BRAZILIAN GOVERNMENT EXTENDS PAYROLL TAX EXEMPTIONS TO 40 INDUSTRIAL SECTORS

Tax break valued at approximately R$ 60.0 billion in the next four years

BRASÍLIA (14 September 2012) – In a press conference held Thursday, Brazil’s Minister of Finance Guido Mantega announced an increase in the number of industrial sectors to benefit from the payroll tax exemptions under the government’s “Brasil Maior” program. Starting in January 2013, the number of sectors that will pay 1 or 2 percent on their gross revenue instead of making the 20 percent social security contributions will more than double from 15 to 40 sectors. 

Minister Mantega explained that the measure will encourage the reduction of labor costs and make enterprises more competitive to face the current international crisis. “Abroad, wages and benefits of workers are being reduced. In Brazil, this does not happen.  We are reducing the employer's tax contribution to preserve wages,” he pointed out, adding that this will also lead to an increase in formal jobs.

The value of the tax break will be approximately R$ 60.0 billion (US$ 27.9 billion) in the next four years. According to the Minister, a lower tax burden also contributes to a lower inflation rate, as the benefiting sectors have committed to converting their tax breaks into lower prices for consumers. 

“By transferring the reduction to prices, (enterprises) will compete with imported products with lower prices,” he stated. 

The potential impact of the payroll tax reductions in 2013 will be R$ 12.83 billion (US$ 6.371 billion), which corresponds to 0.26 percent of next year’s forecasted Gross Domestic Product (GDP)  of R$ 4.9 billion (US$ 2.43 billion).

For 2014, the impact is expected to be R$ 14.11 billion (US$ 7.01 billion). The Minister explained that all the 40 business sectors benefiting will be exempt from paying a combined R$ 21.57 billion (US$ 10.72 billion) in contributions to social security, while the gross revenue-based tax system will mean tax expenses of R$ 8.74 billion (US$ 4.35 billion) for these participating sectors. 

The Minister pointed out the importance of the tax reductions for food sectors such as the poultry, pork and pork derivatives sectors, which have been facing high grain prices. “Brazil is a great producer and exporter, and the reduction in the price of labor may compensate for the impact of the increase in the cost of inputs,” he said. 

In the public road transportation sector, the Minister stated that the tax exemptions will avert an increase in the price of bus fares, which has a great impact on inflation. 

The payroll tax exemption policy began in August 2011 at the launch of the Brasil Maior program, which aims to strengthen national industries. By August of this year, 15 labor-intensive sectors were beneficiaries of this program.  Yesterday’s announcement brings the total number of sectors eligible for these payroll tax breaks to 40 sectors.

Accelerated depreciation

Another measure announced by the Minister is the accelerated depreciation for the acquisition of capital goods between September 16 and December 31, 2012.

Depreciation is the value registered as expense related to capital goods. By including the goods as an expense, the company reduces profit and pays less income tax. With this new measure, instead of depreciating capital goods every ten years, the goods are depreciated every five years.

“In other words, instead of registering the expense as 10 percent of the product’s value, 20 percent is subtracted each year. This reduces the income tax paid by enterprises,” explained Minister Mantega.

The Minister anticipates an acceleration in the purchase of capital goods through the end of the year. “We are encouraging an anticipation of purchases so that there is an increase in investments made by enterprises,” he said. 

The total value of tax breaks in five years is forecasted to reach R$ 6.75 billion (US$ 3.34 billion), including R$ 1.374 billion (US$ 0.68 billion) per year between 2013 and 2016 and R$ 1.259 billion (US$ 0.624 billion) in 2017.

Inflation and growth

The Minister of Finance stated that inflation is under control in Brazil and that all measures for reducing costs adopted by the government will result in a reduction in prices. He stated that the global economy has experienced a shock in supply due to climate-related issues. 

According to the Minister, several measures are being taken that contribute to the drop in prices. He pointed out the reduction on the Tax on Industrialized Products for several products, the drop in the cost of energy, and the newly announced tax breaks. “With the measures that will come into force next year, inflation will behave in 2013.”

Mantega said the measures announced also ensure a 4 percent growth for the Brazilian economy next year. He indicated that some indexes have pointed to this growth trend, such as retail, which recorded a 1.4 percent growth in July as compared to June. “That is a lot. It is growing significantly,” he assessed.

For 2012, however, the Minister commented that at the next GDP review, the forecast will be for 2 percent annual growth in comparison with the previous estimate of 3 percent.

For 2013, Minister Mantega said that additional tax breaks may be announced. “We will continue to conduct a cost containment policy in order to increase room for the expansion of investments and continue to offer tax breaks,” he stated.

QE3

Questioned about the impact of the new QE3 stimulus measure announced Thursday by the United States Federal Reserve, the Minister said he is watching this new monetary expansion closely and adequate measures will be taken if unwanted resources make their way into Brazil in the short term. 

"We will not let the real raise its value because of these measures,” he emphasized.

In a communiqué yesterday, the U.S. Federal Reserve announced that it will buy US$ 40.0 billion in mortgage debt per month and that it will continue to purchase assets until employment-related prospects improve substantially.

In Minister Mantega’s view, it would be ‘desirable’ if the monetary resources that are expanding in the United States market went to production in the country itself without hindering emerging markets.  

“This would enable higher growth for the American economy, which would be positive for everyone,” he said.