Brazil reinstates tax break for chemicals, incentivises natgas-based fertilizers plants

MADRID (ICIS)–The Brazilian government has reinstated a tax break for the chemicals industry after intense lobbying from the sector.

The new regulation provides for additional credits for companies that invest in expanding their production capacity or in new plants that use natural gas to produce fertilizers.

The reinstated Special Regime for the Chemical Industry (REIQ) is to lower the PIS/COFINS tax rate that the chemical industry pays for inputs within the xylenes chain, including naphtha, benzene, propene, ethene, toluene, and cumene.

PIS and COFINS are imposed on the Brazilian entity or individual (the importer of goods or services) and should apply to the import of services at the rates of 1.65% and 7.6%, respectively.

Under REIQ, the PIS/COFINS rate stands at 3.65% overall. With the suspension of REIQ under the previous Administration, the PIS/COFINS rate rose to 9.25%, with PIS making up 1.65% and COFINS making up 7.6%.

The current Brazilian cabinet presided by Luiz Inacio Lula da Silva had been hinting, since it returned to office in January, at potentially restoring REIQ as the chemicals industry’s woes have increased this year.

“The special regime improves the competitiveness of a sector that generates 2m direct and indirect jobs in the country and accounts for 11% of the industrial GDP, according to data from the Brazilian Chemical Industry Association (Abiquim),” said the Brazilian government.

The Brazilian government cited a study published by the Getulio Vargas Foundation (FGV) from 2021 which analysed the effect REIQ had in the chemical industry as well as the economy as whole.

According to that study, the withdrawal of REIQ would have caused a drop between Brazilian reais (R) 2.7bn ($552m) R5.7bn in the chemicals sector’s annual productivity.

According to the same study, REIQ guarantees a contribution of up to R5.5bn to the GDP and at least R2bn annually in collection, the government said.

HELPING HAND
The Brazilian new cabinet has been more supportive of chemicals compared with the previous administration.

Soon after taking office, the government approved a sharp hike in import tariffs for several plastics and rubber as domestic producers felt the pinch from lower-priced overseas product.

In July, the minister for industry met with Abiquim to present an academic study highlighting the benefits of higher domestic natural gas production, although the minister fell short of making any state-backed financial promise.

The chemicals industry has had a difficult year so far on the back of lower demand persistent high input costs. In the first half of 2023, demand for chemicals fell by 5%, year on year, according to Abiquim.

When presenting the reinstatement of REIQ, Brazil’s vice president and minister for the economy and industry, Geraldo Alckim, said chemicals was a key part of the government’s plan to prop up the country’s industrial sectors.

“It [chemicals] is a strategic sector for the neo-industrialisation project and the strengthening of the industry as a whole. REIQ is essential to guarantee competitiveness in this market, generating jobs and income,” said Alckmin.

($1 = R4.90)

Thumbnail shows Brazilian money. Image by Shutterstock.