IPI, Back to Normal. Primary Surplus, not so!

During his time at the World Economic Fórum in Davos, The Brazilian Finance
Minister, Guido Mantega told journalists that the measures announced to assist the
economy, such as the reduction or elimination of The IPI (Imposto sobre Produto
Indutrialisado) tax on motor vehicles, and domestic appliances (ovens, refrigerators,
washing machines etc.) would not be renewed. With respect to automobiles, the tax, as
shown in the table below, was set via a sliding scale to arrive at levels that existed prior
to the exemptions of April, 2009.

Figure 1.
AUTOMOBILE Upto Sept 30 Oct Nov Dec Jan
S
Petrol
Up to 1000 ccs 0% 1.5% 3% 5% 7%
1000 – 2000 ccs 6.5% 8% 9.5% 11% 13%
2000 ccs + 25% 25% 25% 25% 25%
Alcohol/ Flex
Up to 1000 ccs 0% 1.5% 3% 5% 7%
1000 – 2000 ccs 5.5% 6.5% 7.5% 9% 11%
2000 ccs + 18% 18% 18% 18% 18%
Trucks 0% 0% 0% 0% 5%
Source: Folha Online

The collection of IPI taxes fell from R$ 29.1 billion in 2008, to R$ 22.3 billion, a fall of
23% in 2009. The graph below shows a month by month comparison between 2008 and
2009. It is worth remembering that the domestic appliances and vehicle exemptions
only started in April, 2009, but the collection was lower when the exemptions were not
in effect in January February and March. The good news for the Treasury is that the
December, 2009 collection figure was R$ 11% higher than in December, 2008.

Figure 2.

Collection of IPI Tax 2008 vs 2009

3.00

2.50
R$ billions

2.00

1.50

1.00

0.50

-
Jan/ Dec 2008
Ja

Fe

Ap

Ju

Ju

Au

Se

D
ov

ec
ct
ar

ay

l
n

n
b

Jan/ Dec 2009

Source: Receita Federal

White goods are returning to the following taxation rates: Refrigerators, 15%; Ovens
4%; and Washing Machines, 20%.
However, if Minister Mantega had wanted to continue the exemptions, there would have
been some strong objections from those managing government accounts.

Figure 3.
Brazilian Government Primary Surplus
4.5
4
3.5
% of GDP

3
2.5
2
1.5
1
0.5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Jornal Valor

Figure 3 above shows the performance of the Brazilian Government’s Primary Surplus,
from 2000 through 2009. Surplus is shown as a percentage of GDP. The effective
surplus for 2009 was 2.06%, a significant reduction from the 3.54% of 2008, which
itself suffered from the crisis at year end. The Government had passed a law that
reduced the 2009 goal of the primary surplus as a percentage of GDP from 3.8% to
2.5%, but was only able to reach the new goal through creative accounting. The creative
accounting included:

• The Government development Bank, Banco Nacional de Desenvolvimento

Economico e Social – BNDES was given a loan by the Treasury of R$ 100
billion, which had no effect on the Primary Surplus. This allowed the bank to
pay R$ 11 billion in dividends which inflated the Primary Surplus`s direct
receipts.
• BNDES also used R$ 3.5 billion to buy dividends from Eletrobras, and pay them
to the treasury, further inflating the Primary Surplus.
• Brazilian banks hold many “judicial” deposits as a result of taxation disputes and
reconciliations. For the first time, the National Treasury has decided to
recognize these deposits, or some portion of them as income.
• In 2009 the Government mooted the possibility of withholding tax rebates and
making payments in 2010. After a public outcry the Government conceded
defeat and said that the payments would be allowed in 2009. For the first time,
however, the Receita Federal (Internal Revenue) resolved to go through 1
million of possible rebates with a fine toothcomb, thus delaying payments that
amounted to more than 600 million in January, 2010.