International Crisis Reaches Brazil. Government Action Knocks Prices Down.

Marcelo de Vasconcellos
by Marcelo de Vasconcellos
international crisis reaches brazil government action knocks prices down

Brazil has historically been a difficult place to do business. The government keeps foreigners out as best as it can, and that extends to vehicle importers as well. In the car business, you are welcome to market your wares as long as you build locally. Imported cars have always been expensive, and the costs are set to rise, as the government has taken new measures that affect both local makers and importers. Read this very closely before you ask for import restrictions into your country.

On Monday, May 21, Finance Minister Guido Mantega announced a series of measures. A 14 percent drop in car sales, a record high 5.7 percent delinquency rate on car payments and an average of more than 40 days to move the metal were some of the justifications for the intervention. I wouldn’t call you a cynic if you believed that this action was taken mainly because the automotive industry is famous for its lobbying prowess and politics. Local elections are right around the corner, and the government finds itself in the middle of a debilitating scandal involving public contracts. A McCarthy-style Investigative Commission has been set up in Congress, and the circus act is on full swing in Brasilia. Most analysts agree that this commission will most likely get results about as valuable as McCarthy’s.

With some close races to be had, especially in the all-important city of São Paulo, which to the glee of our politicians holds the third largest purse in the country, it wouldn’t be too far-fetched to imagine the automotive industry threatening mass firings and a government cowed into spreading some cheer, divert attention from its troubles and avoid unemployment and loss of votes.

Measures included in the government’s pacote de bondades, as the Brazilian media likes to call such things, involve cutting taxes. The Minister mentioned that the government will pass up 2.1 billion reais in uncollected taxes. Cars will now incur less IPI (Tax on Industrialized Products,) measured according to displacement, vehicle class, its fuel requirements and country of origin. As a peace offering to OEMs that import, rather than build locally, imports will also benefit from lower taxes – as long as they have a displacement of 2000 cc or less (see tables below). Supposedly that’s for ecological and economic reasons.

A cut in the IOF (Tax on Financial Operations) was approved to stimulate consumers to take more credit and pay longer plans. This way, more costumers will be in a condition to get themselves into further trouble, I mean, take on more debt. Previously, consumers paid an IOF of 2.5 percent a year. This has been cut to 1.5 percent. Imagine that instead of taking the interest of your alleged home equity loan off your taxes, you would have to pay additional interest to Uncle Sam. Inconceivable? Welcome to Brazil.

Banks will also have to make fewer compulsory deposits. This will free up about 18 billion reais for the banks to apply in long-term financial operations. According to the Central Bank, this figure represents 10 percent of all the credit available in the car segment.

Cars produced locally or in Mercosur or MexicoCategory/DisplacementFuelNew IPI TaxPrevious IPI TaxUp to 1.0LAny0%7%Between 1.1 and 2.0LEthanol and flex fuel5.50%11%Between 1.1 and 2.0LGasoline6.50%13%Above 2.0LAny25%25%Commercial VehiclesAny1%4%Cars Imported from countries other than Mexico and MercosurCategory/DisplacementFuelNew IPI TaxPrevious IPI TaxUp to 1.0LAny30%37%Between 1.1 and 2.0LEthanol and flex fuel35.50%41%Between 1.1 and 2.0LGasoline36.50%43%Above 2.0LAny55%55%Commercial VehiclesAny31%34%

In Minister Mantega’s explanation, he warned that the IPI reduction would be valid only until August 31. At that point, he seemed like any small time dealer shouting, “Buy now!” on TV. The IOF tax and reduction on compulsory deposits are good for an undetermined amount of time. He stressed that makers had agreed to sacrifice for the good of the country and agreed to reduce list prices anywhere from 1.5 to 2.5 percent depending on model. Buyers of imported cars above 2 liters are out of luck. They keep paying a dizzying 55 percent tax on their cars.

As analysts have pointed out, delinquency on car loan payments has almost doubled from a year ago. That means many consumers are already strapped for cash and heavily in debt. The Minister stressed that the government expected its measures to trigger a reduction of around 10 percent in prices for cars in the 1.0L category. For the higher displacement cars expectations hovered around a 6 to 8 percent drop. Also, the lowered IOF and easier credit would naturally lower interest rates, extend the number of installments and reduce the necessary outlay demanded by each installment.

