By Breakbulk Staff, on May 16, 2013

Reforms, Incentives Ease Tax Burden for Some

In Brazil, imports are taxed at such a high rate that moving a piece of project cargo from Santos to Sao Paulo can cost more than moving it from Hong Kong to Santos, according to logistics providers.

This punishing tax code is a prime contributor to the impression many foreigners have of Brazil’s high costs, said Eduardo Kiralyhegy, tax attorney and partner with the firm Negreiro, Medeiros & Kiralyhegy.

The picture has become more complicated recently. Courts have ruled on the side of the taxpayers in several recent cases, and Brazil has implemented several sector-specific tax incentives aimed at speeding the construction of needed infrastructure and development of the country’s golden goose, offshore oil and gas.

“Taxes in Brazil are certainly high,” said Kiralyhegy. “But some sectors like oil-and-gas and infrastructure investments, and the refurbishments for World Cup and Olympic games … are almost exempt from all taxes.”

Without the advantage of a tax exemption, imported cargo can accrue up to six different taxes before reaching its final destination.

These taxes can include:

• The basic import tax, which varies according to the Mercosur Common Nomenclature code.
• An industrial products tax.
• A freight tax of 25 percent on ocean freight (10 percent on cabotage) and port handling charges.
• A state sales tax at 4 percent (charged twice if cargo travels through more than one state).
• Federal taxes levied at 1.65 percent and 7.6 percent, respectively.
“In addition to the numerous taxes, [there] are also many ancillary obligations,” said Kiralyhegy. “Definitely, doing business in Brazil would be easier if the tax environment was significantly simpler than the one we have today.”

Under the special tax regime for the oil-and-gas industry, known as REPETRO, goods utilized in the industry are exempt from the basic import tax, the industrial products tax, the federal taxes and in some cases the freight tax.

Interpretation is Key

Tax breaks can benefit importers, but only when the government interprets them correctly.

For example in a recent case, a tax subsidy set up for the shipbuilding sector was presumed to exempt a large engine from the import tax, Kiralyhegy said. But Brazil’s internal revenue service, the Receita Federal do Brasil or RFP, interpreted the tax break as applying only to equipment with no domestic equivalent. Unsurprisingly, Kiralyhegy’s client and other shipbuilding companies disagreed with this interpretation.

Kiralyhegy was hired by the Sindicato Nacional das Empresas de Navegação Marítima, known as SYNDARMA, to file a class-action lawsuit on behalf of all Brazilian shipping companies. The case, which they won, claimed that equipment for ships, repairs, new builds, or conversions were exempt regardless of whether an equivalent could be found in Brazil.

Will these special tax breaks last? What about more lasting amendments that would relieve a broader swathe of the business community? In terms of more lasting amendments to the tax code, a dispute handled at the federal level recently triggered an important change.

Until the end of last year, several states were fighting over state sales taxes. States handling high volumes of cargo kept their rates low, diverting traffic from other states. To stop this, Brazil’s federal government stepped in at the end of 2012 and enacted Resolution No. 13, which mandates all states keep their applicable sales tax at a fixed 4 percent.

“We can’t measure it yet,” said Ana Kriegel, commercial manager with Agunsa Maritime Services. “But this action shows the government wants to make changes to improve our market.”

In another recently completed and lengthy case, Brazil’s Supreme Court ruled in favor of importers who claimed the method the RFP used to calculate import tax was unconstitutional.

The faulty calculation consisted of a complicated mathematical formula that wrapped federal taxes and sales taxes into the total value of the cargo.

“The calculations were bigger than they should have been and several lawsuits were filed,” said Kiralyhegy. Since losing the case, the RFP estimates it might have to reimburse up to R$34 billion (US$16.9 billion).

There will not be any automatic repayments, however. Only defendants who take the issue to court will have a chance to receive damages. In the future, as companies are no longer burdened by the erroneous calculation, this could reduce taxes on some imports by 2 percent to 3 percent. That may not seem like much, but it cuts costs, Kriegel said.

Mirror, Mirror

Brazil’s Supreme Court is unlikely to be finished hearing maritime-related tax cases anytime soon.
In February 2011, Brazil’s Secretariat of Federal Assets, known as SPU, began trying to resurrect an old law that would charge private ports a fee based on the surface area of water they occupy.

Decree Number 9,760, also known as “espelho d’agua” — Portuguese for “mirror of water” — was originally enacted in 1946. It allows the federal government to collect taxes on coastal waters. How exactly these taxable waters are to be measured or assessed is unclear.

The decree was ignored for decades, until the SPU began trying to bring it back to life two years ago. Wilen Manteli, president of the Associação Brasileira dos Terminais Portuários, known as ABTP, called the law “absurd.”

Manteli filed a lawsuit with the Supreme Court to nullify the law, which threatens to impose more taxation on existing port terminals as well as on new ones to be built as part of the government’s R$54 billion (US$26.7 billion) port infrastructure modernization plan.

“The president is making a considerable effort to attract private investment to Brazilian ports to have them ready for new and growing trade demands,” said Manteli. “While on the other hand, the SPU is trying to block it with state bureaucracy, requiring this tribute. It is unacceptable bureaucracy that will impede the installation or expansion of port terminals.”

Manteli said that, if enacted, the mirror tax would frighten off private investment the port sector desperately needs.

The SPU has given private port operators until the end of 2013 to comply. Meanwhile, Manteli hopes to defeat the mirror tax in the Supreme Court before the end of the year.

End Game

Despite a few recent gains in court, much remains to be done.

Celso Pavão, owner of Polo Port Operators, recommends exempting the cabotage trade from taxes on cargo and on ship bunkers.  “Long-course ships should be able to bunker without paying any taxes.”
The tax code holds back domestic manufacturers as well as importers. Kriegel recommends cutting the industrial products tax and state sales taxes on export cargo.

“Just eliminating these two taxes would increase exports, opportunities, and jobs locally,” she said.
Kiralyhegy believes reducing payroll taxes would also help. Employment costs in Brazil “are indeed huge,” he said.

“Our government needs to change all taxes, including costs for merchants,” Kriegel said. “But this process will be delayed a lot, 10 to 20 years.”

Sweeping change will not come quickly or easily. Despite reforms and subsidies and although Brazil’s government has sworn to lower taxes on all goods and services, long-entrenched interests are bound to push back. Changing the rules, Pavao noted, often comes down to “who is receiving the benefit if the rules stay in place.” No one expects Brazil’s infamous tax regime to disappear overnight.