the country’s GDP, with its contribution dropping from 23.3% in 2010 to 17.7% in 2020.
That was despite the fact that foreign direct investment (FDI) as a proportion of GDP has remained relatively constant during the same period, prior to the global pandemic seeing FDI tumble in 2020.
With the cut in industrial production tax in Brazil now making the manufacturing sector a better bet for investors, and the government promoting its efforts to spark greater industrialization, those patterns could soon begin to change.
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