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  • TonyJZX TonyJZX on May 30, 2012

    i think this sort of article is a great thing because it highlights just what economic conditions exist around the world i know most places are anti-car... even the English speaking west such as the North Americas have some odd anti-car legislations and I hear some places in the EU have a 5,000 euro yearly tax on cars over 5.0 liters... it would be nice to see just how bad it is around the world i know singapore pretty much sucks and of course everyone knows of the 2.5 euro per liter petrol costs in some places

    • MrWhopee MrWhopee on May 30, 2012

      Singapore has to be anti-car, because of circumstances. It's a really small country with relatively prosperous citizens. If cars are priced like they were in the US everyone would own cars and drive everywhere. The city/country would be inundated with cars, and they can't go anywhere. Thus the high tax, road pricing, and such to keep car population manageable. Plus they have excellent public transportation!

  • Carbiz Carbiz on May 31, 2012

    ... and yet Brazil has a very healthy industrial capacity. GM, Ford, VW... they all seem quite happy to build vehicles there. Perhaps Sao Paulo would not be the industrial heartland it became without these disincentives? Maybe a generation ago, Brazilieros were happy to accept jobs and compete with Europe and the United States on the wage front, but now they have a burgeoning middle class - and who wants to compete with Thailand or Korea for wages? Why would Brazliieros have a problem with a Camaro costing R160,000? If you want one bad enough, buy it. Otherwise, buy a Chevrolet or VW built in Brazil. Maybe Brasilia is happy to sign all the trade deals with China it can, but they are not so stupid as to hand over all their jobs, too.

  • MaintenanceCosts We hear endlessly from the usual suspects about the scenarios where EVs don't work as well as gas cars. We never hear the opposite side of the coin. From an EV owner (since 2019) who has a second EV reserved, here are a few points the "I road trip 1000 miles every day" crowd won't tell you about:[list][*]When you have a convenient charging situation, EV fueling is more convenient than a gas car. There is no stopping at gas stations and you start every day with a full tank.[/*][*]Where there are no-idling rules (school pickup/dropoff, lines for ferries or services, city loading, whatever else) you can keep warm or cool to your heart's content in your EV.[/*][*]In the cold, EVs will give you heat from the second you turn them on.[/*][*]EVs don't care one bit if you use them for tons of very short trips. Their mechanicals don't need to boil off condensation. (Just tonight, I used my EV to drive six blocks, because it was 31 degrees and raining, and walking would have been unpleasant.)[/*][*]EVs don't stink and don't make you breathe carcinogens on cold start.[/*][*]EV maintenance is much less frequent and much cheaper, eliminating almost all items having to do with engine, transmission, or brakes in a gas car. In most EVs the maintenance schedule consists of battery coolant changes and tire maintenance.[/*][*]You can accelerate fast in EVs without noisily attracting the attention of the cops and every passerby on the street.[/*][/list]
  • MaintenanceCosts Still can't get a RAV4 Prime for love or money. Availability of normal hybrid RAV4s and Highlanders is only slightly better. At least around here I think Toyota could sell twice the number of vehicles that they are actually bringing in at the moment.
  • Tree Trunk Been in the market for a new Highlander Hybrid, it is sold out with order time of 6 months plus. Probably would have bit the bullet if it was not for the dealers the refuse to take an order but instead want to sell from allotment whether it fits or not and at thousands over MRSP.
  • AKHusky The expense argument is nonsense. My mach e was $42k after tax credit. Basically the same as similarly equipped edge. And it completely ignores that the best selling vehicles are Rams, F150s, and Silverados, all more expensive that a bolt, MAch e or ID4. As an owner, I'd say they are still in second car territory for most places in the country.
  • Johnster I live in a red state and I see quite a few EVs being purchased by conservative, upper-class Republicans (many of them Trump-supporters). I suspect that it is a way for them to flaunt their wealth and that, over time, the preference for EVs will trickle down to less well-off Republicans.