Sectors slam Brazilian govt over tax credit measure

Brazilian business sectors are up in arms over a government decision to limit the use of tax credits, a move some analysts say could affect the approval rating of President Luiz Inácio Lula da Silva’s administration.

Last week, the government issued a provisional measure changing the rules for the use of the PIS and Cofins tax credits, affecting sectors such as the mining and oil and gas industries.

The provisional measure restricts the reimbursement of PIS-Cofins credits from specific sectors and will bring an estimated 11.7 billion reais (US$2.2bn) to the government's coffers, and limits the use of PIS-Cofins credits for paying debts related to other taxes, with an estimated impact of 17.5bn reais, said Brazilian mining association Ibram in a statement.

"This measure represents a significant tax impact on companies, harming competitiveness, loss of markets and discouraging investments," said Ibram. "This limitation will certainly have a substantial impact on taxpayers' cash flow, especially exporting companies, for which in practice, only the refund request will be left as an option to benefit from credits related to their inputs," the association added.

The change will have a direct impact on companies' cash flow, as many firms use the PIS-Cofins tax credits to pay other taxes. The use of such credits for tax payments is preferred by companies instead of relying on tax refunds, which are subject to uncertain calculations and lengthy approvals.

The provisional measure will be in force for 120 days and has to be approved by congress to become permanent.

"The government is taking a huge risk with this provisional measure as there is a strong chance that it will be vetoed by congress, which is strongly aligned with the interests of business leaders," André Pereira César, a political analyst at Hold Consultoria, told BNamericas. “The government made a political mistake because it should have negotiated more with the business sectors before signing this measure, and now we are likely to see Lula's approval decline even more.”

Recent polls have shown support for Lula gradually falling. According to César, the impact on Lula's approval rating will be the result of fuel distribution firms having announced they will hike the price of fuel this week to compensate for the tax credit change.

"What is happening in Brazil is something I imagined since the beginning of the tax reform, when the government made a series of concessions [to approve the reform]. Now the tax authority, the finance ministry, are working quietly on the edges, they are changing the rules to increase the government’s tax collection," said Rubens Ometto, chairman of Brazilian energy and logistics conglomerate Cosan, at a business event, drawing strong applause for his comments.