Brazilian government to compensate states for fuel tax losses

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Finance Minister Fernando Haddad announced on Friday that state governments will receive BRL 26.9 billion (USD 5.14 billion) to compensate them for revenue losses due to tax changes. In March last year, former President Jair Bolsonaro reduced the rates of the state-level ICMS goods and services tax charged on gasoline, diesel, and ethanol.

Similar to when he exempted fuels from federal social security taxes in June, Mr. Bolsonaro changed ICMS rules with an eye toward re-election, hoping the measure would ease inflationary pressures and increase his chances of victory.

Mr. Bolsonaro’s decree changed the method of charging ICMS, which became a fixed ad rem rate per liter instead of a percentage.

In June last year, House Speaker Arthur Lira reached an agreement with other political parties and passed a proposal to cap ICMS tax on fuel, electricity, transportation, and telecommunications at 17 percent. These goods and services came to be deemed essential.

Both changes had a multi-billion real impact on the states’ cash flow.

The Supreme Court mediated the conflict between the federal government and the states. In December, it gave both sides 120 days to reach an agreement. 

The states demanded up to BRL 45 billion in compensation, although the final amount is much lower. Mr. Haddad recalled that, like any agreement, this one was not entirely satisfactory to either party. In January, the federal government had talked about offering around BRL 15 billion.

According to the agreement, states entitled to receive up to BRL 150 million will get half the amount this year and the rest in 2024. Those entitled to between BRL 150 million and BRL 500 million will get a third of the amount in 2023 and the remainder next year. And those with more than BRL 500 million to receive will get 25 percent in 2023, 50 percent in 2024, and 25 percent in 2025.

For states that are indebted to the federal government, the payment will be made in the form of discounts on their liabilities.

According to the Secretary of Finance, Rogério Ceron, this agreement will not affect the federal government’s fiscal objectives, as the financing will be spread over four years. For 2023 specifically, around BRL 4 billion will be compensated.

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