MercoPress. South Atlantic News Agency

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

“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.