Brazil’s Punitive Vehicle Import Tax to Kick-Start Falling Domestic Production

SAO PAULO – Brazil’s government is betting the domestic auto industry will recover this year, after total vehicle production fell 1.9% in 2012, according to the National Association of Automotive Vehicle Manufacturers (Anfavea).

The country’s overall industrial output was down 2.7% in the year, and the Brazilian Institute for Geography and Statistics says, “Vehicles exerted the highest negative influence on the overall index, pressed by the decrease in the production of approximately 80% of the products surveyed in this sector.”

Vehicle imports, facing complex duties and other penalties, also declined; falling from 23.6% of total sales in 2011 to 20.9% last year. Anfavea sees a silver lining, as the squeeze on imports could kick-start demand for Brazilian-made vehicles, and it predicts production will bounce back this year.

“In 2013, the market will continue to grow between 3.5% and 4.5%, reaching a minimum of 3.93 million new vehicles sold,” says Ademar Cantero, Anfavea’s director-institutional relations. “In terms of imports, there is still a positive sign, and there may even be another (decline this year).

“(Brazilian) production, due to the expansion of the domestic market, with some reduction in the share of imported vehicles, is expected to grow about 4.5% to 3.49 million vehicles.”

This will maintain Brazil’s position as the world’s fourth-largest auto producer. And it should please the government, which sees decreased auto production as a reflection of the slowing growth in South America’s largest economy, partly due to low consumer spending.

Data from the Central Bank of Brazil shows the gross domestic product rose a meager 0.9% in 2012, the lowest growth since 2009 when the economy contracted 0.3%.

But with only one car for every 6.1 Brazilians in 2010 (compared with 1.2 in the U.S.), the country remains an attractive market for auto makers.

Last year, the Ministry of Finance acted to boost auto sales by reducing sales taxes on vehicles. It also approved an Incentive Program for Technological Innovation and Automobile Supply Chain Densification (INOVAR AUTO) that launched Jan. 1, says David A. Taylor, an attorney with Brazil Business and Law Consulting.

The move is designed to encourage the sale of vehicles that are both (at least in part) made in Brazil and have a good environmental performance.

Under the program, taxes on light vehicles and light-commercial vehicles manufactured between 2013 and 2017 imported from outside the Mercosur trade-pact region (Argentina, Paraguay, Venezuela and Uruguay) are subject to an increased Industrialized Products Tax (IPI) of 30%.

IPI tax credits are available, but only if foreign manufacturers sell more green and fuel-efficient cars or locate some production in Brazil.

Taylor says manufacturers would have to meet average vehicle fuel-efficiency targets to qualify. Companies would have to demonstrate these in at least three of four ways – through their policies for research and development; engineering; basic industrial and supplier development; and manufacturing steps and tagging.

It’s a complex system. Combined with the current 35% import tax and a variety of other duties being levied, the import-vehicle group Abeiva claims imported cars now face up to 340% in indirect taxes.

That’s not a good sign for foreign brands such as Mercedes-Benz, which manufactured in Brazil as far back as the 1950s but stopped building cars here in 2010. The German auto maker increasingly has been relying on imports, but this strategy now could be regarded as flawed.

“In 2011, Mercedes-Benz achieved its best result in Brazil since it arrived in the country, selling more than 10,000 automobiles,” says Dirlei Dias, senior sales manager in Brazil. “But 2012, due to new taxation on imported vehicles, was a bit harder. We had a drop in sales as well as the whole premium market.”

Dias says because of the INOVAR AUTO scheme’s IPI tax, Mercedes has had to adjust its portfolio to keep its costs down.

“Right now, with the rules defined for the next five years, Mercedes-Benz do Brasil is preparing to respond to all requirements from the government’s INOVAR AUTO program in a way that we can keep growing with the market each year,” he says,

On the plus side, these protective policies might encourage auto makers to set up more manufacturing facilities in Brazil. General Motors reportedly is looking at Brazil to build a fourth plant in the region that would see BR4.9 billion ($2.5 billion) in investment over the next five years.

GM already has a manufacturing plant in São Caetano do Sul, Sao Paulo state, that produces about 60,000 vehicles annually. It also builds cars in Sao Jose dos Campus, Sao Paulo, and in Gravatai, Rio Grande do Sul. Last year, it began construction of a new engine plant in Joinville, do Sul.

According to local media, the auto maker will commit to the new investment in early 2013.