Brazil to make bolder tax cuts on industrial products

© Reuters. FILE PHOTO: Brazil's President Jair Bolsonaro speaks during a ceremony to hire the first doctors of the "Medicos pelo Brasil" Program at the Planalto Palace in Brasilia, Brazil April 18, 2022. REUTERS/Adriano Machado

By Marcela Ayres

BRASILIA (Reuters) - Brazilian President Jair Bolsonaro signed a decree to cut taxes on industrial products (IPI) by 35% effective on May 1, a deeper tax cut than the 25% reduction that is in force now, an effort he says will boost economic activity as the country emerges from the pandemic.

The IPI tax is levied on industries that make and import manufactured products, like refrigerators, cars, air conditioners and televisions.

The decree, which does not need to be approved by Congress, will lead to a decrease of 15.2 billion reais ($3.08 billion) in government revenues this year.

Considering the 25% reduction in force for the last two months and the additional cut announced now, the tax waiver will reach 23.4 billion reais in 2022, according to the Economy Ministry. Revenues will also decrease by 27.4 billion reais in 2023 and 29.3 billion reais in 2024, the government added.

Brazil says the tax reductions, first announced in February, are aimed at helping industries recover from the pandemic downturn and fight inflation by enabling companies to reduce prices.

The move comes despite earlier reservations about its legality. In March, Economy Minister Paulo Guedes pledged the IPI cut would be extended to 33% from 25%, but Bolsonaro decided against the move as questions about the legality of the measures were raised.

An injunction request filed by the Republican Party of the Social Order (PROS) in the Supreme Court questioned the tax cut's constitutionality, arguing that it threatened the Manaus Free Trade Zone in the state of Amazonas.

Companies operating in the Manaus Free Trade Zone are exempt from paying IPI, and can generate credits equivalent to the industrial tax and make deductions from other tax obligations. The lower the IPI rate, the smaller their potential credits, which reduces their fiscal advantage.

The government spared products representing around 76% of the Manaus Free Trade Zone's revenue from the new tax cut, leaving them with a 25% reduction in industrial tax.

The 18.5% tax cut for vehicles announced in February was not increased, and the government kept the exclusion of tobacco products from any benefit.

($1 = 4.9385 reais)