One of the strategies adopted by the economic team since the beginning of the Jair Bolsonaro government to give more dynamism to the economy was the reduction of taxes, in some cases temporarily and in others, definitively.
According to the Ministry of Economy, these measures seek not only to reduce the tax burden, but also to improve the allocation of resources and allow an increase in productivity in the Brazilian economy. Another objective was to contain inflation.
The most recent measures were in the direction of lowering prices and were probably the most noticed by the consumer. The government has zeroed federal taxes on gasoline, ethanol and diesel, and has articulated for the approval of a ceiling for the ICMS charged by the states – in this second case, naturally, there is no impact on federal finances.
The Ministry of Economy estimates that the impact of all tax reductions announced since 2019 and still in effect will reach around BRL 30.9 billion, or 0.32% of Gross Domestic Product (GDP) this year. Even with these exemptions, the economic team believes that public debt will not be harmed. THE gross debt has been lower than expected by the market and, in May, it corresponded to 78.2% of Brazilian GDP, according to the Central Bank.
The impact of the tax reduction is not greater because, in some cases, the government looked for ways to compensate for these measures. It is the case of temporary reduction of federal taxes on diesel oil and definitive reduction on cooking gas (LPG), announced in March last year. To compensate for the loss of revenue, the government increased the tax levied on banks, limited the exemption from the Tax on Industrialized Products (IPI) on cars for people with disabilities, and ended a tax waiver for the petrochemical sector.
Months later, in September, to make more money available for Auxílio Brasil, the government temporarily increased the Tax on Financial Operations (IOF) levied on individuals and companies.
Tax reductions did not prevent an increase in the tax burden
This impact of 0.32% of GDP, however, is not enough to reverse the high tax burden that took place last year. According to the National Treasury calculation, the weight of taxes in the Brazilian economy increased by 2.1 percentage points compared to 2020 and reached 33.9% of the Gross Domestic Product (GDP)the highest level in at least 12 years.
The biggest increase in revenue came from taxes collected by the Union, but states and municipalities also recorded strong growth in tax revenues. According to the Treasury, the increase is related to “the reversal of tax incentives introduced during the Covid crisis, in addition to economic growth in 2021 based on the resumption of trade and services”.
What are the purposes of tax reductions, according to the Ministry of Economy
Government measures have several objectives. The declared intention of the linear reduction of the IPI by 25%, subsequently expanded to 35%for example, is to reduce the tax differential between goods and sectors.
“It is expected to reduce the interference of the tax differential in the choice of families, in addition to improving, at least partially, the incentives of companies in the search for capital return and not for tax benefits”, quotes a note from the Ministry of Economy.
But some of the measures, especially the most recent ones, were also aimed at fighting inflation. This was the case of the aforementioned reductions in IPI and import tariffs.
The IPI cut was even suspended by decision of the Minister of the Federal Supreme Court (STF) Alexandre de Moraes, given the interests of the Manaus France Zone (ZFM). Therefore, on Friday (29) the government published new decree to guarantee a 35% tax reduction on goods produced outside the ZFM.
Another set of measures focuses, according to the ministry, on raising productivity through greater openness of the Brazilian economy.
Measures were introduced with the aim of reducing trade barriers and expanding Brazil’s access to more efficient international technologies. Among them are the reduction, in two blocks of 10%, of the rates of products of computer goods, telecommunications and capita. In addition, there was a 20% reduction in import rates within Mercosur.
The Additional Freight for Merchant Marine Renewal (AFRMM) has also been reduced. The rate on long-haul shipping freight increased from 25% to 8%, benefiting mainly products originating in more distant countries. The measure also reduces the cost of transporting goods transacted in the country. Estimates by the Economic Policy Secretariat (SPE) indicate that the impact of this measure on the prices of the basic food basket could be 4%.
Economic recovery favors tax cuts, says government
According to the Ministry of Economy, one of the factors that favors the reduction of taxes is the above-expected economic recovery after the stoppage of activities during the pandemic, which has allowed tax collection to grow to levels above nominal GDP.
“Tax reduction is an economic policy on the supply side, which aims to increase the productive capacity of the Brazilian economy in a sustainable way over a long time horizon, generating an increase in productivity and correction of misallocation, opening space for the expansion of production by through new investments and ventures”, says a note from the folder.
What were the tax reductions promoted by the Bolsonaro government
Reduction of IPI for specific products
- Average annual estimated cost: BRL 707 million
Extinction of the 10% FGTS fine on terminations of employment contracts without just cause
- Average estimated annual cost: BRL 5 billion
2020 (measures related to coping with the pandemic)
Reduction to zero of IOF rates on credit operations
- Average annual estimated cost: BRL 18.6 billion
Reduction to zero of Import Tax rates on specific products to fight Covid-19
- Average annual estimated cost: BRL 3.3 billion
Reduction to zero of the rate of the Simplified Taxation Regime (RTS) of special products
- Average annual estimated cost: BRL 1.6 billion
Temporary reduction of IPI for goods necessary to combat Covid-19
- Average annual estimated cost: BRL 0.8 billion
Temporary exemption from PIS/Cofins for drug supplies
- Average annual estimated cost: BRL 0.6 billion
Suspension for 90 days of the deadlines of the Union’s active debt collection processes and new installment conditions for individuals or legal entities
- Average annual estimated cost: BRL 0.8 billion
Reduction of contributions to the S system by 50% for 3 months
- Average annual estimated cost: BRL 2.6 billion
Definitive reduction of PIS and Cofins on LPG
- Average annual estimated cost: BRL 847 million
Temporary reduction of PIS/Cofins for fuels (diesel oil in March and April 2021 and from March to December 2022; gasoline and ethanol from July to December 2022)
- Average annual estimated cost: BRL 9.8 billion
10% reduction in the Mercosur Common External Tariff) in 2021 and 10% in 2022 + Reduction of 10% in 2021 in the items of Capital Goods (BK) and Computer and Telecommunications Goods (BIT) and of 10% in 2022
- Average annual estimated cost: BRL 6.7 billion
Reduction of the Additional Freight for Merchant Marine Renewal
- Average annual estimated cost: BRL 4.5 billion
Linear reduction of 35% of IPI for industrialized goods in general
- Average annual estimated cost: BRL 20.9 billion
Gradual reduction of the IOF on foreign exchange operations, to be zeroed by 2028
- Average annual estimated cost: BRL 938 million