From AAIA Capital Report
The Brazilian government enacted a new tax policy on April 4 that will affect new vehicle and auto parts manufacturers currently doing business in Brazil and throughout South America. Last September, Brazil increased its IPI excise tax by 30 percent for all vehicles with less than 65 percent of their parts manufactured in Brazil or in the other South American countries that make up the Mercosur customs union, including Argentina, Uruguay and Paraguay. The tax increase was implemented to protect local companies from an increasing number of imported vehicles coming from Europe, South Korea and China. In order to escape this higher tax rate, foreign auto companies had been urging the Brazilian government to offer tax relief for establishing assembly plants in Brazil. As part of a new economic stimulus package, all vehicles sold in Brazil, even those produced locally, will be subject to this 30 percent tax beginning in 2013; however, companies can receive tax credits on vehicles if the majority of the parts are purchased locally.
The new policy outlines specific rules for companies hoping to take advantage of these new tax breaks. For instance, in 2013, if a manufacturer of light vehicles ensures that eight of the 12 total steps in the production process occur locally, then they would be eligible for a significant tax break. In addition, if a company’s vehicles meet certain fuel efficiency standards or they agree to invest in new technology, then further tax relief will be made available. These criteria will become stricter every year until the policy ends in 2017. Furthermore, in order to encourage foreign auto companies to invest in plants in Brazil, the government has agreed to allow them three years to meet these requirements so that they may receive the maximum tax breaks.
