Brazil’s Tax Credit Trimming May Hurt Company Cash Flows

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By Ed Taylor

Foreign-owned companies in Brazil are struggling to deal with a sudden reduction in tax credits and fiscal benefits.

The government has agreed to create a subsidy for diesel fuel, but will pay for it by cutting certain tax breaks and tax credits for companies—moves that will impact multinational companies and their subsidiaries.

Three decrees issued May 30 are part of an agreement with truck drivers to end a nationwide strike that brought many sectors of the economy to a halt.

Several business associations, including the Federation of Industries of the State of São Paulo (Fiesp), Brazilian Chemical Industry Association, and Brazil’s steel industry association, are threatening suits to challenge the constitutionality of the measures.

Individual companies, meanwhile, are being advised to file injunctions to protect themselves. Attorney Luis Alexandre Barbosa of the firm LBMFtold Bloomberg Tax he is preparing to file five injunctions for clients against the elimination of credits for monthly income tax payments.

Raise Costs

Through provisional measure 836, the government took away a tax break from 2013 that allowed chemical companies in Brazil to receive tax credits on their purchases of petrochemical raw materials.

Fernando Figueiredo, president of Abiquim, said the move could force chemical companies to cancel investments that had depended on the incentive. Abiquim estimates it will raise the industry’s costs for the remainder of 2018 by $100 million and starting in 2019 by $300 million annually.

“In practical terms, this represents the risk of several factories closing, with a direct impact on the maintenance of jobs and the competitiveness of the industry,” Figueiredo said at a June 5 press conference.

Another decree ( No. 9,393) practically eliminated the “Reintegra” program for exporters.

The program was created in 2011 and has allowed companies to receive a 2 percent tax credit on the value of their exports of manufactured goods.

The decree cut the credit to 0.1 percent as of June.

Jose Augusto de Castro, president of the Brazilian Foreign Trade Association said in a June 1 press conference that the slashing of the credit will likely reduce foreign investment in Brazil.

Welber Barral, a consultant and former government foreign trade secretary, told Bloomberg Tax by email June 11 that the loss of the credit will have a serious impact on the food processing sector, a major exporter, due to the low profit margins of these firms. He added that he expects many companies will turn to the courts to challenge the government’s decision.

Not Ready for This

The government added a third credit-reducing measure to Law 13,670, which was signed May 30.

According to that measure, companies that pay their income taxes on a monthly basis can no longer use accumulated tax credits to cover all or part of these payments. It could apply to multinational companies.

“This will impact the monthly cash flow of companies who will have to use these funds to make their monthly tax payments,” said Helcio Honda, legal director of Fiesp, at a June 5 press conference.

Attorney Rafael Serrano of the law firm Chamon Santana told Bloomberg Tax via email on June 11 that companies will feel the impact of this measure immediately.

“Taxpayers have until the last day of the month to declare their taxes and they can no longer compensate (with credits). They will have to use cash flow money even if they aren’t ready for this,” he said.

The move caught companies by surprise, said attorney Marcelo Salles Annunziata of the law firm Demarest.

“The taxpayer was counting on these credits and when he opted to pay on a monthly basis this was possible. Now he can’t go back and choose for example to pay on a quarterly basis,” he said by email on June 11.

To contact the reporter on this story: Ed Taylor in Rio de Janeiro at correspondents@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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