Brazil: benefits to automakers cost US$970 million per year and do not develop regions, says an audit
By Fernando Jaspe*
Tax benefits for automakers installed in Brazil’s North, Northeast, and Center-West regions cost the federal coffers about R$5 billion per year and, contrary to what was promised, do not promote regional development.
In effect for over two decades, the billionaire tax waiver – paid for by the remaining Brazilian taxpayers – has had a low socioeconomic impact, generally restricted to a few municipalities, and failed to decentralize the country’s automotive industry.
These are the main conclusions of a joint audit conducted by the Federal Audit Court (TCU) and the Office of the Comptroller General (CGU) on the so-called Automotive Regional Development Policies (PADR).
The report, obtained by Gazeta do Povo, should be considered by the TCU plenary on the afternoon of Wednesday (29).
“The PADRs, at the cost of over R$5 billion annually and over R$50 billion since 2010, had a small and localized impact on GDP per capita, general employment, and technical-scientific employment, thus not contributing to regional development, its main objective.”
“The installation of the beneficiary factories has not resulted in industrial agglomeration around them, and the companies buy most of their inputs from suppliers in the Southeast and South regions,” points out the report.
The tax incentive was implemented during Fernando Henrique Cardoso’s (PSDB) government by two laws, one from 1997 and another from 1999, which guarantee presumed credit for the Tax on Industrialized Products (IPI) to vehicle and parts factories in the three regions.
The benefit, which initially would last until 2010, was successively extended by Congress without any proof of socioeconomic return and is now valid until the end of 2025.
According to the audit of the TCU and the CGU, between 2010 and 2021, the Union gave up R$51 billion in taxes on automakers installed in the contemplated regions, in inflation-adjusted values.
Between 2017 and 2021, the waiver was more than R$5.6 billion per year, on average.
“A cost that is redistributed to all other taxpayers,” the auditors point out.
In the case of the Fiat Chrysler plant (now Stellantis group) in Goiana (PE), where the Jeep models are produced, the tax waiver is equivalent to R$34,400 (US$6,695) monthly per job generated “without significant changes in the socioeconomic reality of that municipality,” according to the report.
This value, referring to 2019, refers only to federal tax relief and therefore does not include state and municipal tax waivers.
That year, according to the audit, the automaker benefited from just over R$4.6 billion in federal tax incentives, or R$388 million monthly, for 11,258 jobs generated.
The document compares the relative cost of the tax exemption to other government programs.
While each job generated by the Jeep plant costs the federal coffers more than R$34,000 per month, the expense per family benefited by Auxílio Brasil (renamed Bolsa Família) is R$600 monthly.
The Continuous Cash Benefit (BPC), paid to older people and people with disabilities, is just over R$1,200 monthly.
TAX REDUCTION FOR AUTOMAKERS HAD A LOW SOCIOECONOMIC IMPACT
The low socioeconomic impact was the rule in all the territories that had plants installed under the ballast of tax benefits, says the report that the ministers of the TCU will analyze.
In addition to the Jeep plant, companies like HPE Automotores, which assembles Mitsubishi and Suzuki vehicles in Catalão (GO), and Caoa, manufacturer of Hyundai and Chery brands in Anápolis (GO), enjoy tax breaks.
Ford was also part of the program, with factories of its brand in Camaçari (BA) and Troller in Horizonte (CE), but at the end of 2021, the company closed the production of vehicles in the country.
According to the audit, the tax reduction policy could not promote industrial agglomeration around the factories.
Of all the inputs purchased by the five units analyzed, 71% are produced in the Southeast, 8% in the South of the country, and only 22% come from the three regions that the automotive policies seek to develop.
Another evidence of the limited impact of the tax incentive is the share of each region of the country in employment in the automotive industry.
According to the report, the Northeast’s share increased from 3% to 6% between 2006 and 2020, and the combined share of the three regions that benefited from the tax relief policy remained at only 8%.
And the same 3% increase occurred in the share of the South region, which did not benefit from the programs.
Also, between 2006 and 2020, the number of employees in the automotive industry in the North, Northeast, and Midwest increased by 16,082, while in the South, the increase was 18,153.
The TCU and CGU report does not address the impacts of Ford’s exit, which worsened the Northeast’s numbers from the end of 2021.
“What can be observed is that the PADR is disarticulated from investment and regional development policies.”
