Sao Paulo Cuts VAT for Carmakers Investing at Least $259 Million

Fernando Ayres
Tax Notes
12/03/2019

The Brazilian state of Sao Paulo said it will grant carmakers that invest an additional BRL 400 million (around $259 million) in the state a VAT deduction of up to 25 percent.
To qualify for the incentive plan, announced March 8, vehicle manufacturers must also create at least 400 new jobs in the state. The tax break will kick in after the investments are made, the government said in a statement.

The reduction allows qualifying manufacturers to reduce the 12 percent state VAT (ICMS) applicable to motor vehicles. Eligible companies are required to submit investment projects to the state’s Commission for the Evaluation of Economic Development Policy for approval. Another agency, the Sao Paulo Agency for Investment Promotion and Competitiveness, will prepare semiannual compliance reports on each approved project.
General Motors Co., which has two plants in Sao Paulo, said in January that it would pull out of Brazil if its operations there failed to return to profitability, warning employees that sacrifices would be necessary to keep the factories open. Two weeks later, the company said it was negotiating “feasibility conditions” for investing BRL 10 billion in Brazil over the next four years. In February Ford Motor Co. said it will close a major facility in Sao Paulo as part of a global restructuring.
Fernando de Souza Ayres, a tax lawyer with Souto Correa Cesa Lummertz & Amaral Advogados, said that while Brazilian states have some autonomy in determining how transactions will be subject to ICMS, that authority was granted by a convention agreed to by all members of the National Finance Policy Council (CONFAZ), which is made up of the secretaries of finance of all states. Under Federal Supplementary Law 24/1975, the validity of ICMS tax benefits is conditional on their inclusion in the CONFAZ convention, which means that ICMS benefits cannot be granted unilaterally, de Souza Ayres said.

Despite that law, many states have historically offered unilateral tax benefits, including Sao Paulo’s ICMS incentive, that are not backed by the CONFAZ convention, de Souza Ayres said. To overcome the resulting uncertainty, the National Congress in 2017 passed Law 160/2017 requiring states to publish a list of all ICMS benefits granted. Failure to comply with that requirement will result in revocation of the benefits and subject the state to penalties under the Fiscal Responsibility Law, including credit restrictions and a ban on receiving voluntary federal transfer payments. De Souza Ayres said that if Sao Paulo meets the requirements of Law 190/2017 — the CONFAZ ICMS Convention — it will be allowed to authorize the reduced ICMS rates, provided that the incentives do not exceed specified time limits.

De Souza Ayres said in an email that it is unclear when a carmaker would be entitled to a tax reduction of less than 25 percent under the decree. “It is a gradual scale, in which incentives are increasing as investments increase,” Finance and Planning Secretary Henrique Meirelles said in the government’s statement about the incentive plan.

“The decree mentions that a special ‘Orientation Council’ will define the ranges of the incentive, according to the investment amount,” de Souza Ayres said. “Even if you analyze the wording of the decree, it is not clear that the 25 percent discount is related to ICMS, although we know it is related, according to the state governor.” The 25 percent reduction was disclosed in the government’s statement.