Sales up; taxes down. I bet you never imagined hearing this line in Brazil. Remember the “Cash for Clunkers” program in the US? Remember the US government’s attempt to stimulate the domestic economy by offering incentives for consumers purchasing new automobiles? Well this time it’s Brazil’s turn to stimulate its domestic economy by reducing IPI tax on vehicles.
For the fourth time, the Brazilian government has reduced the tax on industrialized products (IPI tax) for vehicles purchased in Brazil. First announced in May 2012 for what was to be a three-month program, the Rousseff administration has extended the policy repeatedly to increase automobile sales and stimulate the domestic economy.
And it seems to be working. We’re now in 2013 and the Brazilian government continues to renew its 2012 initiative. According to The Rio Times, “sales of cars, light vehicles and trucks grew 20.8 percent in March compared to February.” And in 2012, the automobile industry experienced its most successful year with more than 3.8 million vehicles sold. So why not continue.
While IPI tax rates vary depending on the type of vehicle, the savings is apparent. In its April 2, 2013 article “Reduced IPI on Cars Extended Again,” The Rio Times estimates that the tax stimulus program has reduced IPI tax payments to the government in an amount equal to approximately US$1.1 billion.
And now it appears that at least until the end of 2013, consumers will continue to save on their purchases. The question now becomes whether the Rousseff administration will extend similar tax savings to other consumer goods, such as refrigerators, ovens and other home appliances. In the past, these goods were also exempt from the IPI tax.
Perhaps even more important in the mind of potential investors is whether the Brazilian government will initiate other tax savings programs to incentivize foreign direct investment. After all, the complicated tax regime in Brazil is arguably the primary obstacle that foreign investors face when doing business in Brazil.
