Government wants to cut freight tax to reduce fuel and fertilizer costs

Amid soaring oil and fertilizer prices, pressured by the war in Ukraine, the Brazilian government plans to cut taxes on sea freight to try to reduce import costs.

The Ministry of Economy intends to establish, through a decree, a linear cut of approximately one third in the Additional to Freight for the Renovation of the Merchant Marine (AFRMM) – a tribute created in the 1980s to encourage the national naval industry.

The measure has an estimated cost of approximately R$ 4 billion per year and there is no need for budgetary compensation because the reduction can be enjoyed by all sectors. The Fiscal Responsibility Law would only require a balance if the tax cut is restricted to a group or segment.

The initiative began to be studied before the war in Europe, in the midst of discussions on the BR do Mar bill (which changed cabotage rules in the country), but government officials confirmed to the sheet that implementation is now being accelerated because of the conflict and the effects on prices in the country.

The AFRMM is levied on the product landed in ports, whether of international origin or from other Brazilian regions (for example, through cabotage navigation). Despite this, practically all the amount collected comes from import operations.

Fuels are the biggest contributors to the tax collection (about 18%), followed by cargo transported by containers (about 17%) and fertilizers (about 13%). Other products are less representative.

The proposal designed so far establishes a linear cut of 33.9% in the AFRMM, with different resulting percentages depending on the origin. In international long-distance shipping, for example, the rate would drop from 25% to 16.5%; in national long-distance travel, from 25% to 16.5%; in cabotage, from 10% to 6.6%.

The AFRMM is considered by the Ministry of Economy as a tax that does not contribute to the activity. First, because it would benefit few national shipyards (80% of the resources go to a group of approximately 20 companies) and second, because it would establish a form of protectionism for the national industry (by taxing products that arrive by sea).

Despite fuels being the biggest generators of AFRMM, the Ministry of Economy sees a more significant impact of the tax on food production. The ministry’s estimate is that the AFRMM will cost farmers around R$ 450 million a year to import fertilizers.

The CNA (National Confederation of Agriculture), which had been asking for changes in the AFRMM since the pandemic, celebrates the measure. The entity estimates that fertilizers and pesticides represent 30% to 50% of the cost of production and classifies the recent rise in prices as “overwhelming”.

According to the CNA, urea increased by 300% last year, potassium increased by 170% and phosphate doubled in price. Also according to the entity, the main nutrients applied in the country are potassium (38% of the total), calcium (33%) and nitrogen (29%).

Of the 35 million tons of fertilizers used annually in Brazilian crops, 74% originate abroad. Russia and Belarus, major exporters, have their sales affected by the war.

The CNA states that the soybean crop leads the demand for fertilizers with more than 40% of the total used, followed by corn, sugarcane, coffee and cotton.

The conclusion of the Ministry of Economy is that the AFRMM greatly increases the cost of transport, mainly on items that make up the basic food basket or affect its cost, such as grains, wheat flour, fertilizers and fertilizers.

Economic calculations indicate that the extinction of the tax would reduce the cost of the basic food basket by 4.4%. The measure and similar ones under discussion are seen internally as the first steps towards a possible elimination of the AFRMM.

Minister Paulo Guedes (Economy) has put into practice different tax cut measures. In his view, it is better to return the revenue gains obtained in the form of taxes to society than to bloat the state and give way to questionable policies.

“This excess revenue is not to inflate the machine again. We prefer to transform this revenue gain into tax reduction for millions of Brazilians”, said the minister last month when announcing a 25% cut in the IPI (Imposto sobre Produtos Industrializados ).

Sinaval (National Union of the Naval and Offshore Construction and Repair Industry) reacted to the measure saying that the sector will be affected. “This harms the industry, as they are resources used for more than 50 years by companies”, says Sergio Bacci, vice president of the entity.

He acknowledges that Merchant Marine Fund resources are currently not being used significantly and that there are billions in cash in stock, but he claims that this is the result of a government policy that does not prioritize domestic industry. He says that Petrobras, a strong contractor for Brazilian shipyards in the PT era, is now ordering its ships from Asia.

For him, the Ministry of Economy is using the inflation scenario to justify a measure that would be adopted anyway and proof of this would be that even cabotage would have its tariffs reduced by the measure. “They’re trying to blame it on fertilizers,” he says.