😈 The devil is in the details

Good morning! Today, we talk about some of the main points of tax reform contention. Brazil and Paraguay reach an agreement over Itaipu. And Paraguay’s push to link Argentinian gas fields to Brazil. 

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What to pay attention to in tax reform regulations

Ricardo Alban, the chairman of the National Confederation of Industry, said this week that he fears the sweeping reform approved last year to simplify Brazil’s consumption tax system may be diluted, as Congress gets into the nuts and bolts of the new regulations.

Big picture. The tax reform will merge five multi-tiered taxes into two VAT-like levies: one at the federal level (CBS) and one for states and municipalities (IBS). Currently, the state-level ICMS tax on goods and services is by far the main source of revenue for state governments.

• But the reform is a broad framework, and now depends on specific regulations to be passed by way of supplementary legislation. The government has recently proposed its version of these rules. 

 Why it matters. The post-reform regulations will determine how high the new VAT rate will be. The math is simple: the more sectors that are granted tax breaks, the higher the standard rate will have to be. As is, the government expects it to fall between 25.7 and 27.3 percent.

Beware. Corporate lobbies have lurked around tax reform discussions to ensure special rules for the sectors they represent. Fiquem Sabendo, a freedom of information watchdog, reported that last year government officials met with lobbyists at least five times more than with civil society organizations.

Here are the main tax reform issues that will be the subject of much debate:

Sin tax. The tax reform foresees higher taxes for products that are harmful to people’s health or the environment, such as alcoholic beverages, tobacco products, and mineral goods. The government chose not to include ultra-processed foods on the list, which had been a concern for the food industry. The sin tax rate is yet to be defined.

Financial services. Regarding loans, there is a provision for a type of presumptive credit to be used by the borrower to prevent the tax on the transaction from becoming cumulative.

Digital platforms. In a controversial point, the reform stipulates that digital platforms, even if based abroad, are responsible for paying IBS and CBS related to transactions they intermediate. 

Basic basket of goods. Food products considered to be staples of Brazilians’ diet will not be subject to the VAT tax. These include milk, soybean oil, corn, sugar, among others. Many players in the food industry will want to get their products on that list.

Different regimes. The proposal reduces VAT rates by 30 percent for the services of 18 intellectual professions of scientific, literary, or artistic nature that are subject to oversight by a professional council. Those include lawyers, architects, biologists, economists, engineers, agronomists, and veterinarians. Unions will try to make that list bigger.

Health. Health insurance providers will have their VAT rate slashed by 60 percent. Companies were happy with that decision, but will seek to take more in Congress if they see an opening. A similar cut will be granted to hundreds of medicines, with almost 400 other drugs being made VAT-free. 

Brazil and Paraguay reach deal on Itaipu

After months of negotiations, Brazil and Paraguay have settled on the tariffs for the energy produced by the massive Itaipu Dam hydroelectric complex, shared by both countries. Brazilian Mines and Energy Minister Alexandre Silveira said the deal will “definitively solve” recent disputes.

 Why it matters. According to Brazil’s Mines and Energy Ministry, the Itaipu plant currently accounts for about 8.4 percent of the country’s total energy consumption. Meanwhile, it supplies more than 85 percent of Paraguay’s electricity needs. 

Context. According to the Itaipu Treaty, signed in 1973, Brazil and Paraguay are entitled to an equal 50 percent share of the energy produced by Itaipu. Due to its tiny size in comparison with Brazil, this arrangement leaves Paraguay with a vast surplus of electricity, which it is obligated to sell to Brazil at the same price it pays. 

• Enio Verri, head of the Brazilian side of Itaipu, told senators last year that Paraguay proposed a return to the USD 20.75 tariff that was charged in 2022 — 24 percent more than the USD 16.71 tariff in place at the time of his Senate hearing.

• Deadlocked negotiations prevented the dam complex from approving its budget, with Itaipu having to freeze payments (including of staff wages) on more than one occasion.

