Exclusive: Brazil to let ethanol tax break expire in December – sources

Source: By Alonso Soto and Marcelo Teixeira, Reuters • Posted: Thursday, August 25, 2016

The Brazilian government has no plans to extend a tax exemption for ethanol sales that expires in December as it pushes to rebalance the country’s depleted public accounts, two government officials told Reuters on Wednesday.

Ending the exemption, a de facto tax increase, should make the biofuel less attractive for mills and motorists, and prompt Brazil to produce and export more sugar while importing more gasoline.

“That is money that we need now,” said one of the officials referring to the extra revenue expected with the end of the exemption to the so-called PIS/Cofins tax. He asked not to be named because the matter is not public yet.

The tax exemption has been in effect since 2013. At the time it was introduced it made ethanol 12 centavos ($0.04) cheaper per liter than gasoline. Its aim was to help offset low international sugar prices and ethanol’s lack of competitiveness against gasoline, the price of which was kept artificially low to fight inflation.

One of the sources said the sugar sector has rebounded lately, in part due to another taxation change in 2015, when the government increased the so-called Cide fuel tax on gasoline. A recovery in international sugar prices has also helped mills to rebuild profit margins.

The Brazilian sugar industry wants the government to maintain the ethanol exemption, in recognition of the environmental benefit of the biofuel and to avoid discouraging its production.

Analysts say the end of the exemption would be yet another reason for mills to produce more sugar next crop at the expense of ethanol. Sugar is already offering far better returns than biofuel production this year, after a rally in prices ahead of a projected global sugar supply deficit.

When the PIS/Cofins exemption was implemented, the cost to the government was estimated at around 1 billion reais per year, but sales volumes have grown since, which should put that number higher.

The finance ministry’s press office declined to comment for this story.


Lifting the exemption is likely to spur an increase in Brazilian gasoline imports to meet greater demand for the fuel as ethanol demand falls, said Joaquim Dib Cohen, president of JDB Consultoria, a Rio de Janeiro oil consulting service, and former long-time Petrobras oil trader.

“Petrobras is being run in a more market-oriented way and as long as you can make more money importing than producing your own gasoline, I think it is most likely that distributors as well as Petrobras will import gasoline to make up for some of the rising demand caused by the revived ethanol tax,” he said

Government ties with the sugar industry are likely to suffer if the tax exemption goes away. But Brazil’s Agriculture Minister Blairo Maggi, speaking at a news conference where he said he did know if the exemption would be lifted, said tax revenues were needed.

“I am part of a government that needs to collect taxes. If I could lower all taxes, I would do that without hesitating, but if we have no revenues we won’t be able to sustain this government,” Maggi said.

Maggi, who was once one of the world’s largest soy producers, said many sugar companies in Brazil have not been profitable due to poor management of cane fields.

“To be profitable they need a lot of cane. That is where profit is made. The ethanol companies did not understand the agricultural process and lost productivity.”

(Additional reporting by Jeb Blount in Rio de Janeiro and Anthony Boadle in Brasilia; editing by Steve Orlofsky and Tom Brown)