By GERALD JEFFRIS and PAULO WINTERSTEIN
BRASILIA -- Brazil will lower taxes on the country's sugarcane and petrochemical industries as the government seeks to boost the competitiveness of its exports as the US expands shale gas production, undercutting global prices, Finance Minister Guido Mantega said Tuesday.
Brazil will "neutralize" the so-called PIS/Cofins social security tax on ethanol producers and petrochemical companies, Mr. Mantega said Tuesday.
By providing tax credits to ethanol producers equal to the PIS/Cofins tax burden, which is about 12 centavos ($0.06) per liter, and providing BRL4 billion in cheaper financing, the government hopes to spur more investment in the sugarcane industry. The tax measures will lower federal tax collection by about BRL970 million this year and about BRL1.2 billion in the following years, Mr. Mantega said.
The government will also increase the ethanol content in gasoline, to 25% from 20% currently, he said.
A similar tax break for petrochemical companies will increase the credit that companies currently receive by about 4.5 percentage points, more than doubling the tax credit they currently receive, he said. The increased tax credit, which should reduce tax collections by BRL670 million a year, will be in effect through the end of 2015, and gradually climb back to normal levels starting in 2016.
"We have a constituted threat from the production of shale gas in the US cheapening the cost of raw materials, greatly increasing the competitiveness of the American petrochemical industry," Mr. Mantega said. With these measures "we are reducing taxes on the main supply chains of the petrochemical industry so as to reduce the prices of products."
Mr. Mantega said that the tax credit for the ethanol industry isn't primarily meant to lower prices at the pump, but spur more investment.
"The main objective is to make conditions favorable for more investment in the industry. Producers won't necessarily pass on savings to the price, but they will have bigger margins that allow them to boost output," he said.
The increased ethanol content in gasoline should pull down prices, however, and eventually the increased production of ethanol should also bring down prices at the pump, Mr. Mantega told reporters. Brazil's government has been struggling to contain inflation and rising prices forced the central bank to raise the benchmark Selic interest rate last week, reversing a cycle of cuts that last year brought the Selic to a record low of 7.25%.
According to Elizabeth Farina, president of Brazil sugarcane association Unica, Brazil will have excess capacity to process ethanol only for the next two growing seasons, and so new investment is needed to increase output.
"This helps the competitiveness of Brazilian ethanol, although [these measures] alone won't solve the problems in the industry," Ms. Farina said, noting that several processors are expected to shut down this year as difficulties mount.
Brazil, at one point the world's biggest exporter of ethanol, has faced headwinds in recent years as sugar prices jumped -- leading many sugarcane processors to switch over to producing more of the sweetener and less of the fuel -- at the same time that bad harvests squeezed supplies and demand rose as the UScut a tax on ethanol shipped from Brazil.
According to Unica, Brazil imported 301 million liters of ethanol in the harvest year ended in March, almost all of it coming from the US, while exporting 2.29 billion liters to the North American country. That favorable balance is in stark contrast to the previous harvest year, when Brazil imported 1.45 billion liters, while exporting just 663 million liters to the US.
Dow Jones Newswires