Brazil announced tax on crude oil exports to mitigate the sensitive issue of ending fuel tax exemptions domestically

The government of Brazil announced a tax on crude oil exports for four months as it aims to compensate for taxes on fuel waived by Jair Bolsonaro last year that are only partially applied again. The matter is politically sensitive.

Brazil Minister of Finance Fernando Haddad
Brazil Minister of Finance, Fernando Haddad (right), during the press conference on February 28 on the fuel taxes. The minister of Mines and Energy, Alexandre Silveira, was also present | © Washington Costa, Ministério da Fazenda

The Brazilian government decided to tax crude oil exports at 9.2 percent for the next four months, the minister of Finance Fernando Haddad announced on February 28. This decision aims to compensate for a loss of revenue until the country fully reinstates taxes on fuel in the domestic market.

The news of an export tax comes as the government also announced the partial return of tax on gasoline and ethanol fuel for Brazilian consumers. The fuel tax exemptions were implemented by former far-right president Jair Bolsonaro who lowered energy prices in the context of high inflation and the upcoming presidential election he eventually lost against left-wing Luiz Inacio Lula da Silva last October.

Mr. Bolsonaro zeroed some taxes for cooking gas and diesel oil in March 2021 and applied the exemption to gasoline and ethanol fuel, bioethanol being largely used in Brazil, as well in June. The waivers were supposed to last until the end of 2022 and the end of the incumbent president’s term.

Reinstating the fuel taxes was debated among members of Lula’s Workers’ Party who were split between political and economic interests. Members of the Workers’ Party were in favor of extending the tax waiver as the president’s popularity could be damaged by removing it and could further drive inflation for consumers.

A few days after thousands of Mr. Bolsonaro’s supporters stormed the government buildings on January 8, President Lula extended the tax exemption on diesel oil and cooking gas until December 2023. Diesel oil is used a lot by truck drivers who have the possibility to heavily affect Brazil’s economy by blocking the transportation of goods and are closer to Mr. Bolsonaro’s politics. Tax exemptions on gasoline and ethanol fuel were also extended until the end of February.

Gleisi Hoffmann, a member of Parliament and the president of the Workers’ Party, last Friday shared she was still against the resumption of taxes on fuel for now, considering it was not the moment for it, as it “penalizes the consumer, and generates more inflation.”

Taxes on gasoline and ethanol only partially resumed

But the minister of Finance Fernando Haddad aims to reduce the federal budget deficit below 100 billion reais (19.2 billion dollars) for the year to give some leeway for financing Lula’s social policy and have the Central Bank reduce interest rates. The federal budget is projected to close the year with a deficit of 200 billion reais (38.5 billion dollars).

The return of the taxes on gasoline and ethanol fuel from March was expected to bring almost 29 billion reais (5.6 billion dollars) to the budget this year. Tax exemptions for diesel oil and cooking gas, as well as for kerosene, will continue.

However, taxes on gasoline and bioethanol are now only going to be returned partially for the moment and may be fully reinstated only in July. So, in the meantime, the government wants to compensate for the loss of revenue by taxing exports of crude oil. The measure is estimated to collect approximately 6.7 billion reais (1.3 billion dollars) in four months and fill the gap to collect the expected 28.9 billion reais, according to the government.

With the partial tax reinstatement, gasoline (which is then blended with 27% ethanol) will cost 0.47 real ($0.09) per liter more, and ethanol fuel will cost 0.02 real per liter more over the next four months. Working with Mr. Haddad, the state-owned petroleum company Petrobras said it reduced gasoline prices to distributors by 0.13 real per liter, from an average sale price of 3.31 reais ($0.64) to 3.18 reais starting March 1, so that the price of gasoline is only going to be raised by 0.34 real in the end. Retailers can set their prices freely though.

Congress will need to decide within 120 days whether it validates the tax scheme. Then, full taxation may add 0.69 real per liter for gasoline, and 0.24 real per liter for ethanol from July.

Petrobras loses almost 3 billion dollars in market valuation in a day

A tax on export is however rarely seen positively by industry players affected by such a measure. The agriculture business was for instance worried that the government would apply a tax on soybean exports, which was eventually discarded by the ministry of Agriculture.

And the Brazilian Petroleum and Gas Institute (IBP) shared in a statement it received the news of a tax on crude oil export with “great concern.”

The oil industry is one of the largest drivers of Brazil’s industrial economy. It is expected to generate more than 445,000 direct and indirect jobs per year over the next decade in Brazil, according to the IBP.

Crude oil has been an increasingly important component of Brazil’s exports over the last ten years. In 2022, the country exported 68.7 million tons of crude oil while it exported less than 20 million tons in 2013, according to Trade statistics from the ministry of Economy.

Oil is the third most important product for Brazil’s trade balance, having generated over 65 billion dollars of export revenue to the country over the last four years argues the IBP, the main trade representative of the sector in a country struggling with debt and inflation.

The export tax “can impact the country’s competitiveness in the medium and long term, in addition to affecting the national credibility with regard to the stability of regulations,” stated the IBP which also considers the negative perception of the tax will last longer than four months with consequences on the international market and investment plans.

What we are doing is correcting a distortion made from an electoral measure by the previous government,” defended the minister of Energy Alexander Silveira on Twitter. Jair Bolsonaro’s tax exemptions “penalized the Brazilian population, taking money from education, security, housing and the fight against hunger and extreme poverty to distribute dividends to the big oil companies,” he added. He also considered the tax would encourage oil refining within Brazil.

The tax on exports is forecast to affect about 1 percent of Petrobras’s profits, according to Mr. Haddad. On Tuesday, Petrobras lost 14.9 billion reais (2.9 billion dollars) in market valuation (-4.39%) in a day after the announcement of the minister.

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