When on the 1st of June 2011, the Brazilian Supreme Court (STF), after 9 years, declared unconstitutional tax incentives for investments granted by 23 federal states and consisting of reductions of up to 100% in value added taxes (ICMS), many observers wistfully thought that was the end of a practice that affected the very own stability of the federal framework of Brazil.
In fact, such incentives now amount to 14% of all earnings derived from ICMS. It is estimated that the amount under dispute amount today to about US$ 200 billion. In spite of the extremely long period it took the STF for a sentence on the direct suits filed before it, the decision was faulty, as it addressed the question of the future only, but failed to resolve the matter of past incentives.
Because of this poor landmark, many states are presently offering retroactive incentives for new investments. Thus, companies desiring to establish a commercial presence in Brazil for manufacturing purposes are getting involved in informal bidding contests negotiating with several states for the best advantages.
In addition, many states refuse to charge past taxes, in order to maintain their newly acquired industrial basis artificially competitive, as their respective territories are often far away from the consumer centers, purveyors and ports.
In this process, state secretaries and state governors have become actively involved in the attraction on new investments for their jurisdiction. This climate, of course, cannot but add to the recognized insecurity of the legal framework of Brazil. Sadly, the many failings of the country’s courts only complicate the situation further.
During the 9 years it took the STF to decide on the direct suits, many states revoked the laws under attack and enacted equivalent new ones, in order to make the original suits moot, in moves that well underline the disrespect for the law and judiciary which is to be found in many regions of the country.
If the foregoing was not enough, a new development has added to the insanity of the framework of tax incentives in Brazil. That is so because some states have been devolving ICMS revenues on imported products, with a view to having them disembarked in ports located in such states.
This illegal practice makes imported products about 9% cheaper. The scale of this saving has made imports utilizing such mechanism amount to more than 10% of total Brazilian imports in 2011. Of course, this also works as an incentive for imports and contributes for a more negative manufacturing environment in Brazil.
Brazil very often complains of the effects of inconsistent trade practices by its partners as responsible for the diminishing size of its industries. The country could not go wrong in also looking at the devastating effects of domestic aberrations in taxation and macroeconomic policies.
Lawyer admitted in Brazil, England and Wales and Portugal. GATT and WTO panelist. Brazilian government ad-hoc representative for the Uruguay Round of the GATT. Post-graduation professor of the law of international trade.