New automotive industry regime sets targets through 2030Valor Internacional
Forced by the recent defeat at the World Trade Organization, the Michel Temer government is preparing a complete overhaul of Inovar-Auto, a program of incentives to the automotive industry created by former President Dilma Rousseff. Primarily named Route 2030, the sector’s new stimulus policy will have 13-year targets. A draft will be presented this Tuesday by the Ministry of Industry, Foreign Trade and Services (MDIC) to automakers representatives.
Incentives should be linked to the achievement of targets in some areas, such as research and development in engineering, energy efficiency and vehicle safety. The new program’s format will be defined by an inter-ministerial group that should complete its tasks on August 30. Launched in 2012, Inovar-Auto expires by this year’s end and is based on an additional 30 percentage points of the Industrialized Products Tax (IPI) for those who do not comply with component-nationalization indexes. Now, there will be no more connection of the stimuli to local-content requirements.
Currently the IPI rates for the auto industry range from 7% to 25%, depending on the type of engine used in the vehicle — 1.0-liter engine and flex-fuel cars pay less, while gasoline-only vehicles above 2.0 liters pay more. In the government’s view, this policy has created many distortions. A sign of this trend is the proliferation of 16-valve, 1.0-liter cars sold in the market as "turbos" in order to guarantee lower taxes. The idea now is that there are no more IPI variations based on the engines, but rather depending on the vehicle’s efficiency level. If the proposal succeeds, it would be a radical change in the taxation within the sector.
The possibility of stopping to base tax rates on engine size also creates a huge opportunity for selling electric-only cars in Brazil. Electric-powered vehicles currently pay the highest IPI because of the engine size formula. Since they don't fit into any category for lacking combustion engines, electric cars pay the highest IPI rate at 25%.
The kick-off for Inovar-Auto's overhaul will be given by Minister Marcos Pereira, and creates a group with four ministries and four other official institutions: MDIC, Finance, Planning, Science, Technology and Communications, environmental agency Ibama, national traffic department Denatran, the Brazilian Agency for Industrial Development (ABDI) and the Brazilian Development Bank (BNDES). The Foreign Relations Ministry will also follow the discussions to monitor the compliance of the new automotive regime with international rules.
Igor Calvet, MDIC’s secretary of development and industrial competitiveness, says one of the focuses is to give more predictability and legal security to companies with plans to invest in Brazil. Therefore, he says, the intention is to have a program with a longer horizon. "Today we work with purely political cycles. This is too bad because no investment decision is made based on a four-year election schedule. "
The automotive industry accounts for 22% of industrial GDP, generates $17 billion a year in exports (including auto parts) and employs 1.3 million direct or indirect workers. "We have a special concern with this sector for its pulling power in the economy," Mr. Calvet says. He recalls that the European Union, Japan, India, Russia, Korea and South Africa have incentive programs. "It's good to stress this because people have a misconception that only Brazil has an automotive policy."
Inovar-Auto was vetoed by the WTO late last year in a dispute sparked by the EU and Japan along with a number of other actions of Ms. Rousseff’s industrial policy. The Brazilian government will resort to the WTO’s court of appeals, but nobody in Brasília works with the prospect of easing the defeat. It's just an attempt to gain some time.
The new regime’s goal is to provide a competitive integration of Brazil into the global market, Mr. Calvet explains, assuming that the world will have five or six major production hubs in the near future.