MercoPress. South Atlantic News Agency

Elimination of a “Brazil cost” item represents a further 1,5 percentage point reduction in tariffs

The Ministry of Economy hopes that importers will then pay 10% when entering the country, below the Mercosur External Common Tariff is currently at 11.6%

The Brazilian government is drafting a presidential decree to change tax revenue mechanisms, which the economic team argues it will lead to a 1.5 percentage point reduction in the rates levied on all imported products. This is part of president Bolsonaro's administration policy of (gradually) opening the Brazilian economy to foreign competition.

According to the Ministry of Economy, the purpose is to eliminate foremen handing services from the tax calculation costs. For example in the port handling sector, foreman services entail cargo loading and unloading in terminals.

Nowadays, the rates taxed on imported items are levied considering foreman services. Governmental sources say that Brazil is one of the few countries in the world to adopt this out of time practice and that not even other Mercosur member countries, including Argentina, do such a thing.

The decree altering the current tax collection mechanism in Brazil has already been approved by key ministries and the country's legal team. The Brazilian Attorney General (AGU) is conducting a final analysis of the decree to avoid any potential for illegality in light of the upcoming elections.

The decree will be sent to President Jair Bolsonaro for signing after it has passed all of the necessary checks. The Ministry of Economy hopes that importers will then pay 10% when entering the country. In effect Mercosur External Common Tariff is currently at 11.6%. Thus, if the decree is implemented, the reduction would lead to a 1.5 percentage point cut.

Brazilian authorities have already described the initiative as another “round” in the country's Tariff reduction policy. Last year levies were reduced by 10% across the board, covering roughly 87% of all products imported. Brasilia recently announced a further 10% tariff reduction, affecting 6,195 customs codes. Both measures, however, are considered “temporary and require the approval of other Mercosur partners to become permanent”.

Anyhow eliminating foremen handling services from the tax costs will be a permanent change until further notice, signaling an important change in the composition of the customs value that composes the basis for calculating the tariff, with a similar effect to a rate cut.

Such a move to reduce costs, is an ongoing demand from the private sector spearheaded by the National Confederation Industry (CNI). The government prefers not to call it a “tax waiver” as it deems import rates to be of a mandatory, regulatory nature. Per law, such tax category does not allow for a tax waiver.

According to the Economy ministry, the estimated revenue loss will be R$ 461.3 million in 2022 but will decrease in subsequent years. On the other hand, the economic team (and the private sector) considers the initiative insignificant in terms of revenue, since it will have a great impact on one of the components of the so called “Brazil cost”, including an increase in competitiveness.