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Montevideo, September 18th 2018 - 13:46 UTC

Brazil planning to cut taxes on electricity to help reduce industry costs

Wednesday, May 16th 2012 - 01:07 UTC
Full article 5 comments
“I don't know of many countries that tax electricity, but we tax it” “I don't know of many countries that tax electricity, but we tax it”

The Brazilian government has plans to cut and simplify taxes for electricity producers and distributors as part of a strategy to reduce Brazil's high business costs and stimulate its struggling economy, reports Reuters.

Brazil has been on the brink of recession since mid-2011 as high taxes, an overvalued exchange rate and other structural problems squeeze what had previously been one of the world's most dynamic emerging economies.

Rousseff has in recent months announced targeted tax cuts for stagnant sectors such as the automotive industry, embracing an incremental approach to reform that has drawn criticism from investors who say more drastic changes are needed.

Apparently the tax reductions for electricity companies, which Rousseff will announce in coming weeks, would likely be the most far-reaching to date.

Brazil has the world's third-highest power costs, and Rousseff is aiming to give relief to consumers as well as companies in energy-intensive areas such as steel and petrochemicals.

Internal government studies suggest that, depending on which taxes are cut, electricity costs could fall by between 3 and 10% starting as early as 2013. That would have a measurable impact on inflation and aid Rousseff's quest to push Brazilian interest rates lower.

Rousseff said in a speech on Tuesday that deep changes to Brazil's tax code were necessary, and cited electricity as an example of what is wrong with the current system.

“I don't know of many countries that tax electricity, but we tax it,” she told a group of mayors. “We tax things that are fundamental for the development of the country. ... We need to push through the tax reform that we all want.”

Brazil's tax code is so complex that an average company spends 2,600 hours a year calculating what it owes, according to the World Bank's annual Doing Business study, which compares business practices around the world. That is almost 14 times the time needed to do taxes in the United States, and by far the highest among the 183 countries in the World Bank's survey.

Electricity prices are a big component of the so-called “Brazil cost”, the mix of taxes, high interest rates, labour costs, infrastructure bottlenecks, and other issues that have caused the economy to become less competitive.

Brazil's average electricity cost of 180 dollars per megawatt hour is exceeded only by Italy and Slovakia, the Getulio Vargas Foundation, a private think-tank, said in a 2011 study based on data from the International Energy Agency.

High electricity rates have contributed to stagnant investment and production in energy-intensive industries. Despite Brazil's bauxite and alumina resources, no new aluminium factories have been built in Brazil since 1985 and two have closed, keeping production levels stagnant, the Getulio Vargas study said. It said electricity accounts for 35%, “an insane proportion” - of the industry's production costs.
 

Categories: Economy, Politics, Brazil.

Top Comments

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  • Fbear

    In what way will the ultimate consumer benefit? IF taxes are cut for producers and distributors, what guarantee is there that the saving will be passed on? I would like to see some specifics.

    May 16th, 2012 - 04:08 pm 0
  • ChrisR

    @1

    You are correct to be sceptical that producers and distributors will keep back some of the money if taxes are removed.

    They will most certainly do so because, like all South American countries the government is bloated with non-productive civil servants and taxes private companies until they howl to pay for them.

    What is required is a fundamental shift in the ratio of government / private headcount.

    Getting rid of the fiscal drag caused by government would suprcharge the economy with all the new workers now available and affordable by lower taxes.

    Agreed, the pampered civil servants would not like it much to begin with as they would actually have to WORK for a living. Restricting the power of the unions to strike would also be required to prevent them destroying businesses.

    I realise that this will be seen as heresy, but as an atheist, who cares?

    I have, in my career, been on the management teams of large international businesses and do understand what is required to get Brasil where it says it wants to be: at the forefront of the worlds countries. It will never happen unless these sorts of changes are made.

    May 17th, 2012 - 02:21 pm 0
  • Fbear

    The president, whom I admire, DOES say all the right things. I just hope she follows through. I also realize that the congress is to blame for much of the problem.

    Interesting what you say about civil servants having to actually work. I happen to know one whose stated philosophy is, “The less work you do, the fewer mistakes you will make.” And to think that we are called on to subsidize their lifestyles. Still, this governmednt bureaucracy, apart from being one of the most complex to negotiate, is little different in attitude from any other around the world.

    May 17th, 2012 - 03:13 pm 0
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