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Government evaluates moderate fuel tax cuts

Paulo Guedes provided an overview of the amendments to fuel prices

Brazil's Economy Minister Paulo Guedes said today that the government is evaluating "moderate" reductions in certain taxes while drafting the proposed Constitutional Amendment (PEC) fuel. The purpose of this measure is to avoid a consistent increase in fuel prices. Guedes indicated that the government is considering lowering taxes on diesel, but questioned a similar measure for gasoline.

“We are studying this very economically, we are looking at those taxes that could be moderately reduced. It may be that [at] [tax] on diesel fuel [if] it can go a little further. But as far as gasoline is concerned, after all, if we are moving to a green economy, if we are moving to a digital economy, should we subsidize gasoline?” the minister asked at a virtual event on the Brazilian economy hosted by Credit Suisse (SIX:CSGN).

According to the minister, the proposal would "sanction", with the approval of the states, among other measures, the reduction of rates of the tax on the circulation of goods and services (ICMS). In turn, the government will also reduce federal product taxes, such as the Social Inclusion Program Contribution and Public Employee Asset Buildup (PIS/Pasep) and Social Security Funding Contribution (Cofins).

“If you want to reduce the ICMS, reduce the ICMS for Brazil to better include diesel. On the other hand, if the federal government is also empowered; we have raised about 17 [bn. reais], almost 18 billion reais per year for diesel fuel; we could reduce it a bit there too,” he added.

The minister also said the issue was political and referred to a bill approved in the House of Representatives that would set a fixed amount for the ICMS collection on fuel.

Currently, ICMS is calculated as a percentage of the final price. This causes the tax to fluctuate as pump prices rise when Petrobras (SA:PETR4) adjusts refinery values  and lowers them when otherwise.

The draft requires the states and the Federal District to list the rate charged to the ICMS for each product in terms of the accepted unit of measure (litre, kilogram, or volume), rather than the value of the item, as is currently the case. The proposal is awaiting consideration by the Senate.

“If they think they should limit the ICMS and leave ad valorem [percentage according to the value of the goods] ad rem [fixed cost] and limit instead of being 34%, that is 25%, 20%. This is a political issue, I do not get involved in this discussion. Now that it's welcome, instead of just thinking about a spending cap, thinking about a tax cap, I like the idea," he said.

The successive rise in fuel prices has led to a fall between the federal government and the states. Several times over the past year, President Jair Bolsonaro has given states some of the responsibility for fuel increases. The federal government advocates that ICMS be charged as a fixed price per litre, as is the case with federal taxes.

Against the background of the president's statements, the secretaries of the State Cabinet approved at a meeting of the National Business Policy Committee (Confaz) an extension until March 31 of the ICMS fuel freeze, which focuses on the weighted average price for the final consumer (PMPF). The freeze, approved in October last year, will end on January 31.

However, the governors say the freeze is not enough and argue that the centerpieces of the fuel boost are "dollar variations and Petrobras' policy of parity with the international oil market," the National Committee of State and Federal District Treasury Secretaries said in a letter released last week.

As a solution, the states are advocating the creation of a fuel price stabilization fund to avoid transfers to the consumer. During an event on Tuesday, Guedes spoke out against the creation of the fund. According to the minister, more than 80% of the stabilization funds of other countries "went wrong."

 

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