March 1, 2019

Brazilian States Loose Significant Revenue due to Kandir Law

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Many states in Brazil are in serious financial trouble and they are desperate for additional revenue. One source of additional revenue involves the Circulation Tax (ICMS), which is a tax on any product that is produced in one state, but sold in another state. Each state can set the amount of the ICMS tax, which generally is in the range of 9% to 12%. States may also adjust the tax depending on the product.

The problem is that back in 1996 Brazil passed a law called the Kandir Law that exempted any product that is exported from the ICMS tax. The goal of the law was to stimulate exports and it worked wonderfully, especially for agricultural products. In compensation, the federal government was supposed to reimburse the states for part of their lost revenue.

Many states, including Mato Grosso, are now complaining that the compensation plan is inadequate and they want it revised. In big export states such as Mato Grosso, the state coffers are losing very significant amounts of money due to the law. In April of 2018, the state treasurer of Mato Grosso calculated that the state failed to collect R$ 37 billion of ICMS taxes over the past 20 years due to the Kandir Law and that the federal government compensated the state only R$ 5 during the same period, for a net loss of R$ 30 billion.

The states want to either change the formula for determining the amount of compensation for each state or have the law revoked. The state of Para took their case to the Brazilian Supreme Court in 2016 and the court gave the Brazilian Congress a limited amount of time to resolve the issue. That time limit expired in August of 2018 without a resolution. Last week, the Brazilian Supreme Court gave the Brazilian Congress 12 more months to resolve his issue.

How it is resolved remains to be seen because the governors and the federal government are at an impasse. The governors want the level of compensation increased while the federal government contends that the current level of compensation is adequate.

For their part, agricultural groups in Brazil contend that the Kandir Law has been a big benefit by stimulating exports and helping Brazil's balance of payments. They fear that if the law is revoked, it could have a significant negative impact on farmer incomes. As they see it, if the Kandir Law was revoked, the price of grain going into the export market would increase and it could make Brazilian grain uncompetitive in the international marketplace. They feel that exporters would then reduce the prices paid to farmers in order to stay competitive.

The agricultural groups contend that a much better alternative would be for the federal government to increase the level of compensation to the states. It is unclear how this gets resolved.