Brazil water companies lobbying to block tax reform proposals

Stakeholders in Brazil’s water and sanitation sector are lobbying lawmakers to reverse measures in the country's planned tax reform that could jeopardize investments and put existing contracts at risk.

Earlier this year, the lower house approved the tax reform framework, which is now under consideration in the senate.

Water companies are trying to persuade legislators to block a measure that is likely to increase taxes for the segment and could result in higher rates for users and impact current contracts.

Sector companies currently have to collect the 9.25% PIS and Cofins federal taxes but are exempt from paying state tax ICMS and municipal tax ISS. 

However, under the regulations for each sector of the tax reform, the water industry faces the risk of seeing taxes increase to 26.5%, which is the estimated rate of value-added tax (VAT) to be implemented through the reform.

"This is a very problematic issue because it could lead to an increase in rates for the final user, as there's a risk of a hike in taxes for companies," Veronica Rios, president and director of Brazilian water regulator ANA, told BNamericas.

A potential increase in taxes for the sector is also causing concern among project finance players.

"The financing operations of companies in the sector were designed for a specific tax environment. If there is an increase in taxes, this could create the need for changes in clauses in existing financing contracts, and in more extreme cases, the revision of concessions and PPPs already in force," the director of the project finance area of one of the most active banks in financing operations in the water and sanitation sector, told BNamericas, asking not to be named.

Earlier this month, the head of Brazil's association of private water and sewage service concessionaires (Abcon), Christianne Dias Ferreira, attended a public hearing in the senate to discuss the impacts of the tax reform on the sector.

According to Abcon, if the tax plans approved in the lower house remain unchanged, rates for consumers may increase 18% and investments could fall.

Brazil needs 900bn reais (US$158bn) in investments to provide full sanitation services for the population by 2033, as foreseen under the current framework, according to Abcon. However, the association says if new taxes are approved, companies that have won contracts since the regulatory framework introduced in 2020 may be able to request adjustments to the terms due to the new conditions, and projected investments may drop.