Helio Beltrão: Guedes tries to reduce the Brazilian fiscal hell

Two important initiatives of the Secretariat of Productivity and Competitiveness of the Ministry of Economy are being discussed this week by political agents: a) the tax exemption for foreigners in fixed income investments and b) the generalized reduction of the IPI (Tax on Industrialized Products).

Both are positive for Brazilian competitiveness. Reducing taxes lowers business costs and consumer prices, as well as promoting investment and employment.

The exemption for foreigners in fixed income investments is uncontroversial. It is customary around the world that only the investor’s tax domicile country taxes its income, avoiding double taxation and allowing free flow of international capital. The exception is investments from countries with low taxation (below 20%) — unjustly called “tax havens”, which are also taxed in the country that generated the income. (A brief naming note: countries like Brazil and others that impose high taxation would be better characterized by the moniker “fiscal hells”.)

Brazil has long adopted the international practice for all types of foreign investment, with a curious exception: investments in fixed income (non-governmental), mainly debentures issued by companies. Investments in stock exchanges, in government bonds, in shares of privately-held companies are exempt; however, interest and capital gains on debentures (as well as CRIs and CRAs) are taxed at a 15% rate.

A company can finance itself via a) bank loans, b) selling securities such as debentures or c) selling shares or equity. By discriminating against foreign investors in debentures, Brazilian companies lose a fundamental source of cheap capital.

Foreign investors hold more than half of the capital of companies listed on the stock exchange, more than 70% of investments in venture capital and private equity, but only 2.5% of debentures and other fixed-income securities issued by companies. An eventual increase in foreign participation to 15% could represent an inflow of more than BRL 100 billion in capital for companies.

The scarcity of capital in Brazil explains our lower salaries, our lower growth and our higher interest rates. It is because of the additional capital in modern machinery that the Tesla line worker earns much more than the equivalent Brazilian worker at an automaker in Brazil. If the Brazilian were hired by Tesla’s gigaunit in Austin, he would earn the same as the American worker, after a brief period of training. Increasing foreign capital for companies would provide better equipment and, consequently, higher wages.

The IPI reduction initiative (25% to 35%), in turn, has an even greater impact on competitiveness and lower prices for consumers. However, the Manaus Free Trade Zone (ZFM) lobby is against it and obtained an injunction from the STF canceling the IPI reduction of all products with competitors in the ZFM.

I believe that former minister Roberto Campos would be disappointed with his creation: the ZFM was conceived in 1967 as a temporary tax haven (30 years) to promote the development of the Amazon. Like any temporary government program, it became permanent and has already been guaranteed by law for the first 106 years.

A culture of acquired rights was created, and it is clear that the ZFM will always be an obstacle to Brazil’s development. The government wants to make the country a less intense “fiscal hell”, but the ZFM, which represents 0.5% of the national GDP, claims that it loses competitiveness (because its profit margins decrease compared to the improved hell). This is pure protection. Will we be hostages?