Meeting halfway. Mr. Silveira, who met with Paraguayan President Santiago Peña in Asunción, said the agreement will authorize Paraguay to sell its half of the energy produced by Itaipu to the private market.

• Mr. Silveira added that the two countries agreed to a USD 19.28/kW-month tariff, up from the USD 17.66 decided in late 2023 and less than the USD 22.60 Paraguay requested.

• The hike will translate into about USD 300 million a year in additional revenue for both countries. Mr. Silveira promised that tariffs for Brazilian consumers will not increase.

• The two countries also pledged to conclude by the end of the year a review of the so-called Annex C, the part of the 1973 Itaipu bilateral agreement that establishes its financial rules, such as the conditions for energy supply, cost, and revenue of the electricity service. Annex C expired last year.

What they are saying. Acende Brasil, an energy sector watchdog, slammed the deal. The institute says payments for the construction of Itaipu accounted for two-thirds of the dam’s tariffs. With that debt completely paid off last year, Acende Brasil says tariffs should be cut to USD 11.61/kW.

Paraguay pushes for Argentina-Brazil gas connector

Reuters reports that Paraguayan officials are in deep negotiations with private companies and the governments of Brazil and Argentina over a bid for a USD 1.5 billion pipeline connecting Argentinian gas fields to the Brazilian market. Paraguay’s push rivals a Bolivian bid to repurpose existing pipelines to transport Argentinian gas to Brazil.

 Why it matters. The push for buying gas from the Vaca Muerta shale oil fields in Patagonia has gained steam in Brazil as Bolivian gas fields deplete. Connecting the Argentinian fields to Brazil would have a massive impact on the region’s energy trade.

What they are saying. “We want to sign a memorandum of understanding at a presidential level [for the pipeline] in June,” Mauricio Bejarano, Paraguay’s deputy mines and energy minister, told Reuters. “There is general support for the project.”

• Brazilian Mines and Energy Minister Alexandre Silveira said Paraguay and Bolivia’s bids are not mutually exclusive and added that further meetings with private companies to assess the viability of these projects are needed.

Other projects. Last year, the former Alberto Fernández administration in Argentina wanted Brazil’s National Development Bank (BNDES) to finance the extension of a crucial gas pipeline connecting the massive gas fields in the Patagonian province of Neuquén to the main consumption centers in Buenos Aires.

• The pipeline could be later extended to the city of Uruguaiana, on the Brazil-Argentina border, near the Uruguay River — and later reach the Brazilian city of Porto Alegre.

• With Mr. Fernández out of the presidency and Brazil-Argentina relations becoming tepid since the ultra-liberal Javier Milei took office, these talks have waned.

Quick catch-up

The Supreme Court will today resume a trial on whether the 2016 law on governance rules for state-controlled companies is constitutional. In 2023, a former justice (now justice minister) suspended a provision imposing quarantine periods for politicians before they can take executive roles in such companies.

The Central Bank will announce a new benchmark interest rate today. The policy rate currently sits at 10.75 percent, and most market analysts are expecting a cut of just 0.25 percentage points, amid mounting inflation worries. 

Pará Governor Helder Barbalho said state capital Belém will benefit from BRL 5 billion in infrastructure investment ahead of next year’s UN Climate Conference.

With a forecast for “widespread thunderstorms,” risks of electrical discharge, winds of up to 100 km/h, hail, and a sharp drop in temperature, Rio Grande do Sul is on alert for the worsening of the climate and humanitarian crisis affecting most of the state’s municipalities.

Congress approved a legislative decree placing Rio Grande do Sul under a state of calamity for the rest of the year, authorizing the government to send extraordinary credit to the state outside of spending caps.

The government is sending 100 National Force troops to Rio Grande do Sul to contain a looting spree, with another 300 agents expected to be sent in the coming days. The state government is also calling up 1,000 retired cops.

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