Brazil’s New Tax-Credit Policy Places Burden on Auto Makers

ANN ARBOR, MI – Brazil’s new automotive policy could prove counterproductive by forcing onerous rules on auto makers operating in the country, a top U.S. researcher says.

The government says the policy, called the INOVAR-AUTO program, is an effort to spur innovation by forcing local auto makers to invest heavily in vehicle and component research and product development in Brazil.

However, critics say it is a thinly veiled attempt at protectionism by forcing auto makers selling vehicles in Brazil to produce more models there that they presently import.

Auto makers that participate in the program receive credits that can be used to offset government-imposed taxes, including 30% on imported cars, an additional 18% state tax and an industrial products tax (IPI) that is based on engine size and can add as much as 50% to a vehicle’s cost.

Marcos Amatucci, the associate dean of research and graduate studies at the College of Marketing and Communication in Sao Paulo, says it’s too early to fully understand the consequences of the new policy, but he warns it could contradict the efforts of the Brazilian auto makers, nearly all of which operate on a global scale.

Speaking at a University of Michigan Transportation Research Institute conference here, Amatucci says the Brazilian government, led by President Dilma Rousseff, was not satisfied with the results of the automotive policy put in place by former President Luiz Lula da Silva, whose 8-year reign ended in 2010. The new government believes those laws provided the industry with too many loopholes.

“Auto makers were including marketing and other expenses as local content,” Amatucci says of the former government’s mandate to source parts from local suppliers. “The new law specifies the requirements. Brazil is making a sign that it wants only real production steps.”

The new mandates take effect next year and gradually increase until 2017. The requirements force auto makers to perform a number of vehicle production steps in Brazil in order to qualify for import tax breaks.

Next year, eight of the 14 steps on the list will be required, increasing to nine in 2014 and 2015 and jumping to 10 in the following two years. The steps are:

In addition, auto makers will be required to invest 0.15% of total income from Brazilian sales into domestic research and production in 2013. The R&D investment requirement increases to 0.3% of total sales in 2014 and 2015, before jumping to 0.5% in 2016 and 2017.

Similarly, auto makers must invest 0.5% of sales in domestic product development in 2013, 0.75% in 2014 and a full 1.0% from 2015-2017. For auto makers that sell in large volumes, the expenditures could prove significant.

Brazil’s the top-selling auto maker in 2011 was Fiat, which delivered 754,062 light vehicles, according to WardsAuto data, including exports. Volkswagen was second with 698,326, followed by General Motors with 632,124, Ford with 313,990 and PSA Peugeot Citroen with 175,847.

Last year’s best-selling car was the VW Gol subcompact, with 293,454 units.

The five leading auto makers all sell vehicles on a global basis, which runs contrary to Brazil’s new policy, Amatucci says. “Globalization and global efficiency is a problem,” he says. “For global corporations, it makes sense to decentralize product development.”

However, they likely will rush to meet the requirements, eager to cash in on Brazil’s growing auto market and support their considerable investments in the country. But the costs of the new laws ultimately will be passed onto the consumer.

“I’m not sure what the government is expecting,” Amatucci says. The policies “will prevent the economy from growing by passing on costs to consumers. The Brazilian government has not been paying much attention to globalization.”

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