Brazil Changing Criteria for Import Tax on Cars to Avoid WTO Challenges

SAO PAULO – The Brazilian government plans to adopt new criteria to define which auto makers in Brazil qualify to pay lower the industrial product tax (IPI) on imports beginning next year, in order to avoid lawsuits and arbitration by the World Trade Organization.

The government hiked the tax on imported vehicles 35% last December but later said it would exempt cars with at least 65% local content after importers protested the IPI increase.

The government’s move was part of an effort to discourage growing import sales, which took advantage of the favorable exchange rate during most of last year and Brazilians’ interest in more up-to-date foreign models.

The increased tax has been effective, with sales of imported vehicles falling 0.4% in the first quarter of this year. The Brazilian association of vehicle importers, Abeiva, earlier complained the tax hike was unconstitutional and said it would file a lawsuit to block the action.

In April, the government announced regulations for its new automotive policies that said auto makers could get back part of the import tax once they built factories in Brazil.

Secretary of International Affairs of the Finance Ministry Carlos Marcio Cozendey now says a new regulation is being prepared by the government and should be announced soon.

Criteria such as investments in technological innovation, adoption of greenhouse-gas-reduction measures and greater energy efficiency should be adopted under the new rules.

“We are working on a definitive regulation compatible with the WTO,” he says. “We are specifying the conditions in which the companies will have a right to a reduction in import taxes. The idea is to avoid the aspects which can be classified as discriminatory, and to give the same treatment for industries located in Brazil as those located in other countries.”

Abeiva saw car sales tumble 41.5% in July, compared with year-ago. Only 10,739 vehicles were delivered, down 4.1% from June, the group says. In the first seven months, members sold 81,710 units, down 24.9% from prior-year.

That compares with deliveries of domestic vehicles, which rose 3.1% in July from June and climbed 22% from year-ago, says Flavio Padovan, president of Abeiva.

Abeiva does not include auto makers that are non-members in its sales data. Some of the largest manufacturers in the country import cars directly and are not associated with the group. However, deliveries of almost all imported vehicles have plunged in the past 11 months due to the import tax as well as the 20% rise of the dollar over the domestic currency, the real.

Abeiva says if imported-car sales continue to fall in the coming months, some 10,000 jobs will be lost. The group is looking to the federal government to reduce the negative impact of the IPI.

But Anfavea, the association of vehicle manufacturers that represents the major domestic auto makers in Brazil, is pressuring the government to increase the IPI to 35% on imported cars from all countries except Argentina and Mexico, with which Brazil has free-trade agreements in place.

That could backfire on the group, as a number of foreign auto makers are accelerating plans to build plants in Brazil.

However, BMW this week said it is rethinking plans to build a factory in Brazil if the new measures imposed by the government prevent a profitable production operation in the country. The German auto maker reportedly is considering a plant in Mexico, which could be an option to Brazil.

Audi already has said it will construct a factory in Mexico to open in 2016. “One advantage of Mexico is that you could support the growing markets down in South America, Brazil,” former Audi of America President Johan de Nysschen told WardsAuto in January, alluding to free-trade pacts between the countries that would cut import costs.