Understand what ICMS is and the effects of its freezing

The freezing of ICMS (Tax on Circulation of Goods and Services) on fuels announced on Friday (29) will not prevent further price increases, but will reduce an additional pressure factor at a time of high in international oil prices.

The government and the fuel industry claim that the tax collection model feeds back on price increases and propose a change in the system to reduce this effect. Contrary to the proposal, but under pressure, the states decided on a temporary solution.

ICMS is calculated based on a percentage of a reference price stipulated fortnightly by the states based on surveys at gas stations, known as PMPF (weighted average price to the final consumer).

Last week, according to Petrobras estimate, it represented 27% of the price of gasoline (or R$1.72 per liter on average in the country) and 15% of the gas cylinder (R$15.09) and the price of diesel S -10, with lower sulfur content (R$ 0.78).

When prices rise at the pumps, whether due to adjustments at refineries or increases in biofuels mixed with gasoline and diesel, the PMPF is readjusted by the states to accompany this movement. The readjustments in the reference price occur on the 1st and 15th of each month.

The collection is done this way because the collection of taxes on fuels is done directly at the refineries and not at the final sale to the consumer, a model known as tax substitution, which aims to reduce the risk of tax fraud in the sector.

Thus, it is not possible to calculate the tax on the price charged by stations on each sale. When buying clothes, for example, the tax is calculated on the price of the invoice issued by the commercial establishment.

For critics, this system of charging the tax on fuel fuels new price increases at the pumps, as the stations will transfer the increase in the PMPF to their prices, generating a new increase in the reference price.

A fixed rate in reais would eliminate this effect, argue the government and fuel distributors. Federal taxes on fuel, for example, are already charged in reais per liter.

With the freeze, the ICMS will be at the same value, in reais per liter, for the next three months. Thus, in case of new readjustments, the stations will only pass on the increase in the refinery price, without the delayed effect of the subsequent increase in the PMPF.

Even so, there will be increases in the case of readjustments at refineries, which is expected by the market in light of the recovery in international oil prices. In October, Brent oil, an international benchmark traded in London, rose 6.62%.

Targeted for criticism by (non-party) President Jair Bolsonaro, the states argue that they have not tampered with tax rates this year. If prices rise, therefore, the responsibility would be Petrobras’ pricing policy.

But they have been profiting from the escalation of fuel prices: even with lower sales, ICMS collection on fuel between January and September was 4.5% higher than in 2019, before the pandemic, already considering the inflation of the period.

For the former director of the ANP (National Agency for Petroleum, Gas and Biofuels) Décio Oddone, the PMPF freeze will reduce price volatility while preserving state tax revenues.