Selective Tax will cause losses of R$7 billion to the oil sector

The incidence of IS (Selective Tax) on extracted mineral goods is expected to have an annual impact of R$7 billion (US$1.5 billion) on the oil and natural gas sector. The calculation was made by IBP (Brazilian Institute of Petroleum and Gas) based on the current price of a barrel of oil and the maximum rate of the new tax, which can reach 1%.

The Luiz Inácio Lula da Silva (PT) government sent a complementary bill to Congress this week to regulate part of the tax reform. The so-called “sin tax” will apply to 6 categories that, according to the Ministry of Finance, are “harmful to health or the environment”. Here is the full text (PDF – 2 MB).

Are they:

• vehicles;
• vessels and planes;
• smoking products (cigarettes);
• alcoholic beverages;
• sugary drinks;
• and extracted mineral goods (mining, oil and natural gas).

The rates have not yet been defined and will be established later by another complementary law, according to the Treasury. Under the PEC of the reform, taxation can reach a ceiling of 1%. The tax will only be levied once on the items and at the beginning of the chain, which is extraction in the case of mining and oil.

If the ceiling rate is set, the IBP states that there will be a loss of competitiveness in the sector and also in the Brazilian economy. This is because the taxation will end up being passed on to consumers as an increase in the prices of fuel and natural gas. It will therefore impact practically all productive segments.

“It will result in costs for the consumer, who will pay more for practically all products because of the tax that will be charged at the beginning of the chain. This applies to everything: petrochemicals, glass industry, civil construction, thermal generation, steel and even agribusiness“, says Roberto Ardenghy, president of IBP.

Ardenghy also states that this extra cost will also reduce competitiveness in the global market for Brazilian oil and gas and products that use them as an input. This would cause a reduction in exports and even greater difficulty for inputs made in Brazil to compete with those coming from Asia, especially Chinese.

“Why can’t Brazil compete with Asian inputs? Because our inputs are expensive. Oil and gas are the foundations for the chemical, petrochemical and several other sectors. This would get worse with the selective tax, as well as making us lose market share in exports”says the executive.

The president of the IBP states that it is a mistake that the tax, called “sin tax”, is applied to the oil industry. This is because it is one of the bases of the economy, just like electrical energy. He also remembers that the oil and gas industry is already highly taxed, with a tax rate that reaches 69% in some cases.

Roberto Ardenghy further declares that “This goes against the philosophy of the tax. In the world, where there is a Selective Tax, it is charged on products of a superfluous nature or luxury goods. It applies to cigarettes, drinks, jewelry, luxury watches and fur coats, for example. Placing it on a product that is at the base of the industry has a very negative effect on the economy.”

The oil and gas sector now intends to seek a construction in Congress that allows for a zero tax rate or the lowest possible. Ardenghy said she will look for the rapporteurs who will be appointed and congressmen to show the harmful effects of the measure on the country.