Taxing times for Brazilian miners with possible new levy

After the approval of Brazil's tax reform last year, this year the government is working on creating the regulations for the changes, and this process could include the introduction of a so-called selective tax. 

If applied, the tax would be charged by federal authorities and would probably affect various sectors of the economy.

Paulo Honório de Castro Júnior, president of Minas Gerais state tax law association IMDT and head of tax affairs at law firm William Freire Advogados, speaks to BNamericas about the potential impacts of the selective tax in the mining sector.

BNamericas: What exactly is the selective tax that mining companies have highlighted as a risk for the sector in the meeting with the government?

Castro Júnior: Alongside the dual VAT, the tax reform created the possibility for the union to institute a tax with a markedly extra-fiscal, rather than revenue-generating, nature to discourage certain acts of consumption that would theoretically be harmful to health and the environment, which is the selective tax.

This is an unprecedented tax for the nation - it cannot be confused with the IPI [Tax on Industrialized Products], as the hypothesis of its incidence and other characteristics are very different from the federal tax on industrialized products.

Nevertheless, taxes such as the selective tax have been seen abroad and have revenue-generating objectives, being applied to heavily consumed goods such as tobacco, alcoholic beverages, oil and motor vehicles; for internalizing negative externalities, the Pigovian tax, based on Pigou's Theory in The Economics of Welfare, from 1920; and to discourage certain acts of consumption considered harmful to human health or state interests.

In the Brazilian case, an excessively broad scope was created for this tax since every human activity has impacts on the environment to some extent.

The tax can also apply to the extraction of minerals, oil and gas, which are the basis of our economy, so it has great potential to cause inflation. We shouldn’t discourage the consumption of what is essential to the country.

BNamericas: Is this selective tax different from the one that mining companies have highlighted as a risk since the approval of the tax reform last year, which generated space for states to create taxes on mining?

Castro Júnior: Yes, they are different things.

In addition to the selective tax, the tax reform provided the possibility for some states to create levies on primary and semi-finished products. However, since only a few states will be able to create this duty, the main concern has become the selective tax.

BNamericas: If this selective tax is implemented, what will be the rate and on what exactly will it be charged or calculated?

Castro Júnior: The selective tax can apply to the production, extraction, commercialization, or importation of goods and services that are harmful to health or the environment, according to a complementary law. The rates will be set by ordinary law.

In the case of extraction, the tax will have a maximum rate of 1% on the market value of the product and will apply regardless of the destination of the extracted good.

There are two main debates regarding the levy on extraction: the issue of exports and what the tax base would be.

I understand that, under no circumstances, does the tax reform authorize the collection of the selective tax on exports. There is even an express rule for immunity in this regard, which was not relaxed for extraction.

When the rule states that the selective tax will apply regardless of the destination of the extracted good, it just means there is a prohibition of differentiated tax treatment between goods and services of any nature based on their origin or destination, as already determined by article 152 of the constitution. That is, the federation cannot create different rates or tax bases for the tax on the origin or destination of the good or service.

For example, preferential treatment cannot be created for sales of goods and services destined for poorer regions.

In every extraction operation, the application criterion must be isonomic.

Attempting to interpret the rule as authorization for the collection of the selective tax on exports, in addition to not being supported by the enacted text, violates the principle of the destination country, substantiated in several constitutional statements, under which taxes are not levied on exports of goods and services under penalty of violating equality in international trade.

On the other hand, the tax base of the selective tax, in the case of extraction, must be the market value of the extracted product. That is, in its raw state without any processing. This is because extraction is the temporal criterion of the taxable situation, which establishes all elements of the tax obligation. Hence, when extraction occurs, the market value of the product must be verified at that moment.

Naturally, at the time of extraction, there is only the raw material, which must be valued at market for the purpose of defining the tax base.

Any attempt to levy the selective tax on the market value of the final product, sold or consumed and transformed, will thus be unconstitutional.

BNamericas: Generally speaking, what is the total value of taxes paid by the mining sector in Brazil at present, and what would it be after the implementation of the points under discussion after the tax reform. Will that value change much?

Castro Júnior: The tax burden on mining varies according to the substance mined.

A study conducted by EY, at the request of Ibram [association of mining companies], showed that Brazil has the highest tax burden in the world on iron ore, manganese, bauxite, and niobium. The second highest tax burden in the world on lead, zinc, magnesite, potassium, nickel, phosphate and copper, and also the third highest tax burden on gold.

In the case of iron ore, which is the main mineral in Brazil's export basket, the tax burden is equivalent to 52% of the mining company's profit.

It's certain that, with the tax reform, if it’s intended to levy the selective tax on exports based on the market value of the final product, the tax burden will be even higher, deterring investments and certainly creating a new tax dispute.

BNamericas: If this selective tax is implemented, will it apply to any and all segments of mining or will minerals needed for the energy transition, such as lithium, nickel and copper, be exempt?

Castro Júnior: The constitutional rule did not make any reservations regarding the application of the selective tax on the extraction of mineral products. Therefore, in theory, it would be possible to apply it to any mineral goods.

However, it's highly undesirable and contrary to what is seen in the rest of the world that there be a fiscal burden on the production of critical and strategic minerals. Canada, for example, grants tax benefits for this production. Brazil cannot lag behind or it could lose a lot of significant investments in the sector.

BNamericas: Besides mining, which other sectors are at risk of seeing an increase in taxes with the selective tax?

Castro Júnior: Activities with a forecast reduction in the IBS and CBS rates, as well as operations with electricity and telecommunications, are outside the scope of the selective tax.

The tax is likely to have a heavier impact on domestic industry, which currently suffers from imports of Chinese products. Hence the importance of implementing the new tax with great caution.