TAX NEWS - June 2010

Brazil Tax: Brazil Extends Tax Breaks On Trucks, Capital Goods

The Brazilian government extended tax breaks for products in key industrial sectors that have lagged the broader recovery in Latin America's largest economy, Finance Minister Guido Mantega said late Wednesday.

The government maintained a cut in the IPI industrial tax for heavy and light trucks, farm tractors and capital goods until the end of 2010. The tax breaks were to expire June 30.

"The measures will serve to maintain stimulus in those sectors that have recovered slowly," Mantega said. "These sectors have only started to rebound in the past few months."

Mantega and Trade Minister Miguel Jorge announced the tax-break extensions during a press conference in Brasilia. Earlier Wednesday, the ministers met with officials from Brazil's powerhouse automotive industry.

According to the two ministers, maintaining the tax cuts will cost the Brazilian government 775 million Brazilian reals ($434 million) in lost tax revenue.

The extensions to Brazil's IPI industrial tax came despite the country's robust economic recovery and rising inflationary pressures. Strong domestic demand fueled 9.0% year-on-year gross domestic product growth in the first quarter.

Concerns that Latin America's largest economy could be overheating pushed the Brazilian Central Bank to boost local interest rates by 75 basis points last week. The benchmark Selic base interest rate currently stands at 10.25% after two-consecutive rate hikes by central bankers.

In late 2008 and early 2009, the Brazilian government cut the IPI industrial tax on a basket of products in an effort to bolster economic growth. The tax breaks on sales of new cars, for example, pushed auto sales to a record high last year.

The government also extended similar tax breaks on construction materials earlier this year because of concerns that a sudden jump in prices could cause inflationary pressures in Brazil's construction sector.

Tax breaks on consumer durable goods such as cars, refrigerators and washing machines, however, were allowed to expire at the end of the first quarter.