“By being designed to encourage specific companies individually, without considering the need for the formation of productive chains, the PADR do not attack the alleged ‘natural disadvantages’ of the North, Northeast, and Center-West regions,” points out the audit.
Another example of the low socioeconomic impact of tax reduction for automakers is the performance of the Municipal Human Development Index (HDI-M), calculated from data from the last two Censuses, 2000 and 2010.
According to the report, the variation of this indicator in localities that benefited from tax exemption was not higher than in other regions of the North, Northeast, and Midwest.
INCENTIVES TO AUTOMAKERS TO REPEAT MISTAKES OF THIS TYPE OF PROGRAM
One of the first findings of the TCU and CGU auditors is that the policy of tax incentives to automakers repeats common errors in this type of program, pointed out by different studies in recent years.
Starting with the fact that the initiative was not based on a previous diagnosis. It is not known which public problem will be attacked.
This original error leads to others.
Without knowing the problem, the Union also does not know what result in it wants to achieve with the tax incentive.
Therefore, no concrete objectives, indicators, goals, or deadlines exist.
“These policies do not have a logic model that explains how state interventions will treat the causes of a public problem at the lowest possible cost,” says the text.
Nor is it defined who is responsible for program oversight and evaluation. “The PADRs merely ‘exist,’ although their roles of direction, oversight, and coordination of implementation, monitoring, and evaluation, almost in their entirety, have not been established,” the auditors point out.
The TCU previously identified similar problems in other tax incentives.
Among them are the Informatics Law of 1991 and the Law of Good of 2005.
In both cases, the tax benefit was not designed as an instrument of a broader public policy but as an end in itself.
THE REPORT SEEKS TO PREVENT THE BENEFIT FROM BEING EXTENDED WITHOUT CHANGES
The problems detected by the TCU and CGU auditors did not prevent the tax benefit for automakers from being extended by Congress on at least three occasions.
The duration was extended to 2015, 2020, and, more recently, 2025.
The main recommendation made by the auditors, which the TCU ministers will now analyze, relates precisely to future renewals of the benefit.
The document proposes to notify ministers and other public agents that sending a proposal to extend this policy, without review and structural changes, “may characterize irregular conduct”, violating article 37 of the Constitution – according to which the public administration must obey the principles of “legality, impersonality, morality, publicity, and efficiency” – and other norms.
The report also proposes to notify the Ministry of Finance to present, within 90 days, an action plan to evaluate, define responsible parties, and improve the governance of automotive policies.
THE FEDERAL GOVERNMENT GIVES UP MORE THAN R$450 BILLION PER YEAR
The incentive to automakers is part of an ocean of tax benefits granted by the Union, by the initiative of the Executive or the Legislative, in most cases without governance or evaluation of results.
In the sum of all tax breaks, the federal government will not collect R$ 456 billion this year, or 4.3% of the Gross Domestic Product (GDP), according to estimates from the Internal Revenue Service.
The waivers were equivalent to less than 3% of GDP until the mid-2000s but gained momentum with initiatives of the PT governments to boost economic growth, passing the 4% of GDP mark in the first years of the following decade.
By the end of 2022, the transition team of Luiz Inácio Lula da Silva (PT) indicated its intention to reassess tax waivers.
So far, however, the government has limited itself to undoing benefits created last year – such as fuel exoneration – and has not presented a proposal for a broader review.
In the opposite direction, Lula has just created another exemption.
A decree published on Wednesday included the photovoltaic segment, for the production of solar energy, within a support program for the semiconductor industry that, by 2023, foresees tax waivers of more than R$600 million.
The government of Jair Bolsonaro (PL) also wanted to cut benefits without success.
Approved in 2021, amid the pandemic, Constitutional Amendment 109 required the Executive to present a plan to reduce incentives to 2% of GDP by 2029 – less than half the current level.
The plan was presented but has been stalled in the House ever since.
And even its eventual approval would have almost no effect.
The program was dehydrated by maneuvers made by Congress, which prohibited cuts in the main incentives, and by creative accounting by the Executive.
The result is that instead of cutting the equivalent of 2% of GDP, the plan set out to eliminate benefits corresponding to only 0.06% of GDP – just over R$4 billion a year, according to the government’s account at the time.
With information from Gazeta do Povo
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